Dueling Fools
eBay Bubble?
March 17, 1999

eBay Bear's Rebuttal
by Paul Larson ([email protected])

As is often the case in this feature, both the bear and the bull are looking at the exact same thing, but each are perceiving two completely different situations. Here's where we differ:

Fulfillment

I agree with Rick that eBay's (lack of) fulfillment is partially behind the company's to-date profitability. It goes beyond eBay not having to worry about shipping costs. The company carries no inventory and therefore has one of the "lightest" business models around. No heavy capital or inventory investments are needed to be an online cupid and match buyers and sellers.

Nevertheless, I completely disagree with Rick that eBay's responsibility to buyer and seller end when an auction is completed. Since the company is collecting a commission, there ought to be some sort of responsibility on eBay's part to make sure that the seller gets paid and the buyer receives what he paid for. It's exactly this lack of fulfillment that has gotten it into hot water with fraud cases in several states.

Even if there is little to no legal responsibility on the company's part, it's plain good business sense to make sure its customers have a positive experience. And if the company wishes to grow to a household name that can be trusted, it's going to take more than the token officer and a community watch program to effectively police the site. More police mean higher costs, and the slightest decrease in margins is enough to foul the profit growth many bulls have extrapolated to the extreme.

Barriers to Entry

Rick seems to agree with me that the barriers to entry are quite low in this line of business, but I fail to follow his line of thought as to why this is a good thing for eBay. That light business model with little capital investment and no inventory also means that it is extremely cheap for others to enter the market. The total operating assets of eBay are somewhere near $30 million, which is about what Microsoft nets every three days. Who's to say one of the giants won't flick some extra pocket change the way of the auction market and come up with a better interface and more effective policing? Combine this with existing on-ramps and eyeballs and voila! A hefty competitor is born.

I touched on Yahoo!'s entry into the market in my initial argument, and I want to make one point about Yahoo!'s auction site -- it's free to list on the service. Having a competitor, especially one with more total users at the moment, essentially giving away its service, doesn't exactly do wonders for pricing power. Just look at what happened to Netscape when Microsoft started to give Internet browsers away for free. Actually, Netscape circa early-1996 and today's eBay seem to have a strong resemblance.

The Penthouse

I will agree with Rick that eBay has a sizable advantage against its peers since it was the first company to effectively start operating in this domain. Size does matter, and eBay currently has size in spades. A wide community does wonders for product selection, especially when looking for that odd collectable. But does size really help the company as it tries to move into the mainstream? Quality assurance and price matter here, and eBay is behind on both counts.

It's funny that Rick should happen to mention possibly buying a sunburst Fender Stratocaster in his argument. A guitar is the perfect example of an item no sane buyer is going to bid on sight unseen. In fact, I'm hesitant to bid on most things I see at eBay simply because I have little way to verify what I think I'm buying is ultimately what I'll receive. Counting on that faceless email address hundreds of miles away to post a perfectly honest description of the product's shortcomings? Get real. I'll admit that the company's feedback mechanism does work to an extent, but capitalism doesn't fly on integrity and honesty alone.

Even if I'm completely misguided in my perception of eBay's shortcomings, there is still that very likely chance that the stock has simply gotten ahead of itself. With an $18 billion price tag and less than $50 million in trailing sales, there's a lot of air underneath the stock and more than a few positive expectations already priced in. Are the shares overbid? That's ultimately up to you to decide.

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