ALEXANDRIA, VA (Nov. 26, 1999) -- Last week, Bloomberg ran an article stating that Yahoo! (Nasdaq: YHOO) was "gaining ground on eBay."

How so?

At the time, eBay (Nasdaq: EBAY) had 3.3 million items listed for auction on its site and Yahoo! had recently cracked 1 million items, to 1.1 million. Yahoo!'s item count has risen sharply from a few hundred thousand items early this year. So, it is true that Yahoo!'s auction site is drawing items for sale at an impressive rate, but it is a leap of reason to report that Yahoo!'s business is gaining ground on eBay. This one measure, with context, doesn't mean much.

Yahoo! may have 1.1 million items listed for auction compared to eBay's recent 3.3 million, but Yahoo! did not receive money for any of its listings. This makes Yahoo!'s listings less valuable to the company and much easier to generate. Since users pay to place items for auction on eBay, and they don't pay on Yahoo!, we can argue that an item placed for auction on eBay is "worth" much more than an item placed on Yahoo! People are willing to pay on eBay to sell in its community. This counts for a great deal.

So, 1.1 million items versus 3.3 million is not a straight comparison. If my lemonade stand gave away 1 million glasses of lemonade on a particularly hot day, while Frankie's lemonade stand across the street sold just 10 glasses that day, Frankie still had a much better day than me monetarily. eBay is paid for each of its 3.3 million listings. Yahoo! is paid nothing for its 1.1 million. So, eBay is winning on both counts and in more than two ways. (It is winning by volume, by income generated, by community size, and arguably by value of the community, because the fee on eBay deters bogus or jokester sellers.)

But let's imagine this is a race simply to list "more, more, and more items." If the online auction race is simply about having more items listed for sale, eBay could jump even further ahead in one instant. This summer, eBay saw over 1 million new items listed on its site in a single day when the company eliminated listing fees for 24 hours in a promotion. In a single day this summer, eBay attracted more new items on its site than Yahoo! had on its site total, and in the process eBay saw its total items listed top a record 4 million.

Arguably more important than having items listed, however, is having those items sold, and here eBay shines far above the others. The sale completion rate on eBay is estimated at 65%, meaning that about 2 out of 3 items sell on the site during their first listing. The sale completion rates on Yahoo! auctions (and Amazon) are estimated to be below 15%. A recent Prudential Securities estimate puts Amazon's (Nasdaq: AMZN) sale completion rate at 14% and Yahoo!'s at a mere 11%. This means that only about 1 out of 10 auction items on Yahoo! sells the first time around.

We should all realize that this means that much of Yahoo!'s "growth" in terms of its "items listed for auction" is the result of the same items being listed repeatedly, time after time, while new items arrive to the mix, too. eBay doesn't have this "advantage," which is actually anything but an advantage. A majority of items listed for auction on eBay sell the first time around, meaning that eBay can only maintain and grow its "items listed" count by attracting new items, which it does daily. At least 400,000 items are sold and instantly replaced by new items on eBay every day. Note, eBay's daily sales count alone (400,000 items) equals about 35% of all items merely listed on Yahoo!

To say the least, the press release stating that Yahoo! is gaining ground on eBay is based on simplified reasoning at best. Yahoo! may be attracting more and more items to its site, but until more and more items are sold from its site, it says little about the quality of Yahoo!'s auction service, especially in comparison to eBay. The threat of competition should never be brushed off without careful thought, however. Further demonstration of eBay's auction dominance include:

Online Auction Page Views
(by market share)
eBay        83%
Yahoo!       9%
Priceline    3%
Amazon       3%
Onsale       1%
uBid         1%
Source: Neilsen Netratings, August 1999.

Estimated Consumer-to-Consumer
Online Auction Market Share

(by gross merchandise sales)
eBay       88%
Yahoo!      2%
Amazon      2%
Others      8%
Source: eBay

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eBay gained big this week partially on news that it is adding 10 more local auction services (including Chicago and New York) aimed at making large-ticket trade (cars, boats, and so forth) much easier. The company has risen from a market valuation of $17.8 billion to over $23.5 billion in the past two weeks. On Friday morning, eBay's stock was up again, as was (Nasdaq: AMZN). Early this week, Amazon reported that its highest holiday sales volume day in 1998, which occurred last December, has already been surpassed. A new single day sales record was achieved last week. Amazon has spent aggressively to prepare for this onslaught of holiday orders.

The stock market was open for only half a day to end the week; it was opened mainly to supply liquidity for investors. The market will never be closed for more than three days straight because liquidity would be unavailable for "too long" a period. This may sound like a Wise law to you and me (some Fools wouldn't mind if the market closed for 10 years straight), but in the business world, it's necessary to provide constant liquidity without more than a three day hiatus, just as banks typically won't close for more than three days straight.

To end this holiday week, I hope that everyone had an excellent, Foolish, fun-filled Thanksgiving. During your celebration of gratefulness, if you haven't had a chance to read Selena's annual Thanksgiving column yet (it is a special feature in this space that many look forward to each year), check it out now. This year, Selena's Thanksgiving column ran as Wednesday's column. It is called A Timeline of Thanks.

Have a great weekend!

--Jeff Fischer, TMF Jeff on the message boards

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