eBay's success, a rarity among dotcoms

Andrea Orr

PALO ALTO: Back when investors liked all things dotcom, eBay Inc. was just

one of a pack of companies that was expected to change the world and enjoy

unstoppable growth for years to come.

Now it is arguably the only one.

Many who have followed the online auction site through the industry's good

times to its current slump, say eBay has become a real enigma among consumer

Internet companies, surpassing even other long-time favorites like Amazon.com

Inc. and Yahoo! Inc.

As eBay prepares to report its fourth-quarter results later this week, it

remains not only one of the few Internet companies to be consistently

profitable, but just about the only major company that does not have a big black

cloud hanging over it.

"The case I've been making for quite some time is that eBay is a very

distinct business from almost any other on the Web today," W R Hambrecht

analyst Derek Brown said.

"The issues facing Amazon and Yahoo have nothing to do with eBay,"

Brown noted. "The slowdown in online advertising that has hurt Yahoo has

had fundamentally no impact on eBay; the concerns over gross margins and

inventory management that have clouded Amazon's outlook have nothing to do with

eBay."

Brown mentioned those other Internet industry leaders because they, along

with eBay, are often cited as three strong pillars in a generally shaky dotcom

arena.

Increasingly, though, eBay is being put in a class by itself. Its numbers

tell a success story that has surprised even some of its biggest supporters and

stunned early detractors who found hundreds of logistic problems with a company

that was essentially an online flea market. In its most recent third quarter,

eBay hosted some 68.5 million auctions, facilitating the exchange of some $1.4

billion in merchandise.

And, in a season where so many companies are missing or just barely meeting

forecast results, eBay is widely expected to surpass official fourth-quarter

earnings forecasts of 7 cents per share when it reports results on Thursday.

The company was not immediately available for comment.

Although the eBay stock has suffered with the rest of the tech sector, it has

performed far better than most dotcoms. Now around $43 a share, it is down about

66 per cent from its 52-week high, compared with the 80 to 90 per cent descents

of so many peer companies.

Continued...

While Wall Street has recently distanced itself from Amazon and Yahoo!, its

support of eBay remains solid. Of the 27 analysts who follow eBay, 23 have

either a "buy" or a "strong buy" rating on its stock, and

the other four rate it as a "hold." By comparison, only nine out of 28

Yahoo! analysts have "buy" or "strong buy" ratings and three

rate it a sell. Sixteen of the 26 who watch Amazon give that company a

"buy" rating and two recommend selling the stock, according to First

Call/Thomson Financial, which tracks ratings.

One big difference between eBay and the other Internet leaders is that its

business model has avoided two of the early assumptions of the Internet business

that turned out not to be entirely true.

The first, that advertisers would flock to the Internet in quantities

sufficient enough to support multitudes of content sites. The second, that

retailing online would slash the overhead costs of brick-and-mortar stores.

Instead, by setting itself up as an online exchange that would connect buyers

and sellers but hold no merchandise itself, the company found a business model

that really was suited to the Internet. It can collect a fee on all the millions

of transactions it enables, but bears none of the costs of expensive warehouses

to hold merchandise.

"Its business model allowed it to be profitable from the very

beginning," said David Burnell, author of a new book, The eBay Phenomenon.

"The company defied all the rules of other Internet companies and had

tremendous, explosive growth."

If eBay was first successful just on the strength of that business model, it

has also shown endurance in staving off copycat auction sites introduced by

Amazon and Yahoo!.

Although Amazon and Yahoo! do not break out results for their auctions sites,

by all accounts eBay dwarfs them both.

Kevin Silverman, an analyst at ABM Amro said that among eBay, Amazon and

Yahoo!, eBay receives some 90 per cent of the auction traffic.

The eBay that once catered to small-time hobbyists and collectors of

low-ticket items such as Beanie Babies, is today a global business where people

can bid on expensive art, homes and cars. Small and not-so-small businesses use

the site to make bulk purchases or unload surplus equipment such as power tools,

x-ray machines, cash registers and photocopiers. Many individuals run their own

small businesses over eBay and their loyalty to the site is legendary.

That unflinching loyalty, in fact, may be the most curious part of eBay's

success story. The company has somehow managed to build its popularity and

financial success while offering less than stellar service.

Although fraudulent transactions on the site represent a minute percentage of

the total transactions on eBay, reports of sellers failing to deliver or buyers

never paying are still fairly common. A recent study on Internet security by the

New York research group eMarketer, found that 87 per cent of all Internet fraud

last year was committed on auction sites, although eMarketer analyst Rob Janes

said it did not appear that consumers were unduly concerned.

More notably, for a company that so many people depend on for their

livelihood, eBay has not been the most dependable. Last year, it suffered a few

lengthy outages, and even after it installed a backup system, it opened 2001

with another site crash that kept the service out of commission for the better

part of a day.

Such outages have been frequent enough to cause the magazine Internet Week to

take a closer look. It concluded that eBay had skimped on some key

infrastructure.

"They have a centralized storage and database architecture that leaves

them vulnerable to failures," Internet Week senior managing editor David

Joachim said. "Most Web sites the size of eBay operate with a distributed

architecture, which means there is no single point of failure so if one piece

goes down another can pick up the task."

But the publication also found these breakdowns have had little impact on

eBay's success.

"It really has had no impact on the business," Joachim said.

"The reason is that it is the only game in town."

(C) Reuters Limited 2001.