FOOL ON THE HILL
An Investment Opinion

FairMarket Network a Blip on eBay's Radar Screen

By Yi-Hsin Chang (TMF Puck)
September 20, 1999

Shares of eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> fell $5 to $136 today following Friday's news that competition is heating up as several major Internet players are teaming up in an attempt to dethrone the online auction leader. Today's decline comes on the heels of a 7% drop on Friday, when eBay finished down $10 3/4 to $141.

The negative stock market reaction to the news of added competition is definitely overblown and is likely to be short-lived. Investors who have been so eager to unload eBay shares are underestimating the very strengths that have made eBay the biggest consumer retail website in terms of sales volume.

What's all the fuss about? Basically, we're talking about an online auction network that includes the likes of Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, Excite@Home <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %>, Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %>, Ticketmaster Online-CitySearch <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TMCS)") else Response.Write("(Nasdaq: TMCS)") end if %>, XOOM.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XMCM)") else Response.Write("(Nasdaq: XMCM)") end if %>, ZDNet <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZDZ )") else Response.Write("(NYSE: ZDZ )") end if %>, and Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>.

These separate Internet portals and retail stores are forming the "FairMarket Auction Network," which allows users of any of the member sites to participate in auctions on any other member site. So someone using MSN or Excite will be able to bid on Dell computers being auctioned on DellAuction.com without actually leaving MSN or Excite.

The alliance was a smart move for the participants and not at all surprising. When I last checked the offerings at various auction sites in August, it was obvious that Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> and Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> were the closest competitors to eBay -- at that point, Yahoo! had about 600,000 items on the auction block compared with eBay's 2.6 million (Amazon did not disclose its numbers). Notice that Amazon and Yahoo!, eBay's strongest competitors, are not part of this new alliance.

As far as I could tell, as of August, everybody else's auction site was still in the embryonic stage -- Excite, for instance, had fewer than 18,000 listings and Go2Net's haggle.com had only a couple thousand listings. Clearly, for those late to the party, it makes sense to link up with others in the same boat in hopes of showing up on eBay's radar screen.

Incidentally, privately held FairMarket Inc. may prove to be the biggest beneficiary here. The deal not only puts its name on the map, but it is also getting investments of undisclosed amounts from Microsoft, Excite@Home, and Ticketmaster Online-CitySearch.

For the time being at least, the FairMarket Network will remain just a blip on eBay's radar screen. First of all, online auctions are by nature community-driven, and it will still take some time before these new players can build up their client base. One of the keys to eBay's success has been its strong sense of community. The company has deliberately avoided selling advertising on its site to avoid creating a corporate feel that could alienate its best customers.

Secondly, as Jeff Fischer (TMF Jeff) has pointed out many times, eBay retains the advantage not only as first mover -- the first to establish an online auction site -- but also as first to scale -- the first to build a formidable site in terms of number of customers. It certainly helps that analysts and TV commentators automatically mention eBay any time the topic of online auctions arises. I have been surprised many times when people I know who barely use the Internet bring up the subject of eBay.

In addition, the whole structure of the FairMarket Network puts its members on an uneven footing with eBay. Members of FairMarket are essentially sharing a piece of the pie, whereas eBay gets its own piece -- roughly 70% of the pie at last count -- all to itself. FairMarket Inc., by the way, is getting a third of the fee on every transaction -- not bad for a middleman. What's more, logistically, the FairMarket Network also will have to deal with coordinating auctions across many sites, not to mention being held accountable for bad behavior on the part of bidders and sellers on the various sites.

Still, even as a blip on eBay's radar screen, FairMarket should serve as a wake-up call to eBay's management. The company can no longer afford to be complacent. It must avoid at all costs the site outages that have plagued the company in the last several months. It must ensure that its customer service is prompt and reliable. It must do everything possible to prevent fraud and other un-"eBaysian" bidding and selling practices.

eBay shareholders can take heart that it won't be easy to topple eBay. As is true in battle, it is far easier to defend than to attack. It's up to Amazon, Yahoo!, and the new FairMarket Auction Network to come up with the winning move.