What's the deal with eBay
Yes, the company's domestic auction business commands just 39% of eBay's revenue pie these days, but it's still the most critical component. Any flaws there may eventually translate into weaknesses overseas, and eBay still needs growth at its auction site to fuel more PayPal account registrations.
So let's start there. The reason that eBay established itself as the only consumer auction site that mattered, despite facing web-savvy competitors like Yahoo!
It was a perfect model. It was the perfect Motley Fool Stock Advisor newsletter pick three summers ago. Publicly traded players with deep pockets couldn't even give their fledling auction listings away. It seemed as if eBay had the perfect moat. Then someone moved the fortress.
You see, it's not rival auction sites gunning for eBay these days. I mean, sure, they're still gunning for eBay, but their aim is terrible. No, the two real threats to eBay's model right now are Craigslist and Google
Internet tracking site Alexa.com claims that eBay is the eighth most popular site in the country. Two years ago? It was also eighth. Craiglist, on the other hand, has spent the past two years skyrocketing from 120th to 36th.
Offering completely free localized exchanges through an ever-growing community database, Craigstlist.org is making a lot of connections that would have otherwise belonged to eBay -- and beginning to gather its own "network effect." It's notching more than 2.5 billion page views a month, with more than five million monthly ads placed.
One can't say that eBay didn't see this coming, as it did snap up a minority stake in Craigslist last year. But the smaller site has become a steam train barreling towards eBay that the auction king is powerless to stop.
Then you have Google. It's not just about Froogle, or that eBay's need to buy traffic has made it one of Google's most prolific advertisers. It's Google's relationship with everybody else. Through its AdWords program, sellers are able to establish targeted leads for just pennies apiece. Meanwhile, eBay's fees have crept higher over the years. Earlier this year, the company instituted increases on merchants in its eBay Stores program. Even though the group generated just 7% of eBay's revenue in 2004, the move transformed many vocal supporters into disgruntled defectors.
Google presented the perfect opportunity to land ideal customers for life. It should come as no surprise to learn that Google has grown more than 2.5 times as fast as eBay this year -- or that Google now makes more in advertising than eBay does in all of its endeavors. What about Google working on a financial payment platform? Even if it's not a PayPal killer by design, eBay has to be nervous as to what it will ultimately evolve into.
Another flaw in eBay's armor? Its dependency on selling cars, with eBay Motors accounting for a quarter of the company's transaction revenue. With Detroit's automakers jumpstarting new car sales with its employee pricing promotions this summer, there is now a glut of used cars on the market. Dealers were left with 150,000 more used cars on their lots in July of 2005 than a year ago.
You can try and spin that as a positive for eBay, as sellers compete to move tired rides, but the bottom line is that the demand for used cars just isn't there. You can't sell what folks aren't looking to buy.
Speaking of folks looking to buy, that brings us to eBay's decision to pay as much as $4.1 billion for Skype. I'm not against this deal, specifically. I'm not naïve enough to write off Skype users as chatty freeloaders. eBay is getting an intriguing company here -- but only because it was the highest bidder. I'm not going to pat eBay on the back over this, simply because it had the desire to outbid News Corp.
The company can use them these days. eBay has made a few celebrity enemies lately. Last month, J.K. Rowling blasted the auctioneer for not being more responsive to the wave of Harry Potter forgeries being exchanged on the site. Earlier this year, Bob Geldof blasted the company as an "electronic pimp" after it facilitated the scalping of Live 8 tickets. It may not seem like much, but these PR disasters can create the same "network effect" that bolted eBay higher. If folks begin seeing eBay as a place where fake goods and overpriced tickets are unloaded on unsuspecting bidders, well, don't let the "Buy it Now" button hit you on the way out, Jeff.
Wait! You're not done. This is just a quarter of the Duel! Don't miss Jeff Hwang's bullish perspective, Rick's bearish rebuttal, and Jeff's final word. When you're done, you're still not done. You can vote and let us know who you think won this Duel.
Longtime Fool contributor Rick Munarriz is a satisfied eBay user -- with the 150 positive feedback recs to show for it. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.