Wall Street, where the stupid are cocksure, but on the other hand ...
Wall Street, where the stupid are cocksure, but on the other hand ...
[11/20/04] The end of "just a venue"?
The uninvested who votes Republican is a chicken voting for Colonel Sanders
In what courts may see as an abandonment of the "we're just a venue" defense against liability, eBay is about to jump into far greater participation in the settlement of sales on the site. Called the ITEM NOT RECEIVED process, eBay is about to tell buyers that if they have not received their goods in seven days, they can file an official complaint with eBay.
There's a sound reason for the new policy. The growing use of ISP spam filters means more buyers and sellers never see each other's email after the sale. An INR complaint might let sellers know the buyer isn't intentionally ignoring him.
But the law of unintended consequences is at work here. The most serious consequence arises from eBay helping complete sales. That's new territory for eBay, a level of participation counter to the venue model. The venue model says: "eBay is just a landlord. Auction transactions are between auctioneer and bidder, and the landlord isn't involved."
Lawyers have been bringing cases for years challenging eBay's "just a venue" defense. Now they are about to be handed a smoking gun with potentially massive consequences for eBay's liability.
If a court declares that eBay is defacto engaged in paternal post-auction sales completion, the reasons why will not matter. The venue defense will be pierced. It will be open season on bad cases making bad law, and go right to eBay's bottom line.
The reason behind this change is profits. Ebay appears to be targeting PayPal, its online bank-alike, to be the next growing cash cow. The ITEM NOT RECEIVED function treats buyers who use PayPal better than those who don't, thereby encouraging users to sign up.
In addition, eBay is about to enable its auctioneers to block bids from anyone not registered with PayPal. They are claiming PayPal registrants are 80% less likely to fail to complete purchases.
And yet a third cattle prod to move users into PayPal is a coming function to block new users from buying multiple items unless they register with PayPal.
There is a rumor that PayPal fees are to be increased, though no announcement of this has appeared at the eBay or PayPal sites.
Since the current PayPal fees are pretty much what the traffic will bear, eBay is evidently trying to raise the value of PayPal in preparation for the fee increase.
It must be remembered that eBay paid $1.5 billion in stock two years ago to buy PayPal. As noted below this was far above its worth but eBay dared not pass it up. Evidently they are feeling the time is nigh to draw more ore from this goldmine.
Because that's how much it took, and eBay really had to buy it. Look at the alternatives.
Paypal was there to be bought. (And for the second time. eBay passed it up once back when it was cheap.) Among the possible buyers this time were eBay's chief auction rivals, Yahoo and Amazon. Does eBay want those people owning the hands-down most popular on-line credit site, the one eBay's own sellers use? What would prevent the new owner from having a 2-tier pricing structure, making it cheaper to hold auctions on their site in order to attract eBay sellers away?
PayPal could have been bought by Microsoft, the economic cancer trying to infect every organ on the Internet so it can get its hand into everyone else's till. eBay already permits Microsoft to run its Passport mooch as a convenience to users who look for it. But that's eBay's choice. If the honey badgers at Microsoft owned PayPal, they would have the power to induce eBay to fully partner with the Passport parasite, and cut Microsoft in on every sale at eBay.
If you don't know, Passport is Microsoft's private VAT, its value added tax to make "just a little something" for Microsoft on every sale on the Internet no matter whose.
Microsoft is not alone dreaming of a cut of eBay sales. It's a popular dot com pastime. eBay management has to play as much defense as offense.
As for offense, PayPal has proven it can raise its rates to increase profits, something eBay's struggling Billpoint can't do. It makes sense to buy the profit generator and close the loser, and that's what eBay is doing.
Other dot coms play poker or shoot craps. eBay plays bridge, and they just pulled the opponent's trumps.
That depends on what numbers we are looking at and what importance we attach to them.
eBay looks to be 100% above-board so far as earnings, profits, expenses, loans, and accounting practices. And the CEO has said she is willing to treat stock options as a business expense as long as a fair and standard method of valuing options could be applied. So far, so good.
