Down on eBay And Bullish On Google

We are all familiar with aggressive shoppers: Take a stroll down Fifth Avenue this week and you're likely to be knocked silly by the power buyers.

Then there are power sellers — the folks who make a living selling various wares on eBay (EBAY $32) and could arguably be described as the backbone of the company's business model. Power sellers are those who do more than $1,000 a month in sales over the auction site and who have high customer satisfaction ratings. They are ranked by the amount of business they conduct on eBay; a titanium-level seller, for instance, sells at least $150,000 a month.

A number of these vendors spoke at the Cowen and Company Internet Conference last week in New York. The takeaway? Not all is milk and honey in eBay land.

While throughout the conference no one could find enough good things to say about Google (GOOG $486), just the opposite appeared to be the case with eBay, which was repeatedly described as unlikely to keep pace with the growth in overall e-commerce. This perception has no doubt contributed to eBay's lackluster stock price performance in recent quarters, and explains why Cowen's Jim Friedland has a neutral rating on the shares. From what we heard at the conference, concerns about the company's competitive position are unlikely to be resolved any time soon.

The final panel of the daylong program included four power sellers. The most entertaining was a fellow named Todd Rath, who runs a company called Rock Bottom Golf. His firm has been selling golfing equipment for six years on eBay, and was ranked no. 290 among Internet retailers in 2005, with sales of $18 million.

Mr. Rath is not happy with eBay, and did not mince words. His complaints include a lack of communication with eBay (he hasn't heard from his rep in 15 months), annoyance that eBay tries to maintain a "level playing field" for its sellers (and, he said, consequently caters little to its largest sellers), and frustration with ever-rising fees being charged on eBay.

Mr. Rath is voting with his feet, and increasingly looking for other online distribution channels. While originally all of his business was conducted on eBay, today the outlet accounts for only 25% of sales. He argued that his profit margins were higher elsewhere, and that eBay is losing share with consumers. He projected that his sales on eBay would decline to only 15% of his volume in 2007, and that actual revenues on the site would drop.

Other vendors reported a similar tale. Jennifer Canty, whose company Dyscern sells recovered and refurbished consumer electronics such as iPods and MP3 players, also said she expects her business on eBay to shrink. While not long ago she sold 100% of her products on the auction site, this year eBay will account for only about 50% of revenues.

Dan Yen, whose company Movie Mars offers more than 250,000 new DVDs, games, and CDs, was most upset with eBay's propensity to change its fees and rules without notice. In frustration, Mr. Yen began selling on Amazon (AMZN $39), where he said he quickly saw a jump in sales. Some of the panelists, though not all, said they saw greater profitability in selling on Amazon, and said consumers have more confidence in the company. Jennifer Canty, who was more supportive of eBay than her fellow panelists, nonetheless agreed that the company had not done enough to boost the image of its sellers.

The panelists were critical of more than just eBay. They also had a few choice words about consumers. Douglas Deist, the vice president of operations for Exel-I, a vendor of computer parts, described buyers on eBay as being exceedingly aggressive. "A normal person turns into a nut," he said, pointing to eBay's huge charge-backs as proof.

Although eBay is apparently attempting to rectify some of these issues, the conclusion from the panel was: "Too little, too late."

The most damning anecdote came from Ms. Canty. She said she has made purchases on eBay three times, but has yet to have a good experience. Does this sound like a company with problems?

Luckily for eBay, it is in a growing industry. The analysts at Cowen and Company recently released their annual E-commerce survey. Not surprisingly, they found an increasing number of consumers across all demographics saying they are ready to spend more in almost all categories online this year. One exception is collectibles, which is another mild negative for eBay.

Cowen is projecting that the American e-commerce market will grow 20% next year, and will expand at 16% though 2011. In other words, the online spending is unstoppable, and affords a considerable wind at the back of a variety of Internet suppliers. It is clear, though, that not all companies have equally good prospects.

Although eBay and Amazon continue to be primary online shopping destinations, consumers are becoming more sophisticated and looking to shopping-comparison Web sites to point them in the right direction. Fewer start their search by going directly to a shopping sites such as eBay or Amazon. Froogle (Googles's comparison-shopping site) jumped to no. 2 from no. 4 in the Cowen survey this year. Shopping.com, owned by eBay, dropped to third place from second.

The Cowen analysts report that Amazon and eBay may be approaching peak market penetration in the U.S. Given the companies' early head start and enormous success, this does not come as a total shock. They also found that Google was likely to continue to gain market share in America. Impressively, the longer someone has been an Internet user, the more likely he is to use Google. This is especially true among young people, a fact that bodes well for the company.

According to another speaker at the Cowen conference, Google's position is bolstered by the increasing use of search engines as an advertising medium. Search is the second-largest activity on the Internet, after e-mail. Google currently has 62% of the search business, with Yahoo (YHOO $26) a distant second with only 22%.

Is there another company ready to profit from eBay's missteps? The CEO of tiny uBid.com Holdings (UBHI. OB $2.41), Robert Tomlinson Jr., appears to be. He describes his company as the fraud-free alternative, and encourages customers to "Save Big, Save Safe." This company screens and certifies its sellers aggressively, and reports below-average fraud issues.

What was most appealing about uBid was their advertising approach. After a careful analysis of the various alternatives, Mr. Tomlinson has decided to advertise in newspapers, which he describes as "discount media." Music to many ears.

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