The Freeware Hall Of Fame

Earlier comments - our written record on eBay

Created March 29, 2001 - last touched July 20, 2004

We began writing this page on eBay in July, 1998, two months before it went public.
We held over 1,000 auctions there. We spend several hours every day studying this company.

For an insider's view of eBay which explains why it's such a great e-commerce business model, see our eBay tutorial.

What we cover - click on what you want to see --
[If your browser is set to always check for new versions of stored pages,
clicking on these links will fail, but you can page down.]

Greenspan discovers oil
[3/29/01] Analysts should recast this quarter & 2001 eBay earnings upward
Now we know - Greenspan can be totally inappropriate
Record earnings again - but analysts should recast eBay 2001 earnings upward
[Dec 19, 2000 + addenda] Fed falls behind the curve inviting recession
[Nov. 29] Lehman creates an eBay buying opportunity by stretching the news
[Oct. 23] eBay turns in a 75% upside earnings surprise - now has 18.9 million registered accounts
eBay cleans up its act. Will virtue be it's only reward?
How long will "PopularDemand" succeed defrauding advertisers?
The gaping flaw in Internet advertising cookies
3.8 million shares of eBay stock to come to market
eBay continues to be the poster boy of Internet success
Value America continues to be the poster boy of Internet failure - Chapter 11 now
Net idiocy of the season
eBay achieved maturity
eBay's site reliability - some background
The US government nudges eBay
eBay background and boilerplate info
The Secondary Offering

Greenspan discovers oil

Now we know how far behind the curve the Federal Reserve Open Market Committee is.

On April 4, 2001, Alan Greenspan publicly acknowledged that the cost of oil and energy were seriously high, and would take a toll on the US and world economy.

He noticed.

During the summer of 2000 when the price of gasoline was 100% higher than the year before, the FOMC ignored it.

During the fall when heating oil rose 60% over the price of a year before, the FOMC ignored it.

During most of a year when providers of electricity in the largest state in the union faced unheard of prices they had no choice but pay, the FOMC ignored it.

Energy, the single most ripple-causing cost in a developed economy and of powerful world-wide influence, was at back-breaking cost levels sucking money out of the economy, and the FOMC ignored that in favor of things like non-farm payroll stats.

This should become the economics poster boy for "not seeing the forest for the trees."

Back on Dec. 19 the evidence to us was overwhelming the FOMC had fallen seriously behind the curve. Two weeks later others began saying it. A month later everyone was.

By January 17 we could say the obvious: "So long as we continue to under-emphasize the Arab oil war and the huge bite energy is taking out of the economy, we will continue to lose the war. It's larger than the rug we're attempting to sweep it under."

On April 4 the FOMC chairman finally conceded there was an energy problem.

Conservatively that puts the feds 90 days behind the curve of what any layman who bothers to look can see, 280 days behind the curve of what energy price charts should have told them. So something is fundamentally wrong with the FOMC's economy forecasting methods.

Having heard Richmond's William Broadus and other Federal Reserve Bank governors speak it's no mystery where some of the problem lies. Not all FOMC committee members are concerned about the big picture.

It's not their votes that matter, or even the chairman having to spend so much time stroking their concerns.

What matters is the pall of unyielding, inflexible dogma they cast over the staff, and the resulting impossibility of revising the A list of data on which decisions are made.

Since the A list has been politically manipulated for years to evade measuring certain areas of the economy, much of it has become a sieve and not a sampling, an ostrich and not a hawk.

Greenspan is no revisionist. His firm history of steadfastness and his current stature attest to that. They also provide ample prestige to carry off a revision should he decide one is needed.

I'm not holding my breath.

Analysts are forecasting the March quarter earnings at 7 to 9 cents. The actual earnings from studying the site appear to be between 11 and 12 cents.

We said the recession, whether real or perceived, will help eBay this year because their on-line auctions are the least costly way to move goods in commerce. That is proving out. The auction placement fees this quarter appear to be substantially up.

Since the fees are from 10% to 65% higher than prior quarters due to eBay's 2001 fee increase, this will be reflected in earnings.

Someone recently observed that when stores have a sale and go into bargain mode, people flock to buy. When the stock market goes into bargain mode, people flock to sell. Curious.

Blowing the discount rate reduction March 20 was even worse than blowing it on December 19. What we said down below can be doubled now. The economy needed a full point discount, would settle for 3/4, and got a tragic 1/2. From here on down the rest of this recession is the fed's doing.

They continue to ignore the massive ripple effect of sky high oil, and ignored still another million-barrel-a-day OPEC supply cut the other day. The perils of information overload. The open market committee looks at all the saplings and is blinded to the redwoods blocking the sun.

Now the bad news. Greenspan, 75, and with concepts of economics formed during and just after the Great Depression, is only two years into a 14-year appointment to the Federal Reserve Board's Federal Open Market Committee. He'll be there until he's 87. His term as Chairman of the Board of Governors of the Federal Reserve System (it's his 4th 4-year term) isn't up until June 20, 2004.

Lest we forget, he presided over the Reagan and Bush Sr. economies.

There is still no one in the Congress who can challenge him. Challenge? Hell, less than half bother to try deciphering his convoluted phrasing, and even the brightest of those who can are no match in a debate.

He's a first-rate debater. If Alan were anywhere near as good an economic planner as he is a debater, the rate cut today would have been a point.

Democrats will get a boost from this. Even though the offices are independent of each other, Bush will be blamed for the Greenspan debacle just as Clinton got credit he didn't deserve for a robust economy floating on dot com madness.

eBay beat expections again turning in 9-cent a share earnings this quarter, up from 1 cent a year ago. Analysts anticipated 7 cents. Quarterly earnings were $23.9 million. Revenue rose 81% to $134 million.

eBay grew its users by 3.5 million this quarter and now has 22.5 million registered accounts, more than double last year's number.

