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eBay Analysis: part 1 of 2

This is Part 1 of a 2 part report

At 11-plus years old, a lifetime in both dot com and dog years, is Ebay a vigorous and healthy company or are they a pharmaceutically enhanced geriatric patient?

As of September 2006, Ebay had almost 13k employees worldwide, more than 50k categories of merchandise and over a million dollars of goods trading daily.

But how is the company really doing?  Approximately 10 of the 30 odd analysts covering Ebay rate it neutral.  I’m more or less with them (and not because there’s strength in numbers).  This would-be Corporate Geriatrician thinks the company is sound but has some real issues to sort out to truly be healthy. 

A 40 or more page analyst report could be written breaking down the issues.  that is way  too much space for this format, so to hit on just 5 of the issues (3 today, 2 tomorrow):

Heavy Reliance on relatively small number of customers:

Ebay has more than 1.3 million global sellers but various accounts suggest a small percentage of global “Power Sellers” account for a substantial amount  of the revenue in the company’s Merchandise Segment (which itself represents about 75% of net revenue).    The exact numbers are unclear but dating back to 2001, its been suggested that as much as 90% of auction revenue results from transactions posted by less than 15% of the user base.  Trouble with this is that as these users expand and grow, they branch out and begin selling through storefronts (which can be more cost effective and not necessarily hosted by EBay).   The migration of these users is a lost revenue opportunity for Ebay.  And while it’s true, EBay is still growing year over year in both volume of active users, and transaction volume, which suggests new Power Sellers replace the departed, just maintaining a balance is leaving money on the metaphorical table.

Questionable Bottom Line Impact from Major Investments and Acquisitions:

Ebay has spent a fortune for long term growth in China and around the globe.   Small scale purchases in core business areas like the acquisition of in Sweden are one thing (if a $50m purchase can be considered small) , but large acquisitions and investments are another.   The Communications Segment (Skype) is showing a loss ($25m for the 9 months ended September 30, 2006 on net external revenue of $129m), and it’s unclear how long it will take, if ever, before it generates the kind of revenue numbers that will justify it’s costly purchase price.  It’s also not clear if it will integrate successfully with Ebay’s core businesses.  It’s an expensive gamble.  Even if the division runs with Capital Expenditures of just a few million a year it’s got a lot of ground to cover.  Then there is  The value of acquisition remains cloudy and the website won’t be directly integrated with the ebay website for a few years, if at all, according to comments Meg Whitman made to analysts in January 2006.   Is there gold at the end of the rainbow?

Retaining Key Staff and an Entrepreneurial Culture is Difficult with Growth:

The people who are instrumental in growing a company through its early years are often less involved when the company matures.  Big companies are complex machines and they often need staff that can function as cogs and sprockets in that machine. That work doesn’t often hold the interest  of the creative and entrepreneurial talents that built the machine in the first place.  Compounding that, money as a motivator loses its power as early employees cash out of lucrative option and compensation packages.  Mentally “checked out staff” and disproportionate motivation only adds to the morass.  If you’re a manager and one of your direct reports has $2m in the bank and you’re shares are unvested, it’s can be personally frustrating, and difficult to motivate him or her to get a quality product.   Innovation, and existence on the cutting edge, becomes more of a motivator than money in many cases.  It’s therefore no surprise that the more companies like Google, or even Yahoo, innovate and expand, the more talent they steal from a more narrowly focused, maturing, company like eBay. And that’s doesn’t consider attrition to start-ups – a Silicon Valley right of passage of sorts.

Tomorrow be back with two more points of issue, and maybe a theoretical R/X for EBay’s coming teen years.

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