Forget About the Gang of 100; Focus On eBay's Real Strengths

Here's a baker's dozen of eBay's strengths that will make this a company to contend with for years to come. Discuss your ideas on our message boards.
Author:
Publish date:

I usually wouldn't revisit a company so soon, but this week has produced a bumper crop of reader mail from

TSC

subscribers responding to my

comments about

eBay

(EBAY) - Get Report

on Monday. We've also seen another great round of reader comments about eBay in our new message boards this week on that column.

Is eBay going to hold on to its lead? Tell us what you think on our

message boards.

(If you haven't yet looked at the new

TheStreet.com

message boards, you're in for a treat. Rather than the random comments, personal invective and raw stock-hyping that have infested so many boards over the last year or so, the

TSC

boards are drawing thoughtful, intelligent, generally well-informed, adult comments from

TSC

subscribers. We're proud of these boards and the way you're reinventing the message-board paradigm here every day. Keep it up!)

A few of this week's eBay letters complained that I was just trying to pump up a fading star, so I could dump my holdings. (Not so -- I'm neither short nor long eBay, as was noted at the bottom of that column.) And a few more predicted a double or triple over the next few months, which I think is highly unlikely.

But the vast middle ground was very interesting, from people who assessed eBay's near-term prospects differently than I had, to those who are convinced (as I am) that eBay has become an American institution, to those who see more strength in the new

Gang of 100

alliance assembled by

FairMarket

than I do. And several readers asked me to separate my thoughts about eBay the company from eBay the stock, at its current price. Fair enough; here goes.

The FairMarket group will certainly get some action on their newly combined auctions. That's inevitable in this business, and let's not forget that their allied sites

already

had some action, so they can build on that. But a crushing frontal assault on eBay? No way. I don't think toppling eBay is even a part of the alliance's plan.

Here's a baker's dozen of eBay's strengths I think will make this a company to contend with for years to come:

    Lots of prospects. When sellers -- the people, remember, who pay the freight for online auctions through listing fees to the auctioneer -- go looking for a place to offer items, they look for one big thing: lots of potential buyers visiting the site. Large numbers of buyers mean sellers have a better chance of finding people interested in what they have to offer, and large numbers of buyers mean there's a better chance of stirring up the kind of bidding frenzy that drives the ultimate price higher. eBay delivers buyers by the millions for sellers, and no one -- not Yahoo! (YHOO) auctions, not Amazon.com (AMZN) - Get Report auctions and not this new alliance -- is likely to even approach that mass of active eBay buyers in the foreseeable future. Lots of auctions. What draws all those buyers? A huge volume of auctions going on at any given time, period. Even after its free-listing promotion is over, eBay is still running more than 2 million simultaneous auctions -- more than the rest of the online-auction industry combined. It's hard to imagine anyone going to eBay and not discovering something they find interesting for sale. Categories. Sellers and buyers alike want reasonable categorization -- all those pigeonholes sellers can tuck their goods into -- so buyers can find them more quickly. eBay already has far better categorization than its competition, and a week ago announced that it's creating another 1,900 of these pigeonholes -- oops, categories -- very shortly. Big mo. The force is truly with eBay. It defined this business; it stands astride this business. When it has technical problems -- still far too often -- that's a big topic of discussion from Wall Street to Main Street. eBay is what America thinks of when it thinks "online auctions." And increasingly, when it hears "auctions," period. Category killer. Talk to antique dealers about eBay. They'll tell you that attendance at many antique shows is dropping -- and that when people do go to a local or regional antique event, all they talk about is eBay. Not just the tire-kickers, but the dealers, too. Many dealers are changing their modus operandi from a retail shop, plus weekly or monthly forays, to antique shows to the retail shop (which continues to have importance as a source of walk-in inventory acquisition) plus eBay. No shows -- or at least, far fewer shows. And bringing just a few high-ticket items to the shows they do attend. We're going to see this pattern repeated again and again in other areas of commerce. In almost every case, eBay's going to be the winner. Insidious integration. Use eBay a couple of times, "win" an auction or two, and you'll go back regularly. In our family, the reflexive assumption that when we need something, we head for the mall, has been replaced, often, by "Want to check on eBay first?" Often as not, it seems we find and buy what we want on eBay. For a lot less money than at the El Giganto Unpleasant Experience Retail Chain Store, Inc., in the mall or strip center or -- gasp! -- downtown. A changing ethic. Remember that "use it up, fix it up, recycle it!" mantra your 9-year-old brought home from Environmental Education Week at elementary school (which didn't originate there, but on the home front during World War II)? That's the direction we're all headed: When we're through with something, don't automatically toss it, but try to pass it along to someone else who will find new value in it. eBay has become our "National Garage Sale," the 24-hour-a-day "stuff-recycling system" that supports this new instinct to pass things along, not toss them. The game. Much more than the other online auction sites, eBay recognizes that for a significant number of players, online auctions have an element of entertainment -- competitive shopping, if you will. Certainly there are a lot of cold-blooded, online-auction buyers out there -- such as the "snipers" who never bid during the course of a week-long auction, but then sweep in in the last 30 seconds with a bid just high enough to win, too late to be countered. But for a good number of the eBay users I talk with, the eBay experience has become at least as much entertainment as commerce. That's an important, and probably growing, element of eBay's success. Focus. eBay is in this for keeps. Its online-auction business is its only business. By contrast, FairMarket's Gang of 100 sites don't really care about the auction business, per se; for them it's a means to an end, a way to keep you coming back to their sites to check on auction results -- so they can sell you something else ... or at least, so they can sell you to their advertisers. Businesses run as businesses will always top means-to-an-end sidebar businesses. Pricing. Listing and selling something on eBay is cheap, by any measure. Sell something for $100 and you pay eBay a $5.13 fee. Sure, others can and will try to undercut eBay's already-cheap-enough pricing, which will from time to time put a little pressure on eBay's earnings. But overall, eBay's prices are low enough to withstand these challenges -- and this isn't a very price-sensitive market, anyway. If you're a seller, and have a choice between the millions of eBay eyeballs or the far smaller number available on other auction sites -- for maybe $1 less -- which would you choose? Auction sellers want reach, which eBay delivers in spades, not nickel-and-dime savings on auction fees. First-mover advantage. Several readers' emails chastised me for not adding first-mover advantage to eBay's strengths. Yes, they have that; and yes, first-mover often counts mightily in Web successes (though I'd say that its first-mover advantage is what has delivered eBay to its present dominant state, and any remaining first-mover advantage is pretty marginal). Market foreclosure. Greg Stranger, from Northwestern's excellent grad B-school program, the Kellogg School, sent me an email and also posted on our message boards a good point: The combination of eBay's existing strength and the FairMarket announcement constitutes market foreclosure. In other words, Greg says, "With this heavyweight entrant, the door is effectively shut on anyone else entering the consumer online auction space. If it was even open a crack, this slams the door. If you were proposing or operating an auction site and were seeking funding, this announcement ruins the party for you. The calls you'd be getting today would be from VC's and I-Banks canceling your appointments." Hidden B2B opportunities. So far, eBay has been strictly consumer-to-consumer. But as it gets its technical-side act cleaned up, I wouldn't be a bit surprised to see it begin selective business-to-business operations, offering to set up and run B2B auctions for industrial suppliers in any number of industries. eBay has the brand name, and the operating experience, to move into those areas, choosing partners carefully and exploiting its market position and infrastructure. (If it can't clean up the technical glitches, of course, this is hopeless. But a six-month run without significant breakdowns would do a lot to repair eBay's image as a technically competent shop.)

So what about eBay's current stock price?

It's down from those heady days in late April, when it was dancing around 200, but in the recent 140-to-150 range, I think it's still overpriced. This is one of those "you can't value Internet stocks by conventional measures" arguments, but even though I make that argument often, I still think eBay has gotten ahead of itself.

Back under 100, in the first half of August, I think eBay was a great buy. But in the market chaos we see today, 150 for eBay feels risky. Yes, despite those powerful underlying fundamentals (in the nonfinancial sense of that term, at least).

I think eBay will be one of the biggest long-term winners in e-commerce. If you agree, and think it's worth riding the Cyclone at

Coney Island

for a while, to make sure you're in the game when the big move comes, then 150 or so is OK. Especially if you're a longer-term buyer -- socking away some money for your kids' college fund, for example -- then putting

part

of that money in eBay now could be a smart move.

But if we continue to have market temblors of the sort we've seen in the past week, eBay holders with a basis around 150 could feel awfully exposed.

My take: Under 100, eBay's a big buy. Up to maybe 115 to 125, it's an OK buy. Above that,

Hobson's Choice

: It may or may not be a buy, depending on your investment style and perspective.

But do recognize that subsequent big price swings are going to be the result of market uncertainties, not the underlying business at eBay.

This one's a winner.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in any securities mentioned in this column, although holdings can change at any time. Seymour does not write about companies that are current or recent consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.