But eBay's strength comes not just from earnings. Any stock that sells for the multiples eBay does has more going for it than earnings to bolster investor confidence. It also relies on quarter-over-quarter, year-over-year growth. It's eBay's strong growth that convinces us this company is the wave of the future and a safe guardian for our investment.
There is one facet of that growth in which eBay numbers have vulnerability. There is a difference between the popular perception of the size of the user base and the true size of that base.
On July 17, 2002, eBay released the figure of "49.7 million registered users" at the site, up 46% in the last year.
The truth is, it doesn't. It has 49.7 million registered accounts. eBay has no true idea how many individual users that represents because many of its users have more than one registered account. eBay doesn't check for that.
It's commonplace to register one account to sell under and a 2nd account to buy under. It's commonplace to sell under multiple account names in order to provide your own competition. It's unfortunately commonplace to register accounts under fictitious names in order to shill auctions. Shilling is the bane of the auction world and its far worse with on-line auctions.
Does the average eBay user have more than one account? Very possibly, when we use "average" as a mathematical term. While the vast majority have just one account, those who have multiple accounts frequently have many. One registrant was found to have over 400.
Another cause of account inflation is that eBay accounts don't expire. Someone who registered an account in 1998, never used it, and died in 1999 still holds that active eBay registration. It's counted in that 49.7 million total. The Internet continues to surprise us but it's too much to believe the far side is buying Pez dispensers.
What's the true number of eBay active users? No one including eBay knows.
Does the quarterly growth really count new people registering on eBay, or does it reflect growing sophistication among experienced sellers that multiple accounts (they are free) is good business? No one has any idea.
On June 27, 2002, a date chosen at random, Medved QuoteTracker showed there were just over 7 million active auctions on eBay. That number went over 8 million twice in 2001, and in March of this year was 500,000 higher than on June 27. It's clear that higher registration numbers do not equal a higher number of active auctions.
What investors can rely on is eBay earnings and a savvy management with clear goals, plus the proven skills to reach them. Registration inflation should never become an issue. The recent management changes are further evidence eBay is putting the best people in the right seats to keep up the pace.
On June 25 eBay announced the promotion of Maynard Webb to chief operating officer. As COO, the 46-year-old Webb will oversee eBay's technology, customer support, and product development divisions. Previously, Webb served as president of eBay Technologies where his performance was considered brilliant.
Webb replaces Brian Swette who resigned as COO in January. Too young to retire but not to relax, Swette moved to vice president of marketing and senior adviser to Meg Whitman, eBay president and CEO.
Webb came to eBay in August 1999, the last of a succession of top leading edge technologists hired to solve eBay's hardware scalability problems. He succeeded where all others failed, becoming something of a legend and earning the highest annual salary of any eBay employee. Prior to joining eBay, Webb worked at Gateway and IBM.
eBay also announced that Jeff Jordan, head of international operations, and Matt Bannick, senior vice president of global marketing, will now also serve as eBay's chief revenue officers.
Along with his responsibilities as chief financial officer, Rajiv Dutta will become eBay's chief strategist. That move can be seen as further entrenching eBay's aggressive financial side.
If we had to deduce how these moves reveal Meg's current priorities, they point to site stability and financial growth as the top 2, continuing the priorities Meg has adhered to since becoming CEO.
eBay also believes that Q2-02 pro forma earnings per diluted share will approximate $0.17, bringing its first half 2002 guidance to approximately $0.35. This earnings level represents an increase of $0.03 to $0.04 from the companys previous guidance of $0.31 to $0.32 per diluted share.
For the full year 2002, eBay expects that net revenues will approximate $1.1 billion, representing the high end of its previous guidance of $1.05 billion to $1.1 billion. On the bottom line, eBay now believes that pro forma earnings per diluted share could range between $0.73 and $0.75, reflecting a $0.03 to $0.04 increase from previous guidance.
