Updated from 2:58 p.m. EDTSAN FRANCISCO - At a time when eBay's ( EBAY) signature auction-style format may be losing favor, the company is increasingly setting its sights on alternatives. eBay reported its third-quarter earnings on Wednesday, exceeding earnings estimates but falling short of revenue expectations on Wall Street. But what really agitated investors was the online auction giant's disappointing outlook for the fourth quarter, which Chief Executive John Donahoe admitted would be a difficult one. eBay expects a 4% decline in revenue during the busiest shopping season of the year. "These are turbulent times for which no one has the perfect playbook," he said during Wednesday's conference call with analysts. "There is a high degree of economic uncertainty and turmoil in the financial markets and this is impacting consumer spending and e-commerce growth rates, and we are seeing an impact across all of our platforms." Shares of eBay closed down 2.35% to $14.97 Thursday. In what could be an indication of the company's shifting priorities, Donahoe spent the first half of the conference call talking about everything besides eBay's online marketplace, which represents about half of its total revenue. PayPal, for instance, now accounts for 28% of eBay's revenue, and Donahoe pointed out that for the first time ever, the payment volume off the site using PayPal has exceeded the payment volume on it. Citigroup analyst Mark Mahaney called PayPal a great growth asset for eBay, noting in his research that its "29% transactions payments revenue growth in Q3 -- at the beginning of a severe recession and with a weakening eBay platform -- is an impressive growth rate."
He added that it is unlikely that PayPal's lead will be displaced by similar online payment services such as Google's ( GOOG) Checkout or Amazon ( AMZN) Payments. eBay's acquisition of Bill Me Later is also being touted by the company as a strong complement to PayPal. Last week, Donahoe announced that eBay would purchase Bill Me Later for $820 million in cash and $125 million in outstanding options. The company is also strengthening its positioning in online classified ads, another area where Donahoe expects to see growth. "In just four years, we have built classifieds into a global business generating more than a quarter billion dollars in revenue with growth in the third quarter of 59%, and today we have the leading classified position in multiple markets around the world," he said on Wednesday. eBay last week also announced that it would purchase two online classified sites in Denmark for $350 million. Youssef Squali, an analyst for Jeffries & Co., said eBay's strategy during a tough macro environment is in part "to double down on Payments and Classifieds through acquisitions to drive top line growth." Still, there's no getting around the fact that eBay relies heavily on its marketplace and that's where it is seeing the most trouble. Gross merchandise volume -- which represents the total value of all successfully closed listings between users on eBay's online trading platforms -- was down 1% in the third quarter, which Mahaney noted was the first such decline in the company's history.
Although eBay has taken a number of steps to attract more buyers and sellers to its site - including a fee restructuring and a new ratings system - Mahaney maintained that the changes have been disruptive. "Internet growth rates are being materially impacted by the recession," he wrote in his research. "We believe, however, that eBay's structural and execution challenges are exacerbating its deceleration." Mahaney pointed directly to eBay's auction format as one of its biggest flaws, while also noting the growing success of fixed pricing. "We believe the auctions business as a whole represents a clear structural drag on gross merchandise volume growth, particularly in the U.S. where we estimate gross merchandise volume in auction format declined 10% year over year in the third quarter (vs. U.S. fixed price gross merchandise volume growth of roughly 10%)," he wrote. Although Donahoe has said that eBay will stick to its auction format, the company is clearly making adjustments to the site that favor more fixed pricing. That includes a recent listing fee reduction of more than 70% for its Buy It Now format. That may have helped boost the company's fixed-priced listings as a percentage of gross merchandise volume. In the third quarter, they represented 46% of the company's gross merchandise volume, up from 43% in the second quarter. But Doug Anmuth, an analyst for Barclays, questioned how effective eBay's new focus -- along with the rest of its changes -- will be, especially in today's economy.
"eBay has operated in a challenging company specific environment as it has attempted to shift its marketplace to better match how consumers want to do ecommerce -- on a fixed price basis, with better search capability, and with an improved overall buyer experience," he wrote in his research. "But we believe eBay has made only minor strides on those issues, and the company will now face major macro headwinds in the form of a slowing consumer and foreign exchange drag."