Sushi Money

By now you’ve probably heard about the new rules and fee changes eBay has recently put out for its community of sellers and buyers. We won’t recap them here, but news over the last week indicates eBay’s tweaks and changes are confusing the heck out of everyone. Originally I thought Is eBay Crazy? was a more appropriate title for this post… a little dramatic perhaps but it fits the general storm confusion that we’ve seen in the media in recent days.

Don’t get me wrong, I’m not a disgruntled investor or user. I’ve been long the stock for over a year and have strongly believed in the company’s future. I still believe in their future but where the company is headed over the short term is anyone’s guess.

From an investment viewpoint, the stock price has offered tremendous value recently. Standard & Poors rates the stock as a Strong Buy with five stars and a fair value of $27 per share. Trading at about 17 times earnings, many analysts see the stock having more upside than downside. Even so, several analysts have recently lowered annual estimates based upon eBay’s cautious 2008 guidance after reporting robust fourth quarter earnings. Personally I love a company with $5 Billion in cash on the balance sheet and zero debt. But as much as I like the company for a long-term investment, my concerns of a year ago have remained and I’m still trying to understand their strategy.

eBay is no stranger to controversy over changes to their guidelines and fee increases through the years. Now that CEO Meg Whitman’s exit has finally arrived, eBay chose the opportunity to dramatically change many parameters of the auction experience, primarily targeted to sellers. The changes have brought out incredible emotion from the eBay community and investors.

A positive spin says eBay is Making a Bid to Lure Back Entrepreneurs. That’s one interpretation. From the PR I’ve read it sounded more like eBay was focusing on the buying experience and forcing sellers to adjust. Perhaps the company is listening more closely to the PowerSellers, but at what cost? As BusinessWeek asks, “What about the little guys?” Obviously the company wants it’s sellers to succeed and buyers to keep coming. But why force such dramatic change on a stable community? My guess is that was a core part of the strategy, stirring up the conversation and bringing eBay back into the media focus. But the sellers are left with the bulk of adjustment and that’s a lot to handle for some of them.

Steve Grossberg, President of the Internet Marketing Association, was interviewd by AuctionBytes.com yesterday and provided a candid assessment of the eBay changes. Probably no change has brought on more concern than removing the ability for a seller to leave negative or neutral feedback on a buyer. Buyers can still leave negative feedback on sellers… but all sellers can do now is to leave positive feedback (or no feedback perhaps).

So why would eBay do this? Naturally the company is trying to improve the bottom line financials, and improve the user experience. The company presents their side in their Feedback FAQ page, but much of it is still confusing. Here’s part of eBay’s rationale for stopping allowing sellers from leaving negative or neutral feedback on buyers:

Why can’t sellers leave negative and neutral Feedback for buyers?

- Since buyers take the primary risk in a transaction (sending money to a stranger), the goal of the Feedback system should be to enable them to accurately assess seller performance. This facilitates safe and satisfactory trading.
- When buyers receive negative Feedback, they reduce their activity in the marketplace, which in-turn harms all sellers.
- The threat of receiving retaliatory negative Feedback from sellers, prevents buyers from leaving honest feedback about sellers, undermining the accuracy and value of the Feedback system.

Does that make sense to you? Philosophically, and practically, buyers have no choice but to accept the initial risk of the transaction. There’s no way around it. Because this is an auction, the “stranger factor” is certainly more relevant than a transaction purchase at a large store with a single, understandable policy for refunds, etc. But do buyers really take the primary risk? I’m not so sure. A buyer does take great risk, and needs the tools to properly assess a seller. But because this is an auction and not simply a shopping site, collaborative balance in the transaction may be more important. By collaborative balance I am speaking of the ability for sellers and buyers to influence the transaction beyond the mere exchange of funds.

Security and safety are greater concerns for buyers in an auction format, there’s no question. Personally I’ve been buying on eBay for 10 years and haven’t yet had a problem. But more importantly I think sellers take a great deal of risk through all the effort required to find, research, place and market a product in the auction in the first place. And not all buyers are angels… as Mr. Grossberg mentions, eBay deals with about a 6% rate of non-paying bidders. So a sellers “marketplace financial risk” is just as real. In fact, the risks that sellers face reach far beyond eBay into the sellers’ homes and communities where the business itself originated. And negative feedback for a buyer doesn’t matter nearly as much as negative feedback for a seller. Besides, a buyer can simply create a new eBay profile can’t they?

I have always found that sellers are far more sensitive to negative feedback than buyers- because their livelihood and unique business model depends upon it.

So are eBay’s changes for the better? Time will tell, but many sellers don’t buy into the reasoning yet either. AuctionBytes.com also released an insightful interview with eBay’s CEO-designate John Donahue yesterday where he was asked, but didn’t really answer questions on the feedback issue. He did provide some interesting views on the announced fee changes, but overall sounded quite defensive to Ina Steiner’s questions in my view.

For an excellent firsthand look at the concerns, no one has explained the sellers’ perspective better than A Modern Guy’s Open Letter to eBay (and the comments are very interesting).

I am left wondering if eBay has become too big to really understand the market, or the concerns of their constituents? Admittedly, eBay has to satisfy a larger group of people than most businesses… sellers, buyers and investors, and the dynamics must be very difficult to measure. So I can only offer opinion, which in my view says that eBay is missing the boat. I think the compnay is trying to reshape their business to meet competition such as Amazon.com and other marketplaces, but are losing the unique and dynamic aspects of what their auction business has always been about. Can I quantify that or put it all into words? Maybe not, but in many ways eBay simply isn’t as fun anymore. The enthusiasm isn’t there right now. And the bold changes have stirred up a hornet’s nest. Maybe I’m getting older… and maybe the internet itself is becoming more established so that it’s natural that our enthusiasm has tapered off. And as buyers, aka shoppers, we have more choice than ever before.

