EBay bids for durability in changing digital world

While Yahoo staves off a takeover bid from Microsoft — and Microsoft braces for life after Bill Gates — another high-tech pioneer is at a digital crossroads.

As eBay ebay readies for the post-Meg-Whitman era, and new CEO John Donahoe takes over Monday, it faces fierce challenges in a Web 2.0 era defined by armies of agile competitors.

Running eBay could be a daunting task. The former dot-com darling has lost some of its luster and is reinventing itself to reverse years of slowing growth in its auction marketplace, where millions trade online selling to the highest bidder or at a fixed price.

Some sellers are drifting away to take advantage of more options these days at online stops such as Amazon amzn and specialty stores, or to protest another fee increase at eBay.

Lynette Setzkorn reluctantly hopes to be "eBay-free" by June. The 50-year-old Tulsa resident sold $30,000 worth of antique furniture in January, but the latest increase was the "final straw," she says. Setzkorn is shifting sales to antiques dealer Ruby Lane and Amazon.

The wrenching changes at eBay underscore the challenges it and other mature Internet companies face as they enter the second decade of the dot-com era, analysts say. Like its Silicon Valley neighbor, Yahoo, and Microsoft, eBay is confronted by the growing shadow of Google as well as the looming presence of longtime rival Amazon.com and other e-commerce sites.

"The issue for most of these Web 2.0 businesses is, what are they going to do for Web 3.0?" says Roger Kay, president of Endpoint Technologies Associates. "Google's model is robust and extensible. If you're an auction site, what do you do for the next act?"

So far, the personable Donahoe has dived into his new assignment.

Donahoe has vowed to put greater emphasis on fixed-priced listings — items sold through its eBay's Buy It Nowservice — a seismic shift for eBay buyers that would approximate their experience on Amazon and elsewhere.

If anything, the 47-year-old Donahoe is a pragmatist. Fixed pricing (Buy It Now on the eBay site) accounts for 40% of revenue at eBay Marketplaces, its largest division. Most of the rest is from auction sales, for which eBay is better known.

To offset slackening growth in Marketplaces, eBay has diversified into online ticketing, payment services for merchants, classified listings and advertising. Donahoe and other eBay executives declined to be interviewed before he assumes the CEO job this week. But he has previously said he envisions a way of combining fixed-price listings and auctions, so both results would be displayed on eBay's main website. Eventually, shoppers could parse a search for new or used iPods by model and price, he has said.

In a nod to the growing sway of Google, goog eBay is developing a comprehensive search engine to evaluate customer feedback, shipping costs, PayPal data and other factors to present the best deals to shoppers. Google has become a factor because consumers increasingly use its search to find inexpensive deals, and Amazon and other eBay rivals have paid for prominent listings as sponsored links.

"My commitment is to build from (eBay's) strengths and make the changes necessary in this competitive environment," Donahoe, a former Bain & Co. consultant, said in a conference call in January. "EBay's best days are ahead."

Yet, three years ago, eBay's revenue and profits were growing at a rate of more than 30% year-over-year. Today, it is in the midteens, says Martin Pyykkonen, an analyst at Global Crown Capital. Revenue in the USA has declined in five of the last six quarters, he says.

Meanwhile, changes Donahoe made to the fees eBay charges its sellers prompted the company to issue lower earnings guidance for its current first fiscal quarter and year ahead. It said 2008 revenue would improve up to 14%, to $8.75 billion — shy of the 17% expected by financial analysts. EBay shares, which touched $40 in October, have tumbled to $30.22. On March 20, eBay said it is cutting 125 jobs in North America and Europe, less than 1% of its 15,500-person workforce.

A time of transition

Donahoe is filling the prodigious shoes of Whitman, 51, one of the most successful female CEOs in the world. Whitman took over eBay before it went public in 1998, when the young company had a rapidly growing user base and powerful network. Her biggest concern then was to manage growth, says Rodrigo Sales, co-founder and CEO of Vendio Services, which provides technology services to online auctioneers.

Donahoe inherits a mature company facing stiffening competition from online auction houses abroad and Amazon, among others, at home.

Donna Klein, 51, of Birmingham, Mich., symbolizes the shifting buying habits of some eBay patrons. Though she "loves eBay," Klein buys books and music CDs on Amazon, where buyers flock to take advantage of inexpensive, fixed prices for items such as CDs and video games. Previously, consumers would look for deals in eBay auctions.

Analysts are convinced the personable Donahoe is up to the challenge.