Beginning early this summer, a new Sotheby's branded site will launch within the eBay marketplace and replace the existing eBay Premier site. The new site will feature all of the same collecting categories of fine and decorative art, antiques, rare books, jewelry and collectibles currently offered on Sothebys.com. It will have a look and feel similar to the current Sothebys.com, but will operate on eBay's technological platform and include eBay's popular "feedback" and "My eBay" functionalities. All items offered will be guaranteed by sellers for authenticity and condition.
Sotheby's will also adopt the eBay Live Auctions technology, enabling real-time online bidding for a significant number of Sotheby's traditional auctions held in New York and London.
After its launch, the new co-branded site will replace both the current Sothebys.com and eBay Premier, and will be accessible from both sites as well as from its own co-branded location. Until the launch, both sites will operate as usual.
In a powerful demonstration to show Wall Street that some businesses still have pricing power despite the recession, eBay announced substantial fee increases for its customers effective Jan. 31.
The increases range from 100% to 5%, and impact every auction seller on the site, large and small. eBay will collect major additional earnings because it continues to be the unchallenged 500-lb gorilla in on-line auctions, and continues to add attractive, value features.
Perhaps the most significant increase is raising the cost 60%, from $25 to $40, to list a motor vehicle on eBay Motors. Sellers listing 50 cars a week will see their monthly eBay bill jump from $1250 to $2000 even if no car sells. A second fee applied if a car does sell is also raised 60% from $25 to $40.
The 60% cost increase buys revolutionary guarantees to car buyers and sellers. eBay will now give buyers a Limited Warranty and Purchase Insurance, and gives both parties Payment Protection. As before, prospective bidders continue to have vehicle inspection available.
Already the key player in on-line vehicle sales, this move using outside insurers vastly improves eBay's attraction to the huge market of customers reluctant to purchase cars without a personal inspection and test drive.
The Limited Warranty program is free and applies to all eligible vehicles under 10 years old with less than 125,000 miles. Buyers are protected against significant mechanical, electrical, and structural problems in the engine, transmission, and powertrain for one month or 1000 miles.
The Purchase Insurance program is also free and applies to every vehicle sold on the Motors site. It protects buyers against fraud or material vehicle misrepresentation. Coverage maximum is $20,000 with a $500 deductible.
eBay has not issued a change in earnings projections due to this but I anticipate higher earnings, higher site usage, and an increase in auctions that result in completed sales. This last is important, because the failure of high bidders to follow-through is of far greater importance on eBay Motors than on eBay itself. On eBay a failed sale means perhaps a $40 disappointment. On eBay Motors it's more likely a $15,000 disappointment.
Also improving eBay's profit structure is an increase in the commission rate varying from 5% to 20%, and doubling the cost of putting a Reserve price on auctions above $199. That fee goes from $1 to $2.
Reserves are highly disliked by auctioneers. They prevent a sale to the highest bidder unless the Reserve is met. No sale, no commission. But that's not why eBay dislikes Reserves.
eBay has always reflected the personal anti-Reserve bias of founder Pierre Omidyar. His wasn't an auctioneer bias. Pierre has no auctioneer background at all. His dislike was because Reserves ran counter to the supply and demand structure on which he founded eBay. He created the site so collectors of Pez dispensers could establish a market value and trade there.
To discourage Reserves, Pierre first tried jaw boning. When that failed he threatened to eliminate them, suggesting that bidding must begin at the lowest price the seller is willing to accept! Lacking auction experience himself he couldn't know that proletarian auctions must begin with low opening bids to spark interest. Reserves are essential when auctioning expensive items in a shopping mall milieu.
Without a Reserve the seller of high ticket goods will suffer a huge loss unless at least two high roller competitors want the item and chance to see his auction. eBay cannot guarantee that, and has rules forbidding sellers from emailing customers when they offer something special for sale.
