Get ready for a bit of drama during eBay's ( EBAY) earnings report Wednesday. After the market closes, the online retail giant is slated to report earnings that, according to a consensus from analysts polled by Thomson Financial, will see net profit rise 42%, to 34 cents a share in the fourth quarter. eBay, which delivered results ahead of estimates for seven of the last eight quarters, is likely to beat the number again. But while anyone long the stock will be jumping up and down in glee, there will be a loud chorus of outrage among a group of people important to eBay's sustained growth: its customers. eBay, after all, would be announcing record profits less than a week after it substantially raised fees for selling goods on its Web site. The fee hikes range from a 60% jump in the subscription rate for sellers who run eBay stores (from $9.95 to $15.95 a month) to a doubling of the cost of listing items for 10 days (to 40 cents an item from 20 cents). Why is the company doing this? Simple, because it can. Its customers are paying for eBay's uncanny ability to draw in loyal buyers -- a feat that business-to-consumer companies have struggled with but one that's absolutely crucial in providing a community for a consumer-to-consumer site. eBay isn't just selling a platform for online auctions, it's selling access to a liquid marketplace that it created. Sellers may grow blue-faced in their verbal protests, but there's one reason why they'll think hard about staying with eBay -- the buyers aren't leaving. Analysts note that previous fee changes didn't dent eBay's growth. Steve Weinstein, an analyst at Pacific Crest Securities, estimated that the higher fees will bring in $48 million in additional revenue this year, or 1.5% of its estimated 2004 revenue. But more telling, he says, is how eBay is trying to drive higher volume. "eBay generally implements fee changes to drive selling behavior that leads to better overall velocity of trade," Weinstein wrote in a recent research note. Last year, eBay lowered fees on its stores to draw customers in. Now eBay seems to be cashing in on those new accounts.
Hardest hit by the new fees are the 143,000 U.S. independent stores that operate on eBay's site. More than 17,000 people have signed an online petition -- a sample rant: "This could be the final straw, eBay!" But it does raise the valid question of how much customers will take. And it opens the door to a potential vulnerability down the road. Amazon ( AMZN) or Yahoo! ( YHOO) have yet to make serious inroads into eBay's auction empire, but they may get a shot if high fees drive more merchandise their way. If the sellers who decide to stick with eBay simply pass on the extra fees in their minimum bids, the buyers may look elsewhere for cheaper offers. Many sellers have vowed to move their goods over to Overstock.com ( OSTK), which expanded into online auctions last September with subscription fees 30% below eBay's (they are now 60% lower). And some are making good on the threat. Since eBay announced its higher fees on Jan. 13, the number of items available for sale on Overstock.com has risen by 50%. "It literally started to grow the moment eBay announced its new fees," says Overstock spokesman Scott Blevins. Overstock's stock has risen 13% in the two days since eBay made its changes. For investors, eBay's report could fill in the blanks on why it's making this move now. If eBay is simply capitalizing on rising demand and loyalty among its customers, or if it's building up leverage to make bold new moves in the future, so much the better. But if there is the whiff of desperation about it -- that is, if eBay is doing it because it has to, not because it wants to -- then investors may not respond so well. If past is prologue, however, eBay is leveraging for growth. In recent months, the company has
bought apartment listing site Rent.com, a clear signal that eBay was searching for new potential growth areas in the consumer-to-consumer market. It also purchased a stake in classifieds listing site craigslist and acquired Dutch classifieds site Marktplaats.nl. And just last week, it acquired assets of Kurant, a maker of software that adds an e-commerce capability to existing Web sites.
eBay's acquisitions suggest it may be buying small, but it's thinking big about new opportunities. Christopher Casey, a portfolio manager with Boston Private Bank, which is long eBay, says he'll be looking for clarity in eBay's acquisition strategy in the Wednesday call. "They have been buying
a lot of small businesses," says Casey. "That's been one of their big growth drivers and uses of cash." Customer drama aside, it's clear eBay had a phenomenal year. The company took what many believed was a small Internet niche and turned it into a way of life. The eBay bug turns out to transcend cultures -- people get hooked wherever they live. Merrill Lynch expects eBay's U.S. revenue to rise 28% in the fourth quarter to $387 million. Pretty good in itself, but it looks sluggish compared with the 67% surge in international revenue. At that rate, the international side of the business will eclipse the domestic side early this year. The question doesn't seem to be whether to invest in eBay, but when. At its Tuesday close of $106.37, eBay was trading at 86 times estimated 2004 earnings and 66 times its estimated 2005 earnings. Those ratios may give some investors acrophobia. Yet given eBay's sterling record of finding hidden and rich mines from which to extract new growth, other investors are having as hard a time saying goodbye to eBay as its customers are.