ALEXANDRIA, VA (November 3, 1999) -- It's that time of year, my favorite time of year -- the holiday season. I'm one of those strange souls that starts listening to the Johnny Mathis Christmas album in late October! Soon, the quaint streets of Old Town Alexandria will be dressed in holiday style. It'll be beautiful. But I don't plan on strolling the streets in search of Christmas presents. No sir. For the past three years, I've done three-fourths of my Christmas shopping online.

And this year will be no different. Who has time to fight the traffic and wait in lines? On the Internet, I have a better selection of goods, the ease and speed of clicking from one destination to the next, and the convenience of doing my shopping at 3:00 a.m. if I please (which I often do). It's a no-brainer for me, and I expect a significant proportion of this year's holiday shoppers to reach the same conclusion. According to Microsoft (Nasdaq: MSFT), online shopping for 1999 is expected to be $20 - $30 billion. That tidbit was mentioned as part of Redmond's announcement of its own answer to online shopping: eShops.

Microsoft now joins the other "usual suspects" -- America Online (NYSE: AOL), (Nasdaq: AMZN), eBay (Nasdaq: EBAY), and Yahoo! (Nasdaq: YHOO) -- that are well-positioned to benefit from what is likely to be a banner year for online holiday spending. Among these, I'm especially intrigued by the possibilities at Yahoo! and eBay. For this year's gift giving, I'm hoping to venture into the online auctions in search of some out-of-the-ordinary presents. eBay is the undisputed leader in the U.S. auction space. But other players are fast on its heels, notably Yahoo!

On Monday, Yahoo! announced that its auctions have now surpassed the milestone of one million simultaneous daily auctions. That's still well short of the three million items currently listed on eBay, but Yahoo!'s progress is impressive. In addition, Yahoo! recently added auction services in Brazil, Denmark, Hong Kong and Korea, giving it the most extensive network of globally branded, localized online auctions services -- 14 total -- in the world. The Internet commerce potential in the international arena is likely to match that of the U.S. in only a few years. Considering the rapid growth of Internet use overseas, eBay's strong position in U.S. auctions doesn't look nearly as powerful as Yahoo!'s diversified network of global operations.

Yahoo! also recently announced the addition of leading retailers Brooks Brothers, Eddie Bauer, Guess?, Patagonia, Macys, Office Max, Toys 'R' Us, Victoria's Secret, and Zales to Yahoo! Shopping ( With its 105 million monthly users, Yahoo! is an attractive commerce outlet for merchants large and small, whether through traditional fixed pricing or auction-style variable pricing. Amazon is also well advanced in the process of offering both fixed and variable pricing, depending on which form makes the most sense. Basically, when an item's value is known, then the convenience of fixed pricing is superior. Only when value is uncertain does auction pricing make sense. Yet, eBay is only dominant in auctions.

Part of the thesis behind eBay's competitive advantage was that the first mover in auctions would always have the most buyers and sellers, both of which would attract more sellers and buyers, and so forth, thereby giving the first mover a permanent lead over other auction services. But now that Yahoo! has crossed the million daily auction mark, and with eBay's site continuing to have downtime problems, eBay's single revenue stream of seller fees looks quite vulnerable, especially considering that the competition offers the same service for FREE. Amazon and Yahoo! have the advantage of multiple revenue streams, which allows them to compete in auctions without charging sellers a fee. Eventually, that price competition is going to put a hurt on eBay's model.

To put my opinion to the test, I pit eBay against Yahoo! using our Rule Maker Ranker spreadsheet (now available from our Rule Maker Spreadsheets page -- linked on the upper right side of this page). The results are entirely one-sided in favor of Yahoo! Here are the highlights of the scoring:
                            Yahoo!     eBay
Sales Growth                 169%      176%
Gross Margins                 84%       80%
Oper. Cash Flow Margins       27%       22%
Cash-to-Debt Ratio          No Debt    22.5
Flow Ratio                   0.37      0.82
The full analysis is available on the Rule Maker Companies board:

Yahoo! vs. eBay

One of the core tenets of Rule Maker analysis is that the direction of a company's results is more important than its current status. From that perspective, Yahoo! looks even better and eBay worse. Yahoo!'s margins have been increasing, while its flow ratio has been decreasing. The exact opposite is the case at eBay. The final score of the matchup is Yahoo! 50, eBay 33.

While both Yahoo! and eBay are likely to succeed in the upcoming holiday shopping season, only Yahoo! with its diversified revenue streams is well-positioned to grow sales and cash flow for the long-term. Yahoo!'s 105 million pairs of eyeballs make it possible. Remember, dollars always follow eyeballs. It'll be fun to see how the fourth quarter's expected online commerce boom shakes out.

Have a great night, and Fool On!