Can eBay Really Blame the Economy?

eBay will have it's 2008 Q4 earnings call on January 21, 2009. It's very likely they will take credit for any good news, and somberly blame bad news on the economy, if they can get away with it, they'll blame Bernard Madoff and ponzi schemes.

Is the economy really to blame?

The economy is bad. That is all the news channels have talked about since late summer '08, well besides the Obama family at the beach. And despite the distraction of the President-Elect's six-pack, people are still buying clothes, electronics, collectibles, books, and Legos.

The real question is: Why aren't they buying on eBay like they were last year?

eBay's Model (circa 1999)

Ten years ago, walking through a public place with an eBay logo on your shirt got you noticed. In a GOOD way. People would stop you and say, "I LOVE eBay!" or tell you of some amazing thing they found there. It was an amazing time. eBay employees in Germany were reported to be moved to the head of lines at restaurants, yes, just like real rock stars. (Granted, the lines were small and the special was Sauerbraten with Spätzle.)

At that time, eBay was really built for the small seller rather than businesses. Millions of individuals flocked to eBay to sell their stuff. And millions of buyers flocked there to buy it. What was in it for each group?

For sellers: Sellers had the opportunity to sell unique and weird things that had once gathered dust. Listings included a man trying to sell his soul and countless used socks. The listing process was easy and cheap, much like some small sellers. It was a straightforward process. The biggest problem people had in those days was how they would get their photos from the camera to the website.

Fees were also straightforward. Since they were low, it was not a risky proposition to list a handful of items. Since small sellers didn't list thousands of items, when a fee increase was announced, it didn't make the news. The impact per seller was relatively small.

It seemed everyone had something to sell. And no matter how small you were as a seller, your listing appeared right next to the bigger sellers. It just felt fair. For example, if you were just selling your own used socks, you could sidle right up to the biggest seller of used socks on eBay. All for the same listing fees.

For buyers: Buyers on eBay found amazing bargains on anything and everything. The most touching stories were about people who reclaimed a childhood toy, or found bargains after losing their jobs.

The process was slower, people actually wrote checks, or even more amazing - drove to the 7-11 or Post Office to buy a money order. Then they wrote out an envelope, stuffed the payment inside and waited for their item.

eBay offered a great way to get really good things cheap. Plus it was fun.

Theoretically...

The idea was that eBay would thrive in a bad economy. It was a brilliant model. In down economic times, people would want to make money by selling off some of their stuff. They would even pull out the cool collectible items to make extra money by selling their things on eBay.

On the other hand, during tough times people look for bargains. They can't afford to pay full price so they'll look for good deals. eBay had the largest selection and the lowest prices. Millions turned to eBay when they found themselves financially embarrassed. "I got it on eBay!" was a common phrase nearly everywhere except clinics.

No matter which way the economy turned, it was believed that eBay would do well. In good times, people would spend more on new things. In bad times, they would drink a lot and intently look for bargains. Either way, eBay would thrive. But eBay is not thriving in this bad economy - why not?

What happened to eBay?

How has eBay gone from rock star to pariah in the past decade? What changed? Well, the answer is in the question. They changed.

It is safe to say that Saint Pierre Omidyar did not envision today's eBay mega-sellers (okay, well mega-listers). There is no way he was thinking of Buy.com when he was writing the code for AuctionWeb in his apartment, Pez dispensers lying all around him on the floor. Somewhere along the way, someone had the idea to grow the site from small sellers to big sellers.

Was it eBay or the sellers that did this?

Back in 2002, eBay really began pushing "practical" items over "collectibles." The company had grown extremely fast and lots of uber-MBAs had moved in. eBay's interview process went from having a coffee at Starbuck's next door, to a three-round obstacle course of interviews with nearly everyone in the company. MBAs who had never sold a thing on eBay were being hired to run it. Many had no real experience in business - but they had "business models" in their heads. They knew how "business" worked, and this flea market thing was just weird. Things needed to change.

Soon each category was viewed as an individual business unit within the larger eBay. Category managers had to add Gross Merchandise Volume (GMV = The total value of all successfully closed listings between eBay users.) to their category to be successful.

To build GMV category managers worked with large sellers to make them larger. At first they did this by sending them donuts, which made them larger, but diabetic. They they shifted their strategy and met with very large companies such as Dell, Bose, Walmart, etc. The idea was to grow the business with new products. "Practical" items like TVs and mixers, rather than collectible items like Hopalong Cassidy badges (which can be quite practical if you are aiming to arrest a gunfighter. - but I digress)

This was also the time Buy It Now was adopted. That single change probably did more to move eBay away from small sellers and toward large sellers than any other.

Disrupting the Disruption

Everything went along fine for awhile. eBay Stores were added and larger sellers began to run full-fledged businesses on eBay. These sellers listed tens of thousands of items, and did quite well. Fixed-price and auctions peacefully coexisted for years under the same roof.

The MBAs pushed and pushed for everyone to "start a business" on eBay. They 'knew' about business doggone it, and eBay's small sellers just didn't "get it." What the managers had unwittingly done however, was create a monster.

Big sellers have more skin in the game. They are noisier. They can also take their ball and go home if they don't like how eBay is treating them. These sellers aren't just finding old baseball cards in their attic. These are the people that have invested their money in inventory, based on eBay's model. They have real business plans with eBay baked in as a necessary component. But then eBay changes things and they have to struggle.

In the past few years, eBay has fooled around with fees. They have taken the side of buyers over sellers. They have irritated their big sellers and many of the same people the MBAs pulled in are now leaving. For many of these departing sellers, the changes of 2008 were the last straw. The training wheels are off and these more mature sellers are striking out on their own. It seems the "models" the MBAs were using did not take into account the fact that real people are involved.

What is the bottom line for sellers? It's certainly not a straightforward process to sell on eBay. Just try to explain to someone how an item shows up in search results. (It helps to use the term "abracadabra" several times.) And it's not all that cheap to sell on eBay anymore. It is not fun.

So the millions of people who would have dug through closets to find things to sell during a down economy have been left behind in exchange for large sellers. Small sellers are what made eBay interesting and fun.

Large sellers list the same things I can get at Target and Walmart. In a down economy, Target and Walmart are lowering their prices. There is simply no compelling reason for me to buy inventory to sell on eBay when the large box stores are competing head to head with me.

What about the buyers? Why should a buyer go to eBay when sellers charge the same prices as local retail stores? Why would anyone buy used or liquidated merchandise, wait a week or more for it's arrival, and all that with the possibility that item will not be as described?

Phake Phun

eBay has taken a successful model, and ruined it. The old model would have thrived in this economy. Most offensive is the fact that people within the company are still pretending eBay hasn't changed. They have invented countless schemes to make eBay seem like the "fun" place it used to be. Winnervators, Windorphins, the "It" campaign, etc. Sorry, it's just "phake phun."

So when eBay comes out with a sad story about how the economy is hurting them, make sure and listen for the news about Paypal and how good it's doing.

How can PayPal be doing so well in a bad economy? I am assuming that people must be getting their used socks somewhere else...

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Tagged as: blame, business model, earnings call, eBay, ebay history, economy, q4 08, Q4 earnings, used socks