Are they happy? Probably. These users did $1.6 billion worth of sales in the quarter.

On Jan. 16 eBay announced a rate increase for listing auctions ranging from 10% to 65%. The new rates begin Jan. 31. The hike coincides with rate increases at the competition - Yahoo and Amazon auctions - so there is little downside risk for eBay.

It seems to have escaped the analysts that while most of the increases are nickel and dime, on items selling for $200 and up the increase is $1.30, or 65% above the $2 those auctions used to cost.

The increases are likely to add $25 to $30 million to revenue in 2001 at no cost to eBay. Based on current earnings that's like adding a strong 5th quarter to their year.

This more than offsets the 2 cents per share cost eBay incurred in buying a majority stake in the leading on-line auction site in Korea. The 2 cents includes lost interest income on the $120 million cash they paid.

With the addition of Korea, eBay estimates their next quarter earnings will approach $150 million and their 2001 gross revenue at $665 million, a 54% increase over year 2000.

eBay now owns or controls the leading on-line auction sites in the US, Japan, the UK, Germany, France, Australia, Korea, Canada, and Austria. Those nations account for approx. 2/3 of the world ecommerce revenue.

Because eBay makes money for its users rather than costing them money, it is likely to grow even faster if the US or any nation falls into recession. Despite the rate increase, the cost of selling on eBay remains far below any other method of sales. The tighter the market, the more likely that buyers and sellers will increase their eBay involvement.

[What we said immediately below on Dec. 19 was the reverse of what every other writer in every medium was saying. Why? The controlling factors were as clear then as a month later when everyone else had to reverse himself. Could it be that the more one knows the harder it is to recognize what is controlling?]

[While factors like money supply are not negligible, abrupt huge increases in everyone's cost of energy dwarfs everything else combined.]

It's not often Alan Greenspan fails to see the big picture, but the fed open market meeting December 19 disappointed professional investors in a big way.

A three-figure anticipatory gain in the DOW prior to 2 pm plunged to a 61-pt. loss when the fed didn't cut the funds rate. The NASDAQ went to its year's low. (Fed decisions are announced around 2:15 pm.)

It was inevitable after the fed announcement showed no awareness they are waiting too long to cut.

Wall Street had been confident Greenspan would do the right thing. Prior to the meeting no one suggested the fed was falling behind the curve.

Stunning fed immobility has shaken confidence in their balanced view. As we approach the day an immature President begins exercising his judgment, there is much to worry about.

As things stand today the longest economic boom in history will end due to blunder, an insistence on form over function. That's what was behind the fed's announcement merely that the bias has changed and they now see recession as a greater threat than inflation. Process before action.

The fed is so taken with procedure it credits its bias with power to affect the economy. While its bias is important it does not loosen credit, and loosening credit was clearly what was needed, not a fed viewpoint.

Even should they ease credit in January as expected they will fall further behind the curve as investors face the reality of an inexperienced administration taking over, and Internet business continuing to weed out losers. The signs say recession in 2001.

Alan had a fine record up to now. Like an around-the-world sailor who successfully crossed every sea and overcame every storm, only to run aground as he entered his home harbor.

Greenspan waited too long to turn, and didn't turn hard enough.

Among those who recognized this was coming: James Cramer of who announced a few weeks ago he was retiring from his hedge fund and getting away from the market. Good call, Jim.

[Jan. 17 addendum 1]

Kudos to Greenspan for the 'tween meeting rate cut early in January. If it's followed by a cut of the same size at the January open market committee meeting, it won't prevent a recession but it will cushion it, and create a few money-making opportunities.

High rates are only one of three reasons for the recession of 2001. The others are energy and the Presidency.

So long as we continue to under-emphasize the Arab oil war and the huge bite energy is taking out of the economy, we will continue to lose the war. It's larger than the rug we're attempting to sweep it under.

We are also embarking on a joystick Presidency. When a well-connected dullard is elevated to office through the efforts of a power group, other hands than his will be aiming the President's arrows and clicking the choices. Until we know who calls the shots and what their objectives are, a wariness will prevail.

There are no historical parallels to draw on aside from maybe kings crowned in childhood. Never before have we had so much power available to a shadow cabinet coupled with such a simpleton President. Not the Reagan years; not the elder Bush years.

That those 12 years had more than 50 criminal indictments and many guilty verdicts of appointees for crimes based on greed, crimes against humility, is worrisome. There are other S&L debacles waiting to happen.

Thanks to the Arabs it may not even be a sure thing to cast your lot with the Texas oil barons, at least not in the short term.

An interesting part of the tapestry is that after the election but long before the Fed rate cut, GE Capital sold its mortgage portfolio to Wells Fargo. Two months later Jack Welch said that if the US had a decent GNP in 2001, GE was in line for a truly phenominal year.

Would Jack's magic dust stop working in his last year at the helm?

[Addendum 2 - Feb 1]

The 50-point cut in January came as some analysts finally awakened to the need and were hoping for a 75-point cut. Greenspan's endorsement of the Little Prince's tax cut was taken by some to mean Alan doesn't feel interest rate reduction can carry the whole ballgame of firing the economy. Since when?

I think it was more a play for re-appointment in two years. If he hadn't taken that stand he'd be seen as out of step with the administration. So long as he's in charge of the fundamentals Alan is a team's best player.

Still, the fed remains under-appreciative of the damage being done by the components of US inflation that are non-indexed or under-indexed. Utility bills affect every individual, every business. Each increase ripples endlessly, and many are paying bills every month that are 100% higher than last year despite an unchanging kwh rate.

This is a massive money sponge with zero correlation to productivity and it isn't going away. Quite the reverse. Energy costs have become a massive drain but a peculiar drain, like a tax on ordinary Americans by a foreign power. The money doesn't get re-distributed here.