Faced with a massive loss of business including all the high ticket items if he eliminated Reserves, Pierre backed off and instead began charging a $1 fee to have a Reserve. Like most of what Omidyar does that stroke created undreamed riches. The bonus is more than meets the eye.
Nearly all Reserve auctions that fail to sell are re-listed. Probably the majority are re-listed three or more times. (The known record so far is 16 re-lists. A bidder met the price on the 17th try.) Either a bidder eventually meets the Reserve or the Reserve is lowered to meet the market. Pierre's $1 Reserve discouragement fee translates to about $3 eBay profit. Doubling the fee on items over $199 will add far more profit than any marginal loss of business the price increase takes away.
In a show of management savvy that must be respected, eBay left unchanged the cost to place an ordinary auction. This would have been a resented increase creating widespread ire among unruly clientele. By keeping that cost unchanged eBay demonstrated not only that it has pricing power, but knows how to use it without rippling the water.
It will be amusing to see how Lehman analyst Holly Becker gets this wrong, as she consistently is about eBay.
On January 1 Brian Swette moved from chief operating officer at eBay to vice president for corporate development, where he manages the company's marketing and sponsorship relationships.
He was reportedly to continue to act as senior advisor to eBay President and CEO Meg Whitman until another executive rises to replace him in that role.
Swette's former responsibilities in marketing, category management, and business development were divided among other top executives at the company many of whom already work directly with Whitman.
Those who were assigned Swette's duties include eBay Technologies president Maynard Webb, CFO Rajiv Dutta, U.S. senior vice president and general manager Jeff Jordan, International senior vice president and GM Matt Bannick, and global marketing senior vice president Bill Cobb.
Jordan, Bannick, and Cobb have been a part of eBay's executive leadership team for several years. The change appears to have been smooth.
eBay's announcement said Swette backed off from the intensive COO duties to spend time with his children in Florida. He had plans to divide his time between homes in FL and San Jose.
The change could result in enhancement of eBay's marketing and sponsorship relationships, though this will be very hard to analyze from outside.
For several months eBay has been exhibiting software problems preventing some sellers from listing or using other functions at the site. Despite large numbers of complaints the site has been unwilling to fully acknowledge the problem. [Update: the problem finally received public recognition at the site on Dec. 7.]
Once a site with stable software, eBay's slide began earlier this year when it committed itself to total Java programming. Apparently either Java or the programming firm(s) eBay contracted were not up to the job of making site functions available across the landscape of browser platforms and user settings.
Among the major current complaints are the inability to log in to post an auction, see current account activities, or change registration information. When trying to use these functions, a substantial number of users go into a login loop where logging in brings them back to the screen they just left requesting them to log in.
It's possible the recent closing down of a major internet service provider, followed by a large number of eBay users unable to update their registration with a new email address, finally pushed the problem to the surface.
eBay's Support desk has no solution for the problems and re-programming some functions has begun. Problems appear with seeming randomness and can affect every version of Internet Explorer, Netscape, and at least some versions of Opera.
No other auction site is known to share eBay's software problems.
Two years ago eBay's problem was hardware. Massive expenditure and expertise were needed to make the site reliable, and several blind alleys were explored before the problems were conquered.
The software problem is different. Although thousands of users are thwarted or inconvenienced, it is only a small percentage of the 30+ million accounts. Nonetheless it appears that as of Dec. 7 eBay decided the expenditure to make repairs is cost effective and is going ahead with them.
In some respects eBay is pioneering new software avenues. For example, at their half.com subsidiary the usual cookies are placed with non-standard cookie placement code. If the code is not unique to the site it's at least highly unusual.
On the 4th eBay filed with the SEC a notice to sell 92,290 shares used for the acquisition of HomesDirect. That filing contains 18 PAGES of Risk Factors, a phenomenal, mind-blowing catalog.
