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eBay Analysis: part 2 of 2

This is Part 2 of a 2 part report

Yesterday I picked out 3 of the many issues facing eBay as it grows – issues of customer retention, ROI on investment and Staffing.  Today, I am going to focus on 2 more issues that relate explicitly to size. I will also briefly mention a 3rd unrelated area:

monkey ladder

The Rule of the Monkey:

The saying goes that “The higher up the ladder a monkey climbs, the more monkeys there are behind it trying to climb up its butt.” The same logic often applied to ambitious employees, applies to companies too.  The larger a company is (and the broader its focus is) the more competitors, who are often (but not always) smaller and able to move more quickly, try and grab market share.  eBay is as susceptible to this as any other company.  In eBay’s Payment Segment there is increasing competition from Google Checkout which is a threat even with Paypal’s expansion to 103 markets and 10 currencies.  In the Merchandise Segment it faces competition, domestically and internationally, from companies focusing on niche areas of the marketplace .  This competition can come from traditional retailers for new products, or even exist in the secondary markets that auctions suit so well.  The event ticket category is one such example.  Resale of tickets has the potential to do well in auction; scalpers have known the secondary market was lucrative for years.   But eBay has competition from classified listing services (Craigslist etc), or online secondary markets like ticket vendor Stubhub, and even auctions of tickets in the  primary market  sellers like Ticketmaster (which can decrease the likelihood of resale by adjusting their prices or model).  eBay will always face this risk, but the broader its focus gets, and the more it proves the viability of different business areas (categories and segments), the more it will be grabbed from those below.


The Law of the 800lb Gorilla:

This second maxim for large companies is largely a rule of simple math: the bigger your revenue numbers get, the harder it becomes to maintain the same kind of year over year growth you might have had earlier.  Generating 35% year over year growth is one thing when your gross revenues are $20m, but 35% of $100m, or $5b is totally different altogether.  It can be partly attributed to this that eBay’s international growth rate (36% for 9 months ended Sep 2006) is larger than the domestic rate of 28%).  But as the international revenue catches up, maybe even passes, the domestic numbers, its only natural that the year over year growth will slow unless other divisions grow, or other business lines are introduced.   All large companies face these issues; all also face pressure from Wall Street to find a way to maintain growth. Sometimes under the pressure, good people do bad things (and I don’t mean illegal things though that happens too, obviously) – maybe a risky strategy is made, or the company tries to hard to please and loses its focus, or gets stuck in analysis paralysisEBay’s heavy investment in China is suspect. It may pay off (I don’t think it will, personally) but the law of the 800Lb Gorilla should remind investors to be cautious in evaluating growth opportunities for large companies.

As a 3rd, and unrelated issue, there are lawsuits.  Sadly, they are the cost of doing business, and all businesses face them.  In technology, IP and Patent suits are almost expected.  And for a company selling merchandise, trade and sales policy related suits are inevitable    For eBay the threat is especially significant- its rapid international growth means the company is increasingly exposed to suits in foreign jurisdictions where the laws and regulations can vary widely.  And Given the increasing contribution of international revenue, the risks these suits present are not negligible.  Among other cases: Rolex has a suit pending against eBay in Germany attempting to block sale of any Rolex products – to prevent fakes from damaging their brand rights – and similar cases have been filed by LVMH and Christian Dior in France.  Different legal issues have come up in India and Asia.  (And all of this doesn’t even address the costs of defense or currency issues which represent a whole different risk factor)

EBay is a great company. It, and Amazon together, are largely responsible for changing the nature of retail sales. eBay has become as ubiquitous a brand as Coke or Kleenex.  Some of the issues the company faces are the kind of growing pains endemic to all companies that go from entrepreneurship to bureaucracy in a short period of time.   Still, questions exist about management’s creativity or vigilance and about what lies ahead.  Is the company coasting? Or do for great new things? I don’t know.  

There is no easy answer for a lot of these questions.  I’d like to see eBay find a way to prevent attrition of talented staff and Power Sellers. I’d like to see big investments that make clear sense, or are explained so that they do.  I’d also like to see an increased effort, to the extent possible,  to manage and guide the types of volume of products sold on the site.  If eBay can wield some influence over what’s sold, it might be able to increase it’s profit margins.

I don’t know what’s wishful thinking or realistic, however.

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