Off the Block: eBay's Post-Auction Future

There were other changes as well, all designed to propel the long-term shift of eBay from offering primarily auctions to that of selling fixed-price "Buy it Now" goods. As many analysts noted, this change of trajectory would seem to be pointing eBay toward a direct collision with Amazon.com … and setting up the next great high tech business duel for the end of the decade.

I think that's probably correct, and I also believe that both companies have such distinct competitive advantages that the final result is not pre-ordained. Amazon may have the superior distribution channel between manufacturers and consumers, but eBay has both the stronger culture and the flexibility to mix and match new and used goods, big manufacturers and tiny resellers.

What I find more interesting at the moment, especially given my long history with the company, is why eBay would make such a brazen move now. It is, after all, synonymous with online auction, having conducted literally millions of them in the last dozen years. And you can't say the business hasn't been lucrative: EBay is one of the great success stories of e-commerce, currently with $8 billion in sales and employing 15,000 people, not to mention several million more individual sellers. The company has also served as the platform for the creation of thousands of small businesses, which have made eBay their primary sales channel.

So why turn its back on the auction business now?

If you look closely at eBay's business and its financials, the reason becomes clear: For all of the attention they receive, auctions are now a minority business for eBay, and even those that still occur offer little profit for the company.

How can this be? There are several explanations. One is success: EBay has done such a brilliant job of clearing out the world's attics and garages that the days of valuable caches of unknown goods are over. By the same token, both buyers and sellers have gotten much better at pricing most items, so the era of bargains is largely over.

At the same time, the novelty has worn off the idea of auctions and bidding -- now the process seems to most buyers and sellers as both tiring and time-consuming. Finally, other online retailers have gotten so good at offering extensive catalogs and good service, that any non-monetary advantages enjoyed by eBay in years past have also largely disappeared.

It's not surprising, then, that a quick tour of eBay these days yields a surprising number of Buy it Now offerings already -- a type of transaction that may not be as fun (or frustrating) as auction bidding, but allows for a quicker "churn" of sales items, multiple sales and easier access to the kinds of sales inventories currently going to sites like Overstock.com.

But if eBay isn't making profits on its auctions and fixed-price listings are the company's future, where are the company's current profits coming from?

The answer to that is the real story, hidden within the eBay announcement this week. When you study the company's financials, you suddenly appreciate that eBay is no longer an auction company, or even a retailer… but a bank. PayPal, eBay's subsidiary payment processing operation, turns out to be the company's big cash cow.

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