Because it goes to such extremes (extremes!) to cover all bases, one suspects this was concocted as a defense to potential litigation from any substantial drop in shareholder value.
Yet despite that huge catalog listing hundreds of threatening, potential (and educational) adversities, one absence stands out like a missing thumb in view of the Sept. 6 filing.
The Risk Factors do not include, "eBay could issue for sale additional shares of company stock that could materially reduce the value of shares currently held."
Two days after submitting those 18 pages of Risk Factors to the SEC, eBay Directors filed an S-3 shelf authorization to issue one billion dollars in new common stock. The company's market cap was just under $16 billion that day.
So long as new stock is used to acquire income producing property, all is well. Or better.
We don't expect stock watering. We expect acquisitions that will increase eBay's hold as one of the top enduring and successful dot coms.
The company's endeavor to raise $100 million for 9/11 charities will come out of its bottom line this quarter and next, but the important numbers to watch will be, as always, year-to-year growth in subscriber-related numbers. They appear to be on-track to new records.
eBay wins an important court case with a summary judgment
There was some concern that the DMCA's extremist protection of Copyrights would shut down US on-line auction sites that allowed individuals to hold auctions.
After passage of the DMCA eBay instituted a series of safeguards, enough to make the case they were doing what they reasonably could to prevent copyright violations.
Congressional members of the House Energy and Commerce Committee are thinking of legislating against auction fraud. Since auction fraud is a contributor to eBay's bottom line, earnings will be affected if fraud is reduced.
The most common fraud is auction shilling, the boosting of bids by the seller and his minions using multiple accounts. The higher the closing bid, the greater eBay's commission.
eBay figures show that approximately 9 million of its 29 million total accounts belong to users who have multiple accounts. That's nearly 1/3.
This does not mean there are 9 million shill accounts. It's not possible to know how many there are. There are many reasons to have multiple accounts, such as one for selling and another for buying, or one for selling specialty A like jewelry and another for selling specialty B like stuffed animals.
But plenty of those accounts are merely to shill with. A user was once found to have 400 accounts. Shilling is done by large and small sellers.
Recently a shiller goofed and users discovered that one of the site's larger auctioneers, a Power Seller, was using several accounts to shill his auctions. His sub accounts even shilled his feedback record with bogus praise.
The transaction-related feedback was the smoking gun and when the evidence was presented to eBay, the site violated its own policy by deleting the tell-tale feedback.
Rather than go after the shiller, eBay shielded him. His accounts remained active. Why? His main one, a "shooting star" account with over 10,000 feedbacks, ran hundreds of auctions at all times. In a typical 30-day period the seller holds over 4,500 auctions on that account.
Following its own rules and banning him from the site would cost eBay significant loot and send that seller and his customers to a rival auction site. Virtue in on on-line biz is its own reward, the same as any other biz in an era when profit is the only respected virtue.
This will play very interestingly in view of the mission that committee chairman Billy Tauzin (R-Louisiana) gave CEO Meg Whitman, which is to analyze eBay's auction rules to learn if they encourage, discourage, or fail to affect fraudulent behavior.
Over the years eBay has relied on "We're trying to stop fraud" when confronting the FBI, the Federal Trade Commission, the NYC Office of Consumer Affairs, public prosecutors, judges, and the public. It always got them off the hook, but promises won't be enough to appease Congress.
Some eBay users feel violated by the blatant favoritism shown to eBay's larger accounts and are itching to have input into the House Energy and Commerce Committee hearings. Over the years eBay has made enemies, as every successful business does. It's not good to have them all in the same room talking to legislators seeking to make a name for themselves.
On another front, eBay's internal structure appears to have been revamped. Where once the site conferred with users before implementing changes to everyday things, that has been abandoned. Under the new approach changes simply happen and users go ballistic.