With choice we desire simplicity and speed- hence Amazon’s success. Trying to find and/or buy something on eBay is often too much work. From my perspective that is the heart of their challenges right now. And just maybe they’ve now compounded those problems by increasing the complexity of their business model for Sellers, Buyers and anybody else that might look at eBay.

I believe it must be about simplicity. Part of the reason Amazon has performed so well in recent years is because they have simplified the user experience and kept their model consistent. I’ve been shopping at both eBay and Amazon since 1998. When you go to Amazon, you know what to expect. But when I go to eBay these days, I’m not sure what the heck is going on anymore. The feedback system has evolved but I don’t really know how it works in depth. And who has time to rate a seller in great detail when you’re just trying to buy something?

Honestly, I don’t really care that much to take the time to learn- I’m busy enough that I just want to go somewhere, find what I’m looking for, and buy it.

Certainly as a buyer, I guess I feel “better” that some dubious seller can no longer leave me negative feedback. But what does that really mean? In many ways, eBay was always about transparency- an auction site and environment where you could evaluate sellers and buyers and choose carefully with whom you wanted to do business.

But sellers now appear to be at a disadvantage. I agree with eBay in that some sellers were ruining it for the rest by intimidating buyers with negative feedback. But was that really significant? Most sellers would be ruining their own business by giving buyers negatives for minor reasons. The only primary reason most sellers would do so is because of buyers that don’t pay for the item. Now however buyers can leave negative feedback for a host of nuisance reasons and sellers have few options over the near term.

Maybe the new feedback system will work really well. At least one eBay expert and “old-timer” believes so.

“We aren’t just talking about a policy change here. For all of us inside the eBay universe, this is a major cultural change; in fact, the most ground breaking of any change ever made on eBay including the first major change to Feedback in 2000 – Transaction-related only Feedback. “

“Starting in May, as buyers begin to leave more honest Feedback and the spread between Feedback scores opens up over time (yes, many of us with lily-white 100% positive scores will loose them), the trust that buyers have in the entire eBay marketplace will increase as well.” Jim Griffith

So maybe eBay’s success depends more upon how well they can foster an auction experience that buyers really trust. Then again, maybe it won’t even matter.

eBay is apparently working hard to improve the customer experience of buyers- which appears to be the primary focus in terms of shopping “safety” and security. Do they have it right? Do the metrics and financial data really show that they’re on the right track? That’s what the company believes. But I think there’s more to the story. AutctionBytes.com has also outlined A Seller’s Guide to eBay’s January 2008 Announcements. For me eBay has always been about the auction experience, whether I’m buying or selling.

Bottom line? Find what I want quickly and at the least costs as a buyer, or sell something quickly and for the greatest profit as a seller.

With that model I think the auction itself (the company) must be market-neutral. Meaning that both buyers and sellers must be free to navigate the market-place. When one side has the ability to influence the reputation of the other, without the other side being able to respond, then the company is no longer market-neutral. At that point the company stands on the side of the buyers.

Maybe that is eBay’s goal. But I don’t believe it’s going to be the salvation of the auction market-place, and instead will turn eBay into just another storefront shopping site. If that continues to happen, they will lose market share and the whole reason sellers and buyers enjoyed auctions in the first place.

eBay states that they’re listening to sellers and working to improve the selling environment. I’m not so sure. My view is that sellers are eBays most important asset, rather than buyers because the eBay auction is driven first and foremost by sellers who bring products to the marketplace to present to potential buyers.

I’ve often believed that eBay’s most important customers were its sellers. The buyers are the customers of the sellers, and clients to the transaction, but the sellers are key to eBay’s model. Help the sellers succeed, and the buyers will come.

Sellers are the stores and shopkeepers doing all the work… the heavy lifting, presentation, marketing, design and shipping. Sellers are the crucial hinge on which all of eBay’s success depends. Right now eBay appears to be treating their sellers as if they are employees who must simply “suck it up” for the time being while eBay tinkers with the company guidelines.

eBay must certainly recognize that each tiny change they make to eBay influences countless thousands of sellers (and buyers of course) in different ways. Is their business model and transactional demand that inelastic in economic terms that they can make dramatic changes each year without worrying about the short-term cost? Perhaps, but it’s more likely that this is an deep structural change that eBay has chosen to move forward with, regardless of the consequences over the short term. But at what point is eBay risking the viability of the marketplace itself?

I keep going back to complexity and confusion as reasons that prevent users from coming back to eBay. And as a buyer and sometime seller this year on eBay myself, I am losing my enthusiasm based on the cumbersome nature of the experience. Too many rules to follow and confusion over who does what.

If eBay can find ways to return to a simpler, and balanced auction experience for sellers and buyers, I think they’ll continue to succeed in the years ahead. They have engendered some degree of collaboration, but at what cost? It seems they are removing the auction relationship itself, especially for small sellers.

Many sellers believe the changes driven by management heighten confusion and represent a corporate culture with blinders on. If eBay drives out enthusiasm and the auction marketplace that brought so much success over the past decade, then they may be relegated to become another mega-shopping site for the masses.

In my view eBay must find a way to leverage the experience, needs and passions of its community from a macro perspective. The company has excelled at this in the past, but doesn’t appear to be listening quite so well anymore.

Ultimately I see the challenge as whether or not eBay is able to effect a necessary paradigm shift that includes Sellers as Customers and Buyers as clients of a trusted, secure relationship. Both must leveraged as vibrant members of the shared community, and positive agents of financial performance.

The company could be so much more, but they need more reasons to stand out positively and reinvigorate their members. The greatest and most effective online auction center in the universe? Sure. After all, they’re eBay!

* Full Disclosure: Long/own shares of eBay at time of writing.

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