In retrospect, we're all geniuses. Predicting the past is low-lying fruit and plotting it back to warning signs after the fact is a smorgasbord of dangling tangelos. With that said, I trust you will forgive me. I saw the future but I never saw it coming. I came across tomorrow's reflection in the mirror and blinked.
You see, there were things over recent months which struck me as peculiar with some of our Rule Breakers. The shares were trading higher then. Adorable kid actors would whisper "I see dead equities" in my ear, but I failed to listen.
Let's take Amazon (Nasdaq: AMZN) for instance. Let's forget about the standard Time curse -- how naming Jeff Bezos "Person of the Year" late last year was the cliche equivalent of a clock ticking to 14 minutes, 59 seconds. Let the milliseconds tick a few months later. When Bezos countered jaded rhetoric with the fact that the book division was turning the corner of profitability it was greeted with sighs of bullish relief. Finally.
But not too much longer after that, as an Amazon customer, I began receiving targeted coupon offers. On May 17, with shares of Amazon closing at $61 a pop (no pun intended -- really -- not this time), I received a "$10 Anniversary Gift" in the form of an e-mail coupon from the e-tail giant. The catch was that I could only use it at Amazon's new stores. So if I wanted to load up on tiki lamps and pinking shears, I could head over to the lawn and patio store and save.
This was at about the same time that Amazon's affiliate reporting went bonkers. The online retailer's Associates Program is a great tool that promotes new business at the grass roots level. Amazon pays out between 5-15% of any sales that were initiated at an affiliate site. Yes, sure, in the element of full disclosure, our own FoolMart will be happy to lead you to other investing titles through Amazon beyond our cool in-house offerings. America Online (NYSE: AOL) does the same thing. But so do more than 400,000 other sites -- in most cases small hobbyist home pages -- like one of mine on Florida theme park attractions. And one day, the daily updates available at Amazon's site just stopped working. Day turned into days, days turned into a week, a week turned into weeks.
It all was eventually remedied but I never saw a single published report on the technical snafu. Maybe it was because Amazon itself didn't publicize the event. It was only once Associates would log on and check the stats that the tracking shortcoming was revealed. It was probably no big deal. But, still, how many of those Associates, tending to the front line of Amazon marketing, got flustered and moved on? Probably not many, though it would only take a few minutes on average to update the Amazon links to barnesandnoble.com (Nasdaq: BNBN) selections.
But between the discounted weed whackers and neglected Associates something just didn't gel just right. Mind you, these aren't the shots critics took to blast Amazon recently. This isn't Lehman Brothers -- or any other recent pundit -- chastising the company for its deficit-ridden and cash-munching ways. And these personal anecdotes probably pale in comparison to the January layoffs or Bezos filing to sell some $20 million worth of his shares back in May. But some clues were there for the taking. Colonel Mustard, I'd like to suggest that it was Amazon in the Library with the Rope.
There was also eBay (Nasdaq: EBAY). Until recently, one of the treats of eBay analysis was that the company proudly proclaimed how many auctions it had going on at any given time -- on its very start page -- to the single digit. So, as an investor who bought in last year when there were 3,231,982 auctions taking place on the site, seeing that 4,123,948 bidding wars were taking place a few months later became a form of validation. Granted, eBay grew beyond its auction revenue stream. But the lure of an eponymous magazine or high-end auction purveyors have never been the driving force at the world's biggest swap shop.
In a bout of spring cleaning, eBay decided to do away with the exact count. Sure, you can check out the unofficial tally at quotetracker.com, but eBay decided it was time to go with an "Over 4 million items for sale!" line item instead. Maybe it was way too many individual investors fretting over a short-term slip. McDonald's (NYSE: MCD) abandoned its burger count too -- but only because it became too tedious to climb the ladder at an ever-quickening pace to match the global expansion. eBay's intentions seem rooted elsewhere.
Stagnation is a pimple and eBay was getting caked up with the concealer. But, you say, McDonald's was proclaiming the cumulative consumptions, a number that is always climbing. Why didn't eBay merely shift gears and begin adding up completed auctions? Could it be the percentage of completed deals relative to listings was suspect? Mrs. Peacock, dare I presume that it was eBay in the Conservatory with the ever-dimming Candlestick?
But with last month's announced acquisition of Half.com -- a site that will gladly let users in on the fact that it is "Currently Listing 4,235,976 Items" -- is eBay picking up a fast-grower donning hand-me-down wardrobe? While our own Richard McCaffery questioned why eBay would pay as much as $374 million in stock for a company that wasn't even in business last year, I think it will prove to be one of eBay's most important acquisitions.
For starters, thanks to the retracted bidding on eBay's own shares, the value of that deal is now closer to $275 million. Like Selena Maranjian, I too was a satisfied Half.com user before the proposed nuptials. At the time, I remember thinking that this was the only other consumer-to-consumer business model that had me as giddy as when eBay was launched almost five years ago.
For those not familiar with Half, users put up their books, CDs, video games and movies up for sale at a fixed price. The only catch is that it must be at least 50% below the list price. It's not a perfect science. The prices are generous, especially on items like video games whose street prices often drop substantially months after their release.
The site has some distinct advantages over eBay for both the buyer and the seller. There are no listing fees. You only get charged a 15% commission on all completed sales. Entering an item is a breeze since all you need to do is type in the UPC Code, enter the price and the product's condition, and you're in the system. Meanwhile, the buyer is getting a wide selection at usually great prices. The transaction is immediate. There is no sweating it out over the bidding process. While that is an engaging and entertaining aspect on eBay for a collectible or a cool domain name, sometimes you just want to buy that Don Henley CD for five bucks without the frills and thrills.
People are actually willing to pay more to avoid the bidding circus. Don't believe me? Consider this. Santana's Supernatural is the current top-seller at Half. All of the Supernatural CDs being put up for aural adoption were marked in the $9.25-$9.48 range (yes, it's an overly generous $18.99 list price there). But if you go to eBay and perform a search of completed auctions you will see that the average closing price there is closer to $6-7 each.
Yet, while Santana picks away at both cyber-lemonade stands, eBay and Half are perfect together because there is little overlap. Really. Since Half specializes in low- priced commodities, it is attractive to the casual user who doesn't have the time to fire up the scanner and pen paragraphs of descriptive prose just to sell a twice-viewed VHS copy of Titanic. If anything, Half might bring a new audience to eBay's doorstep as Half sellers move on to get rid of non-Half merchandise.
However, it appears more likely that the association will find more and more eBay users smitten by the Half.com bug. Ultimately, it will give eBay a one-two punch. Each commerce platform should achieve a critical mass that makes it a fortress against new entrants. eBay has proven that if you have market share in the auction turf, even if online giants like Yahoo! (Nasdaq: YHOO) and Amazon practically give away their services, they will come up short. Half.com is in a great position to follow suit.
Better make that a dark suit while we're at it -- seeing the way shares of eBay and Amazon are angling toward last year's lows. But is all the pessimism itself a clue? No, it's not the same as AOL circa 1996, when the company got blasted by the media mainly for busy signals that indicated a surge in demand. These two are being punished for more tangible concerns. While revenues just about doubled for both companies in the March quarter, eBay is being pressed hard to continue growing organically (from existing operations alone) while Amazon is dodging cash flow concerns.
In late July, with quarterly reports, we'll see how much eBay is growing and if Amazon is improving its financials. Maybe the numbers will tell us something new, because when everyone is looking one way, the clues often lie in the other direction. Clues. They're there. And Mr. and Mrs. Green can't be too far behind.
Rule Breaker Survey, Question Two
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