Some recent occurrences make it clear that programmers with no experience using the site themselves, and no exposure to user focus groups or chat boards, are in charge of designing, approving, and implementing changes. That's like a TV network putting electricians in charge of the programming schedule.
Occupied with new enterprises like half-com, picture hosting, eBay stores, and its overseas ventures, management has taken not just its focus but evidently its eyes off the auction venue that built the company.
eBay is still the 500-lb gorilla of dot com auctions but a growing number of its auctioneers recognize and dislike the company's taking their loyalty for granted. Worse, auctioneers have money problems and are blaming eBay for their drop in sales and lower average closing bids.
The recession has taken a toll on collectibles. People don't have the money or confidence to spend as they did. The collectibles market is saturating, due to eBay. Supply has increased, demand has subsided. Collectibles auctioneers are behind the curve and treating 2001 with 1999 expectations.
If they take it out on eBay they may also take themselves out, either to reduce their auctioneering or to try another site. eBay can comfort itself that deserters have never been more than a trickle, but this is the first time money is drying up. Anything could happen.
Collectibles offered by millions of part-time sellers are not eBay's big company earner but they are responsible for the site's phenomenal popularity. Without them eBay would be an outlet for manufacturers and importers just like other sites, and traffic would likely plummet. An eBay with shrinking quarter-to-quarter figures would cease to be Wall Street's darling.
Is the schoolyard bully going to get away with years of petty extortion?
Microsoft is a software developer and publisher whose operating system and Internet browser dominate the PC industry. Because the company channels users to its home page and email service without asking, these became hugely successful separate businesses earning billions for the company.
Sophisticated users can re-channel much (not all) of the software to other home pages and other email services, but the vast majority of users remain hapless subjects of the Microsoft kingdom.
These sites have nothing to do with the company's business of developing and publishing software. They came about through the abuse of monopoly, and it is a disgrace that the court has not required Microsoft to auction off its Internet sites to bidders unaffiliated with the company.
It is a disgrace that they are allowed to continue channeling users of the Windows system and Internet Explorer browser to Microsoft sites.
There is no justification for it. Certainly not software maintenance.
Unknown to any but a few users, undocumented software in the MS Windows operating systems (RPCSS.EXE among other programs) will, when the machine is connected to the Internet, continuously poll MS to share users information with the software giant. This is entirely separate from the channeling.
The polling, which supposedly is to keep up with software updates, occurs as often as every 5 seconds. Turning it off or changing the frequency is difficult in some Windows systems and impossible in others.
Users are unaware this is happening. Only an Internet firewall program can detect it and many of them do not even report the activity or presence of Microsoft's "Distribute COM Services" on the system, yet DCS is but a small step away from spyware.
Because the proper authorities won't curb the bully, we have schoolyard guerilla warfare sniping at the giant - virus writers and Denial of Service attackers exploiting every nuance of Microsoft products. Whether we call it guerilla warfare or the revenge of the nerds, it's the innocent who get hurt.
Unless the court meets its responsibility, this can only continue, to everyone's detriment.
One interesting point eBay CFO Rajiv Dutta made at the JP Morgan H&Q Technology Conference May 1, 2001, was "so far ... we've had very low penetration of a huge addressable market."
The reference was less to eBay's penetration than to overall on-line penetration. eBay sees the global market for goods sold online -- automobiles, collectibles, art, sporting goods etc. -- worth $1.6 trillion dollars last year and $2 trillion by 2005
Dutta said EBay has penetrated only 0.46 percent of that market and wants that percentage to rise to between 1.5 and to 2 percent by 2005.
That would mean eBay sellers doing $30 to $40 billion worth of business in 4 years, up from the $5.5 billion in gross merchandise sales they did last year.
Will they? So far they're on track. First quarter sales this year were $1.98 billion vs. $1.61 in the prior quarter, a 23% gain. It was a 72% gain over the first quarter of 2000.
eBay's cost to make these gains is negligible and their margins are huge. But as noted below, there's more to the picture.
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