Online Seller eBay Suffers Growing Pains

Part 1 of this Report

Last year, eBay's fourth quarter results disappointed Wall Street. Though the online marketplace has recouped, some sellers have left. In the second of two reports on eBay, a look at whether the site will continue to make the financial strides it has enjoyed in the past.

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STEVE INSKEEP, host:

In business news, eBay turns 10 and suffers growing pains. The auction site is among the great success stories of the Internet age. We heard yesterday how it grew from a small start-up to a company that nets more than $1 billion per year. But as eBay matures, it is not growing quite as quickly as it used to, and recent rate hikes caused some sellers to leave. In the second of two stories, NPR's Laura Sydell considers whether eBay can continue to thrive.

LAURA SYDELL reporting:

Over the last decade, eBay has woven itself into the fabric of American business and culture. Strange items on sale, like an onion ring with an image of Christ, have been the stuff of late-night talk show jokes. Mentions of eBay are even popping up in Hollywood blockbusters like "Spider-Man" when the garbageman tries to sell the hero's costume.

(Soundbite of "Spider-Man 2")

Mr. BRENT BRISCOE: (As Garbage Man) I think I deserve a little something for this.

Mr. J.K. SIMMONS: (As J. Jonah Jameson) I'll give you 50 bucks.

Mr. BRISCOE: (As Garbage Man) I could get more than that on eBay.

Mr. SIMMONS: (As J. Jonah Jameson) All right, a hundred. Ms. Brant, give this man his money and throw in a bar of soap.

SYDELL: But eBay may have hit a saturation point. For the first time since the dot-com bust, the company disappointed Wall Street with its 2004 fourth-quarter results. In one day, the company's stock price dropped nearly 20 percent, and though it's been slowly reviving, Derek Brown, a research analyst at Pacific Growth Equities, told his clients the stock was overvalued.

Mr. DEREK BROWN (Pacific Growth Equities): We maintain an underweight rating on it, but still expect revenues to grow 30 percent plus this year, so growth isn't really the question. It's how much growth and at what price.

SYDELL: Thirty percent only looks disappointing when a company's revenues once grew 70 percent a year. The slowdown also comes at a time when there is rising discontent among sellers. Up until three years ago, Leo Garcia ran a tropical fish store. In his spare time, he started selling his childhood coin collection on eBay.

Mr. LEO GARCIA (Former eBay Seller): Lo and behold, within the first couple weeks of me selling, easily sales were over $30,000, and not even in my best months selling tropical fish would I get even close to selling $30,000 in one month, let alone two weeks' time on eBay.

SYDELL: What eBay gave Garcia was a site where millions of people came every day to search for items they wanted to buy, but this year, as growth slowed, eBay raised some of its fees. There was an uproar when the company began taking 8 percent of the sales price of items sold at eBay stores. According to a group of former eBay sellers, 7,000 of them, more than a hundred and sixty thousand eBay stores, stopped selling on eBay because the fees made it unprofitable. Among them was Leo Garcia. His profit margins were small and the fee increases pushed him off of eBay.

Mr. GARCIA: Believe me, I was doing extremely well. I felt like I was on top of the world when things were really going good, and all of a sudden, it's like somebody pulling the rug out from you, and your face hits the ground hard, and you wake up and you say, `What was I doing?'

SYDELL: Many large volume sellers on eBay are doing more business using their own Web sites. Jonathan Garriss runs Gotham City Online, a shoe retailer, and he's also head of the Professional eBay Sellers Alliance.

Mr. JONATHAN GARRISS (Gotham City Online): There is a level of sales that businesses reach, where the incremental cost to grow is just too high, and so to some extent, it becomes a disincentive to businesses to really push to take their business to the next level on eBay.

SYDELL: But Garriss says that part of the reason many sellers are so upset by the rate hikes is that they've been voicing frustrations for months to eBay about other problems, such as fraud, fewer bidders per auction, lower selling prices and poor service from eBay. EBay has had its users' rebellions over the years, but this one was especially loud, admits eBay CEO Meg Whitman.

Ms. MEG WHITMAN (CEO, eBay): We really listen hard, and this one, by the way, wasn't hard to hear. But we do listen hard, and we try to be responsive to the marketplace.

SYDELL: In response, eBay has made a few long-demanded changes, like telephone customer service to all shop owners and more employees working to eradicate fraud. EBay threw in a bone, and sellers didn't have to pay the 15.95 monthly fee in April. Still, Whitman says they have no plans to lower the fees or alter their strategy because of a few complaints.

Ms. WHITMAN: It's a bit like citizens in the United States. You make your point of view known. You hope that there will be changes, and then you decide whether it still makes sense for you, you know, to be part of the marketplace, and I think most decided that it still made a lot of sense and that they were able to change their listing mixes around so that they felt like they still had a great value proposition.

SYDELL: Whitman certainly has a strong history of success to buttress her confidence. She came to eBay in 1998 at a time when the company was still an informal shop under the auspices of founder Pierre Omidyar. Whitman helped professionalize it and steer eBay safely through the dot-com bust, says Adam Cohen, author of "The Perfect Store: Inside eBay."

Mr. ADAM COHEN (Author): She took the company, first of all made it IPO ready, so that they could do a road show, and a lot of people would invest a lot of money in it, but then since then has made just one after another, I think, very strategic, very smart decisions, including buying PayPal, buying Half.com, going global early and in a smart way.

SYDELL: But can Whitman keep eBay growing? She says she's looking to expand the PayPal division outside of its presence on the eBay site, and the company is increasingly investing in foreign markets, especially China. Back in the US, many analysts still worry that eBay's best days are behind it. There are those thousands of frustrated sellers. Yet, there continue to be inspirational stories of retirees, housewives and unemployed executives who have transformed their lives. Just this last year, Richard Brown, an unemployed Silicon Valley executive, started a business from his home selling iPod and video game accessories. It's grown so fast, it's taken over his life and his home.

So is there any room of the house that hasn't been invaded?

Mr. RICHARD BROWN (Sells iPod And Video Game Accessories): The bedroom, because if I invade the bedroom, then my wife will invade my skull with a saucepan.

SYDELL: Brown is about to move his business into an office and hire someone to help him out.

Mr. BROWN: And without eBay, I wouldn't be here today. I don't know. I'd probably be--I don't know--behind a desk working for some company. Working for yourself is fantastic, you know. You're in control of your destiny.

SYDELL: While eBay is facing challenges, in many ways, Brown and other users continue to prosper from the vision set out by eBay founder Pierre Omidyar of a perfect marketplace where everyone can bring something of value and find what they need at the best price. Laura Sydell, NPR News, San Francisco.

INSKEEP: This is MORNING EDITION from NPR News. I'm Steve Inskeep.

RENEE MONTAGNE (Host): And I'm Renee Montagne.

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