"He is tremendously open and receptive to Wall Street, shareholders and the eBay community," says Robert Peck, an analyst at Bear Stearns. "His ability to change things quickly, as he did with pricing, bodes well for the company."

For the past three years, he was president of eBay Marketplaces, which accounts for about 70% of eBay's total revenue. During his tenure, Donahoe was well-regarded by sellers for his hands-on management style and accessibility.

Now, he may have to apply his persuasive skills to appease some of eBay's 82 million sellers, who are renowned for their loyalty and for their withering criticism of the online auctioneer.

Since Donahoe's announcement as new CEO in January, he has made seismic changes to the fees eBay charges, and to its feedback system. The cost to list items will be cut 25% to 50% to encourage more listings, but the commission eBay charges for completed sales increased more than 25% for many, favoring sellers of commodity items such as CDs and video games over sellers of unique items. He also tweaked eBay's feedback system to encourage buyers to return to the site. A seller's commission fee for a $20 sale is now about $3.14, compared with about $2 for the same sale a few months ago, says Gary Richardson, 42, of Batesville, Ark., who sells goggles, eyeglasses and sunglasses on eBay.

'Fees are killing me'

The adjustments raised the ire of some eBay sellers, who mounted a week-long boycott in February to "let eBay executives know that we were not happy about the changes they are implementing," says organizer Valerie Lennertof Anaheim, Calif.

"Fees are killing me," says Keith Yockey,57, of Landrum, S.C. He sells $3,000 worth of dog whistles a month on eBay, where he has been a seller since 2004. Since he joined Amazon in July, he averages $4,500 a month. "EBay is my home, and I hate to see it go away," Yockey says. "But if they continue to drive sellers away, so be it."

"I'm paying more to (do business with) eBay, but I have the same size of audience," says Laura Seleman, who averages jewelry sales of $3,000 a month on eBay. The Cleveland resident says higher fees forced her to start selling on her own website, at online auctioneer eBid and at Amazon.

"Amazon represents a huge challenge for eBay," because it is difficult for eBay to take on Amazon in the online retail business, says Kartik Hosanagar, a professor at the University of Pennsylvania's Wharton School who studies Internet commerce.

Nonetheless, he says, "This is eBay's battle to lose."

EBay remains the dominant online auction site — in large part because of booming sales at its PayPal division, says Patti Freeman Evans, senior retail analyst at JupiterResearch.

It commands a dominant slice of the $34 billion online auction market, and its market value is $40.1 billion. By eBay's own estimates, it accounts for 14% of global e-commerce revenue and is the primary source of income for a staggering 1.3 million people.

PayPal's runaway success — it racked up $1.9 billion in 2007 revenue, up 40% from 2006 — has compensated for any erosion in eBay's core business, Evans says.

Even eBay's online telephone service, Skype — which came at the steep price of $2.6 billion in late 2005 — is valuable because it offers eBay members the ability to communicate directly, Evans says.

Though eBay reported a third-quarter loss because of a $1.39 billion charge related to its acquisition of Skype, the division has experienced substantial growth. It reported $382 million in 2007 revenue, more than double from 2006.

In its recently completed fourth quarter, eBay said profit jumped 42% to $611 million, or 45 cents a share, from the same quarter a year earlier. Revenue increased 27% to $2.18 billion, eclipsing the $2.14 billion forecast by Wall Street.

There are trouble spots, to be sure. Not only is eBay's core business cooling off, but it could do better in Asia. It has yet to fully catch on in China despite an investment of about $200 million, says Scott Devitt, managing director of Internet consumer services at investment firm Stifel Nicolaus.

Donahoe must also remake eBay's management ranks. He's done so by taking corporate stars from across the company to invigorate eBay — most notably the move of eBay Marketplaces President Rajiv Dutta, who previously ran PayPal and Skype, back to the parent company.

And Donahoe has assiduously picked the brain of customers to see what they want. Scot Wingo, CEO of ChannelAdvisor,a maker of automation software for eBay sellers, recounts how Donahoe sought him out at a Starbucks in Boston last year and peppered him with questions on how eBay could improve the user experience. Wingo suggested lower listing fees, better search and a crackdown on fraud. "So far, they've done a good job," he says.

Despite several lingering obstacles, analysts such as Pyykkonen see no end to eBay's momentum as it begins the Donahoe Era. There are more challengers to the throne, but this is one tech titan that rolls along, he says.

"Lots of companies would love to be in eBay's position," Pyykkonen says. "But a constantly evolving market makes it a little scary for everyone."