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eBay
My Case For eBay

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By swapusa
February 28, 2001

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First, the disclaimers: I have been an eBay seller (merchandise seller, that is) and an eBay bull since before its IPO in 1998, bought the stock in October of 1998 at split-adjusted price of $14, and I'm still holding and plan to hold for long term.

Back on 12/26/2000, I submitted a post to this board titled "eBay is recession proof." Now 2 months later and after about 1200 more auctions, I am going to make the case again for eBay's business.

First some facts about our involvement with eBay:

I spend about 6 to 8 hours a day on eBay, browsing, submitting new auctions, and looking for new opportunities to sell. eBay is now a very important part of our business (we have 3 retail video game stores) and we use it regularly to sell our excess inventory of games and systems, and now more and more we sell products that we specifically acquire for eBay auctions (our eBay user id is SwapUSA). At any moment we have between 100 and 200 auctions running with many Dutch auctions and we ship an average of 400 to 500 packages a month. Two and sometimes three employees are dedicated to eBay auctions, and we are adding a new full-time employee this week to increase our auction count. After spending over 2.5 years selling items on eBay, I think I have a pretty good idea of this fantastic marketplace and its future potential.

I still believe that eBay is recession proof for the same reasons explained in my post on 12/26/00. eBay has recently implemented some new features and changes that, I believe, will make its business and future earnings even stronger.

BUY IT NOW
The biggest and most important new feature, in my opinion, has been the "BUY IT NOW" feature put in place during the holiday season. This feature has not only made it easier for us the sellers to sell our items quicker and at a higher price, but has also added tremendous additional revenue for eBay. To better explain I need to get into some detail.

With the "BUY IT NOW" feature, we can now specify a set price at which we would sell the item. There is still a minimum bid price that can be much less, but the first bidder who uses the "BUY IT NOW" option (I will call it BIN from now on in this post) will end the auction and win. The only problem is that if a bidder bids the minimum instead of the BIN price, the BIN feature is no longer available for that auction. Yahoo! has a similar feature, but even if there are some bids on the item, any bidder can come in and end the auction at the set price. At first I couldn't understand the reason why eBay's BIN feature was not similar to Yahoo!'s. I wanted to start all my auctions at $1 to attract more bidders, but also wanted the BIN feature to stay so any bidder at any time could buy my item at my set price. It took me a while to understand why eBay has done it differently, and boy, is it smart of them.

Because of the way eBay has implemented the BIN feature, they simply make a lot more money in initial listing fees. I have to get into more details, but I think it is important to understand how it works (I have always believed that eBay bears and the analyst market do not truly understand eBay's business model). eBay's initial listing fee is based on the starting price of the auction. The seller pays a listing fee of $0.30 for start price of $0.01-$9.99, $0.55 for start price of $10-$24.99, $1.10 for start of $25-$49.99, $2.20 for start price of $50-$199.99, and $3.30 for start of above $200.

When we first started using the BIN feature, we started all our auctions with our usual $1.00 bid price to pay the minimum listing fee (plus, it attracts more bidders) and put in a BIN price in hopes of selling the item quickly at a higher price. Then we noticed that almost nobody could use the BIN on our items because there was always some wishful thinker who would bid the minimum of $1 and end the BIN option. (Are you following me?) And this was just before Christmas and buyers didn't want to wait for 7 or 10 days for our auction to be over. We were basically losing all the impulse buyers and hurried shoppers who wanted the item quickly (busy dads). We said to ourselves, "these eBay guys don't have a clue. They should have done the BIN just like Yahoo so buyers could buy it at any time." It took a while until the GENIUS of eBay's BIN feature hit me. These guys actually wanted us to start our auctions at a price close to our BIN price.

You see, if you start an auction at a price that is close to its true eBay marketplace value, you may not get any bidders until the last few hours of the auction. So, in most cases, bidders can still use the BIN feature. So, we tried that, and much to our surprise it worked wonders. Suddenly, we are selling our items at a much higher price than before, and much faster. There is also a much higher fill rate (bidder actually paying) since with BIN, the bidder immediately knows that he/she has won the auction and can immediately call our 800 number or use Billpoint's instant purchase or PayPal to pay. Now, when we auction an item that usually ends up selling at $70, instead of starting it at $1 and pay $0.30 in listing fees, we start it at $55 and pay a listing fee of $2.30. Suddenly eBay is making 2, 3, 4, or even 10 times as much in listing fees from our BIN items. And we are selling the items at a higher price so we are happy with paying the higher listing fee.