To keep the economy up requires a dramatic increase in available financial resources. One point reduction in the fed rate is not a dramatic increase, just a beginning.

Wall St. is using the last quarter to create buying opportunities and eBay is included. It began with eBay down 8 points (18%) after Lehman analyst Holly Becker said "growth projections for the year 2005 will cost more than anticipated." (Har)

Why did she have to over-reach with such a silly statement? Because eBay's strong growth and earnings projections are being met. Rationally, the company is unassailable for at least the next 12 months. Lehman evidently judged that creating an eBay buying opportunity was worth the cost of a little credibility. Thank you for including eBay, Holly.

Among the things Holly missed: eBay's wholly-owned companion site,, is now listing over 8 million items, up 60% in two months and growing even faster than eBay. is a very profitable business adding to eBay's bottom line.

Now for what else matters - the quarter just ended and the outlook ahead.

eBay turns in a 75% upside earnings surprise and
now has nearly 19 million registered accounts
eBay's growth continues to be phenominal, predictable, and inevitable

eBay's 3rd qtr earnings were 7 cents a share. Analyst consensus (Holly Becker included) was 4 cents. The rest of the earnings and growth news was just as good.

In a different climate the stock would have surged on all the positives but in this climate it sags. When that happened in the past eBay was the sector leader the next time Internet stocks cycled upward. No reason that shouldn't happen again and I expect eBay to be in the mid to high 70s on the next upward cycle.

It does matter that the number of registered accounts grew 146% year-to-year, and is now 18.9 million. Not only must that generate more earnings and profits, it further cements eBay as the on-line auction leader and increases its lead over competitors.

Sensible acquisitions and partnering are still occurring.

Major institutions such as Disney find eBay a terrific sales medium to increase earnings at little or no cost. The marketing plan, successful from the start, gets more efficient as it matures. Courts are unanimous in upholding eBay's legal standing as a venue, much like a newspaper classified advertising page. And like a newspaper, eBay is not held responsible for the statements or acts of its advertisers.

Interestingly on-site banner advertising, so important elsewhere, is a mere blip at eBay. If banner advertising died tomorrow (as some fear it could) Bay's bottom line would have to read the WSJ to know.

But what about the future?

Under another Democratic President the climate would continue as it is. Under a Republican President government oversight would shrink and the FTC and JD would polish their paperclips.

eBay's US site listed 68.5 million auctions in the 3rd qtr, and that annualizes to 89% growth year-to-year. But it's not just eBay that's profiting. The individuals and businesses selling their goods through eBay were treated to an 83% increase in sales. The glue that holds the community together - lucrative e-commerce for the little guy as well as the big - keeps getting stronger.

Professional analysts by needs must hedge their bets but in fact, there is no meaningful cloud whatever in the short, mid, or long-term, not in the US, not in Europe.

Especially worth watching is Butterfield & Butterfield, the venerable, highly-respected, and wildly successful west coast gallery auction house now owned by eBay. B&B has begun to "simulcast" auctions on-line using eBay facilities. Buyers anywhere in the world can tune their PC or laptop in to the B&B auction gallery floor and bid.

It works. The auction fever temptation to keep bidding is just as strong on line as in person. (I speak from experience.) In one 2-hour sale that I monitored approx. 80% of the items went for more than optimistic pre-auction estimates, some over 100% more.

Too soon to make predictions but beyond question there is tremendous promise in simulcasting gallery auctions on the Net. The worst that can happen is that routine gallery auctions will have larger audiences of potential bidders.

eBay already owns a company that can put these simulcasts on a palmtop.

If simulcast auctions fulfill the promise, prices realized and commission earnings could rise in substantial double figures at B&B in the next 12 months, reflected in eBay's earnings.

Sothebys and Christies also announced plans to simulcast gallery auctions. The mid-term buy and hold countdown is now underway in this sector.

Since its explosive popularity eBay has had to balance the rules between what is legal and what some users find objectionable. It's generally been a toss-up. That's now changing, with eBay about to rule more things off limits.

With every such narrowing decision sellers leave and set up shop at other auction sites. In effect, eBay enhances its competitors and harms itself each time it rules a seller's wares unacceptable. And the bottom line loses because in business, virtue is its only reward.

We saw it with animal breeders who were thrown off eBay when the site ruled no live animals could be sold. Now porn is the target.

Porn was allowed because it was in a separate database unseen in a site search and unreachable by minors. It required a credit card to view X-rated auctions, which is about all a web site with 12 million users can do to screen minors out.

Bluenoses are as vocal on eBay as they are anywhere and they continually object to the very existence of auctions for X-rated videos, home movies, sex-enhancing devices, and the like, even if they never see such auctions.

Evidently they wore eBay down because the long-standing policy of balancing the interests is getting a re-balance favoring the bluenoses. Effective Nov. 21 eBay will prohibit listings that are "sexually explicit or graphic" which is nearly everything in the X-rated database not found at Blockbuster or a convenience store magazine rack.

That's a lot of listings from very active sellers and a large customer base, and eBay is going to lose them to another auction site, almost certainly Yahoo which is the No. 2 site.

eBay will gain nothing in return. The complaints will not end. Anyone who ever re-balanced interests knows that when you adjust in favor of one side, the winning side re-defines its goals and forges on chasing new goals.

The legal exposure to minors filtering in and seeing forbidden things will not change. It's a tiny window now, it will continue to be a tiny window as new sellers run forbidden auctions out of ignorance or as a challenge. eBay can't pre-filter these. People must see them and report them.

One wonders if eBay will have now have multiple standards: one for eBay US, another for eBay Canada, eBay France, Germany, etc. Americans are perfectly free to view all those, and opportunists are free to sue. eBay probably won't gain a thing driving away its income from sellers of the sexually explicit.

