Dueling Fools
eBay Bubble?
March 17, 1999

eBay Bull's Pen
by Rick Munarriz ([email protected])

Let me start by stating the obvious: You will be hard-pressed to find a cheaper stock than eBay. Seriously. I know $18 billion today may seem like a lot of market cap. $12 billion sounded pretty high last month when our own Rule Breaker portfolio bought in and, to some Barron's columnists, even $2 billion the day after the company went public in September was overdone. However, relative to the few Internet companies that are also profitable like $88 billion America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> and $36 billion Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>, eBay is a bargain.

But, you see, this is where most bears get it wrong. The key to understanding why eBay owns the only feasible e-commerce business model has nothing to do with the fact that the company is profitable. No, it is WHY the company is profitable that matters. eBay is a masterpiece on many different levels and, please, come scale them with me now.

Level One. Fulfillment. Cyber merchants, even the established players like Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>, stumble because they have to physically service every transaction and price it accordingly. I know I'm going to lose a lot of support here, but I just don't know how a CDnow <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDNW)") else Response.Write("(Nasdaq: CDNW)") end if %> is ever going to make it. The e-tail revolution made sense early on. Without the costly upkeep of brick and mortar storefronts, these online upstarts were supposed to lock in some serious cost shavings. It never happened. Those savings got eaten up, and then some, because the online stores had to discount their wares well below the neighborhood stores to compensate for the high shipping costs. That's fulfillment and fulfillment kills.

eBay doesn't have to worry about product fulfillment. It is the merchandise matchmaker, an econo-Cupid if you will. It has successfully set up a buyer and a seller more than 35 million times in its brief tenure, but its role ends after it strikes the virtual gavel and collects its modest royalty. That is why gross margins at eBay are a stunning 80%. Wow. That is three to four times better than Amazon.com and CD-Now.

Level Two. Barriers to entry. The Internet has been called the great leveler and it's easy to see why. If you have $70 burning a hole in your pocket, any untaken domain name is yours for the next two years. It's just that simple. That's all it takes to set up your little ole lemonade stand in cyberspace. Anyway, until just recently it also helped to have wads of spare cash lying around, too. You used to have to pony up millions for online promotion to succeed. From exclusive deals on some of the most popular portals to scattered banner ads, getting folks to your online store cost a whole lot more in advertising than those seemingly obsolete brick and mortar stores ever spent.

However, with the emergence of new commerce-based search engines like www.ecompare.com, typing in a book or music title will yield a list of retailers carrying the selection along with the selling price and shipping costs. No amount of banner space will make up for the word-of-mouth of one-click comparison shopping. That is rattling the very retail-based online model that at one time justified eyeballs over earnings. The playing field is level again. All you have to do to land a sale is be willing to bleed more than the next guy or url.

eBay doesn't have to worry about this. There really is no feasible way to search all auction sites for the best price on a specific Department 56 collectible or a sunburst design Fender Stratocaster since the product condition and alterations, as well as terms of the ultimate transaction, are based more on qualitative, often visual, seller descriptions than the programmable quantitative features search engines thrive on.

Basically, in traditional e-tail (as if we're fogey enough in the genre to even have traditions), you can start small and create an immediate impact on the industry if you drum up some hara-kiri stunt like selling three DVD's for a dollar like www.800.com or giving away a compilation CD like K-tel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> did last year.

That is certainly not the case with eBay. There is only one ingredient necessary to build a more efficient market than eBay. More people. A green newcomer isn't going to register more than 2.1 million users overnight. There will always be another player set to become the next Amazon.com or CDnow. Yet no company can subsist with user apathy until it reached the same kind of critical mass to hold a candle to eBay's auction market. As it stands, there is only one site in the whole World Wide Web that can claim more usage time than eBay -- Yahoo!, which is too entrenched as a jack of all portal trades to ever compete as a master of one. Will its auction site ever match the 600 million monthly auction page views generated by eBay? I doubt it.

Level Three. The Penthouse. eBay has enriched the world in every sense. I'm the kind of guy that likes to keep obsolete techno-gadgets around the house. Like most folks in this predicament, I found me a wife who has been less than tolerant of my clutter-clutching ways. So after she breaks into a Sanford & Son theme song for the third time over the same item (and she really does do this), it is time to dump the junk. Now, a charity doesn't want my obsolete computers and video games, so my Atari 2600 and my archaic XT bit the dust last year. Now she's whistling the junkyard tune as she eyes my Amiga 500. Yet, if I head out to eBay I see that these once incredible Commodore computers are going for about $40 a pop. There's a new solution for me and it's called found money. There is a bustling economy of found pocket change bubbling and eBay has helped turn my trash into, well, a night at the movies.

When Kennywood, a great amusement park in the outskirts of Pittsburgh, was getting ready to ditch props for a dark ride that burned down last year, it could have tossed the memory-making relics away. Instead, earlier this month it sold quite a few of them on eBay. When the Mark McGwire and Sammy Sosa homerun balls were ready to be auctioned off, eBay took some pre-bidding to help set the opening price for the live auction. Rosie O'Donnell's All For Kids Foundation holds regular charitable auctions of the show's memorabilia.

Before you vote on this Duel, all I ask is that you think back to that one thing you always wanted but never found. Maybe it's a bit of Tinseltown memorabilia. Maybe it's a toy that your parents never got around to buying. Now take these unfulfilled dreams and head out to www.eBay.com and look around. As unsavory as a flea market with unlimited bounty may sound, check it out. I think you will come to see why more than 2 million registered users and counting are hooked -- and why a thriving Internet community deserves the equity success it has had, and more. When you return, I doubt you would want to bet against this company, though you might want to bid on it.

Next: The Bear Argument