Here is a true and very good example of how the BIN has helped us sell items at a higher price. Before the BIN feature we tried many times to sell obsolete but hard to find Sega Genesis games on eBay. We would put them on auction with a starting price of $1 and hope for 2 or 3 competing bidders to drive the price up. Well, in some cases that strategy worked, but many times it did not because there were only 1 or 2 bidders who would come at the last minute and buy the item for $1 or $2. Had there been another really interested buyer, one of them may have paid up to $20 for the same game. It wasn't even worth the effort, so we gave up selling Genesis games. Now with the BIN feature, we start the same games at $14.99 and put a BIN price of $20 or $25 and a large number of them sell at our BIN price. You see, there is always someone who is willing to pay the top price right now but that buyer may not be around 7 days from now when the auction is ending. The result: We get a much higher price, and eBay gets a much higher listing fee and Final Value fee from us. I just read that almost 25% of eBay's sellers are now using the BIN feature and it has been a slam-dunk for eBay. Just for this BIN feature alone, I believe that eBay will have another upside earnings surprise in the first quarter. I don't think the eBay guys themselves were even aware of the power of the BIN feature that they added.

LISTING FEE INCREASE
At the end of January, eBay implemented new, higher initial listing fees, partly in response Yahoo starting to charge fees for auctions. eBay's listing fees went up anywhere from 15 to 60 percent. A $0.25 listing fee is now $0.40, and a $2.00 listing fee is now $3.30. eBay also started charging a $0.10 surcharge on 10-day auctions. As expected some groups of sellers backed by other auction sites cried foul and predicted that eBay would lose some sellers. The result: As a seller we don't even care about the new higher listing fees. We are getting so much more bang for our buck with the BIN feature that we are still happily paying the new higher listing fees. Last I heard, actually, Yahoo has lost a lot of sellers and I think I know where all those sellers have gone. They are selling where the customers are, on eBay.

Oddly enough, we have recently noticed a small but noticeable surge in the prices for our items on eBay. I can only attribute this to possibility of more buyers that migrated from Yahoo to eBay. I don't blame them a bit; there just isn't enough stuff on Yahoo to buy. (Don't get me wrong, I am a long time Yahoo shareholder.) To be honest with you, we only use Yahoo auctions for the items that eBay does not allow us to sell (like Japanese import Dreamcast games).

Other positives for eBay
Last week, 2 days before Sun Microsystems warning about future slowdown, an analyst at Merrill Lynch (I think it was Merrill Lynch) downgraded SUN. One of his reasons was an availability of a lot of "used" Sun servers in the market from dead dot-coms. The funny thing is that since I spend so much time just surfing eBay and trying to find out what other sellers are selling, I have recently witnessed a noticeable surge in the number of Sun servers and also Cisco routers and networking equipment on eBay auctions. Due to their high, typically multi-thousand dollar price, they are typically Featured auctions and you can't miss them.

The above phenomenon is exactly what I was referring to in my original post 2 months ago. There is an excess of inventory in every industry worldwide and this excess has to be sold off and, in most cases, liquidated. And eBay is ending up to be a big beneficiary of this trend. eBay is no longer just about individuals selling their old collectibles and garage sale items. Businesses large and small are involved. I know Persian Carpet retailers who haven't sold a single carpet at retail in months (luxury items get cut first in a recession) and they are selling expensive Persian carpets on eBay to generate cash flow and stay in business. I know used car sales organizations that have a tough time selling cars and they are auctioning them on eBay to pay debt. I am also seeing huge volumes of excess inventory being sold on one of eBay's sister sites, tradeout.com, owned by eBay. These days any liquidator I talk to knows about eBay and tradeout.com and that is making it tougher for us buying from them because they now know they can sell their items on eBay. If only other troubled retailers like eToys.com knew about eBay!

Since the beginning of year 2001, the high-tech stock market has taken another nose dive and dropped close to 20%. In the same time eBay's stock price has gone up from the mid $30s to the mid $40s. While most other high-tech companies are suffering from a glut of excess inventory and reduction of capital expenditure by their customers, eBay has no inventory and it does not suffer from the same problems, and it is actually gaining market share at the expense of Yahoo.

I believe that eBay will consistently beat earnings estimates for years to come. This is one of the characteristics of Gorillas in the marketplace. They are misunderstood by the investment community, and will always be undervalued.

A final note: eBay was profitable from the first quarter its business started which was 3 years before its IPO. Since it hardly needed any money from investment bankers for the IPO, it has never had to kiss up to the analyst community and did not have to give much of the company away in the IPO. This could well be a good reason why eBay is so misunderstood (or under-hyped) by the investment community. It just doesn't get as much lip service from the analysts as its Internet peers.

Sorry for the very long post.

cheers,

Mehran

SwapUSA