The exposure to lawsuit is the birthright of all Americans. It appears to be the growth industry, driving unfettered commerce into a recession.

One of the web's worst spammers and abusers of on-line privacy is also giving advertisers false information.

As an inducement to subscribe to PopularDemand services, advertisers are told that email sent to the PopDamn mailing list was requested by the recipients.

On the contrary, PopDamn's emails are simply unwanted spam carrying false information that one can be removed from their list. Removal is impossible. No one willingly opts in and no one can opt out. I visited the so-called removal site and there's nothing whatever for that purpose.

The PopDamn spam I get is from a Connecticut florist named Amos Pettingill who shares private info he comes by with PopDamn including credit card information. How do we know? Because PopDamn has information from a credit card I used with White Flower Farm and no where else.

One of the worst e-commerce errors users can make is to order from Pettingill's White Flower Farm. From then on you will be spammed by PopDamn. In addition to violating customer privacy Pettingill ignores email on the subject of privacy and refuses to stop violating it. In spam messages he claims to have a "Privacy Policy" but the page is inoperable.

Before it was sold a few years ago White Flower Farm was one of the great mail order greenhouses, known for the founder's superb catalog. The catalog survives, still available and still superb, but the farm has been transformed into one of the web's most expensive florists.

Evidently a list of customers who don't compare price and just pay top dollar is seen as especially desirable to spammers like PopularDemand. One can understand that.

Fortunately the leading email programs make it easy to block PopDamn spams. You never have to see them. But you do have to wonder, and worry, what bucket shops like this are doing with your private information.

The idea behind cookie monsters like PopularDemand and DoubleClick is to shadow users around the Internet and build a database for each user based on "where his interests lie." In fact that's not what happens. The database they build has little to do with a user's interests.

They build the database by using cookies and other tools that identify the user on the net when he visits a site. If he goes three pages into a site, that 6 cookie hits, one for each page going in and another for each page backing out. He's counted even on sites visited in error when looking for something else.

Error visits make up about 50% of ALL site hits. Yet these hits, they claim, are evidence of "user interest."

The most apt comparison is a private detective outside every store in town, jotting down the name of each pedestrian who looks at the window as he saunters by. That's a cookie hit. If he glances twice, that's two hits. If he does it again a few days later that's 4 hits, etc. If he actually enters the store, he gets a whole notebook page to himself.

Over time every gumshoe's notebook will list most everyone who ever walked down the street and didn't buy anything in the store.

If you were a store owner how much would you rely on that notebook to find new customers? How much would you pay someone to use that data for your marketing program?

If it resulted in bombarding those pedestrians at home with junk mail you paid for and they found annoying, resulted in impersonal sales calls during dinner using your name, resulted in virtually zero new business, how long would you keep the detective on your payroll?

PopDamn and DulClick are the detective agencies banking on staying employed. The bulk of their datalist is pedestrians who walk by.

The rest of the list is people who bought from you or your competitors. Those people are also being annoyingly spammed as the result of information you and your competitors provide. A fair percentage of that list is so opposed to junk mail, junk phone calls, and junk spam they will never deal with you again.

Do you respond positively to junk marketing? Then who does? Learn by examining Reader's Digest, a great junk marketer.

99% of Internet users aren't too old, too young, or too stupid to have proper judgment. That rich vein mined by the Digest isn't on the Net, so neither is the Digest. Netusers are people like you and me and react like we do. Spam turns them off. Off and against the spammer.

While the nation is becoming incensed at the wholesale privacy invasion prepetrated by Net junk marketing, that's not the biggest threat to e-commerce. The cost when sites lose actual customers is even greater.

"Deal with these people and get spammed," old customers tell themselves, and tell others interested enough to ask, "Where's a good source for ..."

eBay filed with the SEC on Sept. 19 for the sale of 3,889,646 shares of stock at an anticipated price of $61.75. These shares are owned by the former owners of, an ecommerce site bought by eBay in a stock deal earlier this year. eBay will receive no proceeds from this sale, and it does not represent an insider sale.

The date for the stock sale wasn't in the announcement.

Such a large number of shares coming on the market in a brief time should create an attractive buying opportunity.

The Bigfoot/Anywho site has white page listings, email addresses, and other info on people. Much of it is hopelessly outdated, and here's why.

For a person to make his contact information current he must confirm the change by phoning in from the telephone number in his existing listing, the one he needs to change. That's impossible for 100% of the people who changed phone numbers or moved to another city.

You can call Anywho but when their CALLER-ID detects the call is not coming from the old number, the change is rejected, and the outdated information remains.


On Sept. 27, 1999, eBay put on the site a new User Agreement that shines with professionalism. The old User Agreeement covered the legalities like a torn fishnet; the new one does more than just close the gaps. It gives eBay Inc. and its users a full understanding of who owes what to whom.

Noteworthy is that the business model didn't change. Scrutiny by presumably a new team of lawyers resulted in allowing eBay to continue as a site venue where auctions are held, not a participant in the sales themselves. The line between auctioneer and landlord sees more bridges now but remains well-defined.

To reinforce this, the new agreement spells out in detail how liability for illegal and fraudulent dealing falls on the user, not eBay.

eBay was an INET business whose popularity ran ahead of its policies. Now the lagging elements are gone. The site is thoroughly businesslike.

This year eBay will nearly double the number of auction categories at the site, a major step toward clarity and user-friendliness. Also a major step ahead of the competition who universally copies eBay's categories but doesn't have the computing power (or the business) to offer anywhere near as many.

New categories come from user suggestions which preserves loyalty. This is unique in the site venue on-line auction field. eBay has items for sale in just about all categories. Its rivals do not.

The record shows that since Meg Whitman arrived eBay has put muscle into the drive for excellence. New accomplishments and advancing benchmarks are a constant. The site manages now to find new revenue streams that don't upset users.

