Yahoo! Auctions' Woes Suggest Gavel Is About to Come Down on Napster

The bad news for Yahoo! (YHOO - Cramer's Take - Stockpickr) could turn out even worse for Napster.

That's an unsettling implication of statistics circulating this week indicating that Yahoo!'s auctions have been decimated by fees introduced last month.

The falloff in listings on Yahoo! Auctions, not suffered by auction leader eBay (EBAY - Cramer's Take - Stockpickr), illustrates the challenges that Yahoo! faces in its attempt to sell new services to users and to diversify its revenue stream beyond the advertising dollars upon which it is so dependent.

In addition, the decline looks to be a bad omen for the privately held Napster, which hopes to transform its immensely popular, free, file-trading community into one that at least a fraction of its users will stomach paying for.

Yahoo! closed at $28.50 on Wednesday, up $1.38. The stock is down 5% for the year, following 2000's monumental 86% plunge.

Going, Going, Gone? Simultaneous auctions slide at Yahoo! (left scale), rise at eBay

Source: Rick Gagliano, www.dtmagazine.com

The decline in Yahoo! Auctions came to light on Tuesday when the Web site E-Commerce Times reported that Yahoo!'s simultaneous auction listings fell to 460,000 last week from 2.6 million on Jan. 10. That factoid, which also made the rounds Tuesday at the Robertson Stephens Technology 2001 Conference, originally was compiled by Rochester, N.Y.-based Rick Gagliano, who had been publishing data about Yahoo! Auctions, eBay and other auction sites on his own Web site, www.dtmagazine.com, since early January.

On Valentine's Day, the news got even worse for Yahoo! Auctions: Gagliano, who says it's been taking him about two hours a week to compile the Yahoo! information, counted only about 248,000 auctions on Yahoo!. That translates into a 90.5% drop from the Jan. 10 level. (The January figure excludes about 212,000 business-to-business auctions, which Gagliano stopped counting in late January.)

A Yahoo! spokeswoman declined to comment about any of the figures circulating about the auction falloff, though she said that the aggregate dollar value of completed transactions hadn't declined. Yahoo! expected a dropoff in listings because of the new fees, she said, but hasn't specified how big it estimated the decline would be, contradicting an assertion in the E-Commerce Times story that the company expected a 50% decline.

For Yahoo!, the decline means that analysts, paying close attention to how well the company is finding revenue beyond the advertising dollars that are its mainstay, may have to go back and recalculate how much money Yahoo! will make from the auctions. In early January, Merrill Lynch analyst Henry Blodget, in a back-of-the-envelope calculation, estimated that the new fees translated into $30 million to $80 million per year in incremental revenue. But Blodget based that calculation in part on the assumption that auction listings would drop by 66% to 75%, based on Merrill Lynch's assessment of what happened when eBay Germany introduced listing fees. If the listings drop 90%, based on TheStreet.com's back-of-back-of-Merrill's envelope calculation, you get incremental revenues more along the lines of $10 million to $20 million. Yahoo! reported revenue of $1.1 billion last year.

Beyond that calculation is another basic problem facing Yahoo! Auctions and any service, including Napster, dependent on a critical mass of users. As fewer and fewer people use the service, it becomes less and less valuable to remaining users on the service. That reinforces the attractiveness of eBay: If you're a buyer, you want to visit the auction site with the greatest choice; if you're a seller, you want to sell on the site with the largest number of possible buyers. It also makes a smaller version of Napster less attractive than the current one, the availability of copyrighted music files aside: the fewer people there are to trade smaller libraries of music, the less useful it is for people to visit.

Of course, there is a value to Yahoo! Auctions for sellers choosing to stay. "Some people might like being the only person listing in a category," Gagliano says. "At least your items get seen more often."

Unfortunately, Gagliano, who specializes in selling old Playboy magazines, won't be able to employ that particular advantage. At the same time that Yahoo! instituted the new fees, he says, it implemented new content guidelines that prevent him from listing Playboys on the site.