For example, the acquisition of the Billpoint on-line charge service has the potential to nearly double a user's monthly bill to eBay - not as a cost - but by creating value for him. Billpoint gives every cottage industry auctioneer an instant merchant account for all the major charge cards at zero start-up cost, zero overhead, and a ton of convenience.

Billpoint has serious competition today in rival Paypal which is free to sellers, but fee-less Paypal may not be a sustainable business model, especially in the eyes of, its new owner.

Recently by way of admission that the fee-less system may be failing, Paypal changed its terms to read, "If you use [Paypal] for the purpose of conducting e-commerce on a regular basis, you agree to register for, or upgrade to, a Premier or Business Account." Those accounts have fees attached. If seller fees must be paid for Paypal, Billpoint becomes more attractive due to its total integration into eBay's auction pages.

So far Paypal isn't making cottage industry auctioneers upgrade, but the rhetoric of their announcements has users expecting it.

History is an unkind judge of eBay techies. History is also an unkind judge of the US ability to launch a space vehicle. Scores of fiery failures. Then the Congress threw enough money and manpower into the space program and that changed everything. eBay tried the same thing and while not everything changed, the bugaboo of site reliability got a whole lot less buggy.

eBay spent more than $10 million in 1999 on new hardware. They added eight 350Mhz processors to the database server, and more Sun E10000 Starfires to process requests.

They also grew the engineering staff by 75%.

At the top of the tech crew since August, 1999, is a former executive with Gateway, Maynard Webb. He's President of eBay Technologies and oversees all engineering and technical operations. eBay searched in vain for the techie who could walk on water until they found Webb. He cut eBay's downtime to just 1%, a phenominal feat.

Users still gripe about the 1% and some do their griping to an eBay enemy at CNET, staff writer Troy Wolverton, who consistently explodes molehills into mountains that never were. Enemies are one price of success.

The story behind eBay's secondary stock offering is that on March 25, 1999, eBay filed with the SEC to sell 4,250,000 eBay common shares to the public. At the same time, insiders filed to sell an additional 2,250,000 shares.

No insider offered more than a tiny fraction of his holdings. This was NOT a sell-off, just their chance to turn a small amount of paper profit into real income. Virtually every insider raised a few bucks, and eBay picked up the tab. This was the first public sale of insider stock since eBay went public Sept. 24, 1998.

An additional 975,000 shares of insider stock was available to underwriters if buyer interest exceeded the 6.5 million shares. Did it?

There were 5 underwriters involved in this, one more than were involved in the IPO -- Goldman, Sachs; BancBoston Robertson Stephens; BT Alex. Brown; Donaldson, Lufkin & Jenrette, and newcomer Morgan Stanley.

This sale put $700+ million into eBay's cash drawer and raised the number of shares in public hands from 10.5 million to 17 million. Total shares issued rose to 125,092,222.

After the sale 73% of the outstanding shares were still in the hands of eBay insiders and financiers. Elsewhere on this site we explain what Nimbus CD International insiders and financiers did when they were offered a buy-out at a price attractive to them but below what the stock was selling for. They accepted the take-under, forcing hundreds of shareholders to take a loss.

There's no reason to think this will happen at eBay, but it's legal under Delaware incorporation law and beneficial to early financiers. At Nimbus, sweetheart contracts for executives made sure their interests were aligned with the financiers.

At the May 28, 1999, stockholders meeting , eBay increased the number of authorized common shares from the current 195 million to 900 million, and authorized preferred shares from 5 million to 10 million. (There are no preferred shares outstanding.)

The preliminary proxy statement filed April 7 says the increase can thwart an unwanted takeover should such ever come.

eBay's list of Risks in the Secondary Offering prospectus doesn't mention take-unders or take-overs. Still, it's the best analyses of Web commerce risk one can find. Not just eBay risks but the entire field of competent e-commerce. Definitely worth seeing, and you can here.

eBay Growth

eBay continues to be the poster boy of Internet success. A few of the landmarks the site cites at the end of the most recent quarter are:

  • Online net revenues reached $87.9 million, a 130% increase over the $38.2 million in the second quarter of 1999.

  • eBay users transacted a record $1.3 billion in gross merchandise sales, the value of goods traded on the site. This was a 108% increase over the second quarter of 1999.

  • eBay expanded the number of registered users to 15.8 million by quarter end, an increase of 183% from 5.6 million on June 30, 1999.

  • The site hosted 62.5 million auctions during the second quarter compared to 29.3 million during the same period last year. A year-over-year growth of 113%.

  • Margins grew 3% from 73% to 76% over the prior quarter.

  • eBay generated $28.3 million in cash from operations, increasing total cash and financial investments to $839 million.

They keep growing like this quarter after quarter. You'd think the on-line auction market was approaching saturation but it's clearly nowhere near it. PC shoppers even demanded PCs with an "eBay key," and having one on the keyboard is now a selling point for the boxmakers.

And for eBay.

Circling the Beemers?

Can the government require eBay, a web landlord, to have a higher standard of liability than newspapers have for running classified ads? The answer to that carries 1st Amendment implications across the whole spectrum of the Internet.

In the spring of 1999 the federal government asked eBay for information relating to sales taking place on the site. These are sales conducted by users, not by eBay itself. If there are violations of law, who has liability: the seller who is committing the violation? eBay who may or may not know about the violation? Both?

Is an indoor mall manager breaking the law when one of his tenants, a bar and grill, sells beer to a minor? If the mall manager learns of the illegal sales to minors, is he obligated to walk into the restaurant and make it stop, or even cancel the lease?

If you advertise taxidermy products - animal parts - in a newspaper classified ad, and the product is legally banned from commerce by the Endangered Species Act, is the newspaper guilty of violating the Act?

Such questions go to the heart of this inquiry, and they are big questions. How they are answered for eBay will apply across the Internet and may bleed over to every form of publication.

Nothing may come of this, expecially after a change in the government. Still, before this runs its course we might see a battle royal, with Internet and publishing biggies circling their limos and Beemers against government attack.

That some Internet users conduct illegal sales is not in doubt. They always have. For example, Microsoft, after doing some investigation, found that near 50% of the MS software sold by Internet auctioneers is pirated.

According to news reports, piracy is not the focus of this investigation. Exactly what is the focus hasn't been revealed, and those who know have reportedly been forbidden by a judge to speak.

Beginning a 1st Amendment case with a gag order? Ugly sight.

eBay defines itself as a venue provider. They give a user some space and what the user does with it is his affair, so long as it doesn't violate a few basic rules of the site. That was quickly taken advantage of by scoundrels who sold pirated software and CDs, bogus autographs, non-existent computers, assault rifles to the highest bidder, porn likewise.

Since the sale was between the auctioneer and the high bidder, eBay wasn't involved aside from providing the venue and collecting a commission. eBay saw itself like a phone company providing a way to order pizza for home delivery.

But while they're not involved in the actual sale, collecting a commission gives eBay a piece of the pie. That difference opens the way for eBay to be compelled to assume limited liability.

There were enough folks getting ripped off, and enough complaints, and enough attorneys general inquiries, and enough potential liability, that eBay reversed its lessez-faire policy. From hands-off they went to aggressive policing by outsiders.

After the government probe was announced eBay empowered businesses outside eBay to police its auctions looking for trade mark infringement. When reported, eBay removes all traces of the auction. In practice it spills beyond trade mark protection, and includes stopping legal auctions that mention a brand name the owner doesn't want to see offered for sale.

For example, legal auctions of left-over Tommy Hilfinger or Vuitton rags can be cancelled, and an auctioneer's career at eBay terminated, if Hilfinger or Vuitton don't want the competition. These are by no means the only brands where this happens.

Originally designed to prevent infringement, eBay left the door open to anti-competitive abuse. Users have legal avenues of protection by way of Counter-Notification and a put-back procedure available in the Digital Millennium Copyright Act. Few know it, fewer use it. The act is poorly understood and difficult for the layman to implement.

Along with what outsiders don't want to see sold, there is also a list of things eBay defines as below "community standards" and will not permit. There's no remedy there. Out is out.

  • Breeders cannot sell their animals.
  • All guns including antique flint locks and air guns are banned.
  • It's questionable that a taxidermist can sell any of his products.
Newsworthy frauds and violation of community standards create bad press, and bad press has resulted in substantial auction oversight. Perhaps that's why the government inquiry is in abeyance.

Begin eBay Background Boilerplate

[Stock information has been updated to reflect the 3-for-1 split, but NOT updated to reflect the secondary offering of 4.25 million shares, all of which was sold.]

eBay hit the tape around 12:20 PM New York time Sept. 24 at 53 1/2 after an IPO at $18. The IPO was only 3.5 million shares (over-subscribed) and they were hot. More than 9 million shares were traded that first day, with the price jumping between 54 1/4 and 44 1/4. It closed at 47 3/8.

Since then it's been in the jaws of the momentum bull and has never traded below 150% of its IPO price.

eBay, the great Internet auction site that dominates the on-line auction industry and has been profitable every quarter it's been in business, is only 15% public. The remaining stock is held by company officers and directors and their affiliates (who got a 3-for-1 split of their holdings before the IPO in addition to the later 3-for-1 split in February, 1999.)

The offering raised $63 million for eBay's bank account. Perhaps more important, it gave eBay a market cap of enough $billion to be a major Internet player.

There was a substantial amount of eBay stock in private hands before the IPO, a pre-split 24.5 million shares. In addition, the Directors authorized another 8 million non-public shares to fulfill old and new stock option offerings to management, employes (76 at IPO time) and others. These were registered with the SEC on schedule within hours of the IPO.

eBay has an employe stock program allowing the staff to purchase stock at a 15% discount. They can deduct between 2% and 10% of their paycheck for stock under the plan.

No one should just buy eBay stock and ignore it. An Internet stock is liable to make all the profit you will ever see in its first year, and then tank out of disfavor, even if the company is still doing well. The stock market is many things but rational isn't one of them.

How could it be rational? We're a nation of folks who never got past the biblical age. To cling to that malarky today requires a weak grasp of cause and effect and enough reliance on mere hope to place bets on it.

The market mirrors both, which is why we have so many Jesus stocks, my term for absurd dot coms that don't have a prayer of making money or being bought out, but people throw money at them anyway.

Before the IPO, eBay's Directors authorized 60 million shares of common stock. Now the number has jumped to 195 million. This is authorized stock, not stock intended for the marketplace.

eBay can and does use that stock to make useful acquisitions to add to its income, like buying up technology to save licensing fees, or buying up competitors. The Directors state they plan to pursue an acquisition policy.

They bought Up4Sale, another on-line auction site, which continues in operation under eBay ownership. And they bought the major on-line auctioneer in Germany.

eBay acquired two privately held companies for about $275 million in stock: collectible-car auctioneer Kruse International and credit-card payment services firm Billpoint Inc.

Kruse does a half-billion in sales per year and is the leading vintage auto auction house. Billpoint is an on-line credit card service which has been integrated into eBay's services to members.

eBay has added wireless features to the site - instant notification and control of buying and selling when you're on-the-go.

In another impressive buy-out eBay bought one of the great live auction houses, Butterfield & Butterfield. The San Francisco company specializes in fine art and quality antiques.

Auction watchers know Butterfield & Butterfield is a 1st rate auction house. It was founded in 1865 in the wake of the California gold rush.

The price for B&B was $260 million in eBay stock. eBay and Butterfield now run a joint on-line auction site aimed at more costly items.

It's amazing. Buyers who rant over paying $5.00 to an eBay auctioneer for packing and postage happily pay Butterfield $70 for identical packing and mailing that's less prompt. High end smoke and mirrors is wondrous to behold.

eBay also offers its users a Butterfield service for fee-based appraisals. B&B has a highly regarded appraisal department. (One wishes it would answer its email.)

Other eBay improvements have included --

A flat fee to auction cars, trucks, RVs, and antique vehicles - $25 to list an item, another $25 if it sells. No other commission.

Combined with their regional breakdown by ZIP code, this gives eBay the potential to be the largest used car market on the planet at $50 bucks a sale. This isn't just cash flow. Nearly every penny is pre-tax profit.

At the same time eBay opened the door to listing real estate by charging only a $50 fee to list real property, and zero commission if it sells.

Realty and motor vehicles dovetail with eBay's regional organization by which users can search what's available within a few hundred miles. That opened eBay to sales of furniture and major appliances which had been all but unsaleable on-line due to murderous, non-competitive interstate trucking rates price-fixed by the government.

Still on acquisitions of sorts, eBay hired away from Pepsi-Cola their top marketing executive. eBay can afford that level of talent. He had an option for 600,000 shares at $15. On paper his stock value went from $9 million to $32 million on IPO day, and $306 million the day eBay hit the post-split 170. Have a Coke.

eBay prepared itself well for going public. Two months before on July 16 it added to its Board of Directors Scott D. Cook, 45, the chairman of Intuit, publisher of Quicken. Cook is also on Amazon's Board. In addition they added Howard D. Schultz, 44, the CEO of Starbucks. Both these fellas know how to make the stock market play Misty for them.

For a complete list of eBay's Board, see our accompanying Director file.

Board members receive no compensation other than stock options. Cook and Schultz each exercised theirs when they came aboard. 257,250 shares at $9.33 for a cost of $2.4 million. Each saw a paper profit of $13.5 million on IPO day, and $128 million the day eBay hit the post-split 170. Do you want fries with that?

In the world of real rather than paper profit, Schultz sold or otherwise distributed most of his $2.4 million investment in eBay in 2001. The sale of 117,188 shares on 5/17/01 brought $7.2 million. Now do you want the fries?

eBay founder and Board Chairman Pierre Omidyar, around 31 when eBay went public, is no newcomer to e-commerce. The first company he founded in that field was sold to Microsoft. By the time he founded eBay he was a master in the game. One suspects he could be the CEO of any e-commerce site he chose. What he chose was to create eBay.

He has a large personal stake in eBay and became a _very_ wealthy guy at 9:20 am California time September 24, 1998. It's worth noting that eBay users on its chat boards commented on that, and were uniform in their pronouncement, "he deserves it."

Chainsaw Al Dunlap, eat your heart out, if faux heart is edible.

I watched Pierre for nine months before eBay went public and his management skills are stunning. Few can match him in ability to put the right people in the right jobs with the right instructions.

One such person is Meg Whitman who was 41 when Pierre installed her as eBay's President two months before the IPO. She controls 7.2 million shares. When eBay hit 170 her paper nest egg was worth more than $1 billion. [All the officers hired prior to August, 1998, exercised their share options in full.]

Speaking of money, it should be mentioned that I didn't own eBay stock until I'd been covering it here for 28 months. Tried like hell for 1150 IPO shares but couldn't get in, so had to wait for it to settle down.

What did Meg do before coming to eBay? Something along the same line she did there, changed a company's structure.

As President and CEO of "FTD" , an association of florists, she turned it into the successful Florists Transworld Delivery, a private for-profit company. After the eBay IPO she has one of the most desirable resumes in the world, and a commensurate net worth. Equal pay for equal ability.

Earlier she was a senior vice president at Disney for marketing Disney's consumer products, and a global product manager at Hasbro for Playskool and Mr. Potato Head. You can laugh but even though you're no kid, this Princeton grad with a Harvard MBA made sure you heard of them.

Making sure everyone hears of eBay is Brian T. Swette. Swette, 43, is Senior Vice President of Marketing. Heavy duty. He came to eBay from Pepsi-Cola where he was Executive Vice President and Chief Marketing Officer--Global Beverages. He reports directly to Meg.

If you never heard of eBay or used it and wonder what the commotion is all about, we describe eBay in an Insider's eBay Tutorial.

If you want to see eBay's original Prospectus it's available on-line from the SEC here.

There is one sour note. Although it's located in California, eBay is incorporated in Delaware. Under Delaware law, company Directors can escape liability for acting in their own interest rather than the interest of shareholders. It's not automatic; it's an option directors must ask for. The SEC filings show eBay Directors asked for it.

No one expects bad things to happen at eBay but under this law, bad things can happen. To see how, click on the story at the top about a Board of Directors that used the Delaware law to lower shareholder value, then force stockholders to sell out at that lower value. We call it, A Red Flag About Small Company Boards of Directors - The Sad Tale That Was Nimbus CD International.

We answered that question here in April, 1999, the day Value America went public. It was obvious the company would bomb and we explained why (see below.)

We looked into them at IPO time because Value America is here in Charlottesville, VA, a few miles down the road. Some friends were talking of investing so we did the homework for them.

One look at the business plan and we warned them off. Anyone who read that prospectus and invested anyway should not be making his own investment decisions. Any stock broker who recommended it (aside from the IPO to deep-pocket clients) should be in some other line of work. Harsh? Not at all. This was a no brainer failure.

And now comes the expected. August 12 the company filed for Chapter 11 bankruptcy protection. They canned at least 180 employes, closed their retail web site, ended consumer-oriented operations, and locked the doors. And their continued existence is more precarious than even that suggests.

They show $22.6 million in debts and claim $63.6 million in "assets." Since they can't pay even their utility bills the assets can't include much cash. They have no real estate or inventory. They defaulted on a contract to buy real estate, and they will be relying on the bankruptcy court to end their lease obligations, having already moved out of two of their three sites.

That suggests the assets are an accounting convention of attributing vastly over-blown value and good will to a business name even though the name has a bad reputation with consumers and is synonymous with failure, a curious accounting convention but a real one.

Value America paid their top executives not only large salaries but huge bonuses for bringing them to bankruptcy. That will be a smoking gun in the already filed shareholder class action suits.

It's instructive (about the parties involved) that in May, Value America was able to convince investors Vulcan Ventures, Pacific Capital Group, and Frederick W. Smith (chairman of FDX Corp. and Federal Express) to dump an additional $30 million into this company! This despite Value American bombing the previous December.

Bombing? This was the company status on Dec. 29th, 1999:

  • The two founders were gone, having made fortunes selling Value America stock
  • The range of products offered drastically shrank
  • The staff was cut 47%. 250 of the 600 employes were terminated that day and 30 more were slated to go in January
  • And a company press release blatantly gave out the last word in double-speak. It said the 47% staff cut is to "dramatically improve customer service."

If that didn't tell you all you need to know about the company, get out of the market before your heirs have you committed.

The company announced their product line would now only include what the competition had a substantial head start on, more good connections for, and more expertise in.

The 4 areas were office supplies - computer products - consumer electronics - entertainment systems.

Given its history, had Value America any chance whatever to succeed in such competitive areas? Hardly ...

The stock went into the toilet, of course, prompting people with no one but themselves to blame to bring class action suits. For what, a moral victory? There are no assets to get here. It would come as no surprise if the class action lawyers, seeing an empty treasure chest, are drifting rather than paddling.

The judge, however, approved payments to the company lawyers so they are paddling. Even in bankruptcy the company refuses to go quietly. They filed for reorganization, not liquidation. After failing as a drop-ship order taker from whom buyers could order almost anything, then failing since December as an order taker for only 4 product categories, now they hope to convince Judge William P. Anderson to let them try the business-to-business paradigm.

There is zero to suggest they stand any chance of succeeding in that business. Judge Anderson should convert this to Chapter 7 now rather than have to do it in a few months when a mile of creditors will be left holding the bag because the executives pay themselves bonuses instead of paying the bills.

How much handwriting has to be on the wall? Reports say the preliminary unpaid creditor list even includes $23,000 in unpaid utility bills for water and sewer, power, and telephone. When personal bankruptcy filings are that bad we call them deadbeats. If they're also diverting assets away from creditors and into their personal accounts we call it something for which they can be prosecuted.

Of course there's always the vaults of financial geniuses Vulcan Ventures, Pacific Capital Group, and Frederick W. Smith. "Come kick the football, Charlie Brown." Will these 3 Charlies beg the judge to let them have another run at the ball?

One suspects Lucy is betting on that which is why she filed for reoganization rather then liquidation.

Here is what we said about this company 8 months before that, in April when they went public. What follows has been here 24 hours a day ever since. Nothing's been changed except a few obvious updates.

[Begin old material]

My choice for Worst Business on the Internet is ValueAmerica (VUSA-NASDAQ), selling around $40 a share as this is written. This company appears to have nothing going for it. The business model is to lose money on every sale and hope to discover a way in the future to make it up in volume.

[Note: The price has since fallen below $1 a share. It was 72 cents before the Chapter 11 filing caused the NASDAQ to halt trading. Shareholders can only pray for a brief re-opening and a dead cat bounce to sell into.]

On Dec. 14 I watched a VUSA infomercial. The PC they were selling for $1300 offered the equivalent of what Gateway & Dell sold for $2200, and VUSA offered free shipping which saved another $100. They had infomercial advertising down pat but that package was a loss leader.

We may hear more about loss leaders in the shareholder suits. On the surface it looks like the company went way outside the loss leader envelope for the purpose of making the gross income look healthier than it was, and of course to promote the site.

But in their own words site promotion would result in more losses, based on their likelihood of profitability as filed with the SEC. This investment looks so bad it can't even be called a gamble. More to the point: can it be called a fraud?

What follows is all quoted from the SEC filing:


We may never generate significant revenues or be profitable. Since we began operations in January 1997, we have incurred significant start-up and other expenses. These expenses have included the costs of additional employees and new equipment, the development of our technology, and the implementation of our sales and marketing program. We have incurred substantial losses as a result of these expenses. In the first three quarters of 1998, we incurred a net loss of $27.9 million, and in 1997 we incurred a net loss of $1.9 million. At September 30, 1998, we had an accumulated deficit of $35.4 million.

We intend to continue to invest heavily in marketing, advertising and promotion, increase the number of our employees, and develop our technology and operating infrastructure. As a result, we expect to continue to incur substantial losses for the foreseeable future. Our product gross margins are small or sometimes negative, and we will not become profitable unless we significantly increase purchases from our online store at acceptable gross margins. To generate substantial revenues and achieve significant profitability, we must, among other things:

*implement and successfully execute our unproven business model;
*establish name recognition and a reputation for value with consumers;
*improve the effectiveness of our advertising;
*manage fulfillment operations electronically;
*develop the technology underlying our online store;
*provide effective customer support;
*anticipate and adapt to a developing market;
*develop business relationships with merchandise manufacturers; and
*hire, motivate and retain skilled employees.

Check the S-1 filing for VUSA. See if you can find any reason to invest there. Then check the prices at the site. They aren't the lowest on the net, and price is what matters in INET commerce.

[End old material]

One final knell, er ... note. I tried to place an on-line order with Value America in mid-December at Christmas time. Not possible. The order page had crashed and had been taken off-line.

The quality of life is defined by what you can do without having to ask.

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