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.

** Update: Long position in eBay was closed in early 2008 after company dynamics and policies changed. Our current view is neutral yet may change again in the future if the company fundamentals deteriorate further, or are convincing enough to warrant further investment.**

What will eBay become in 20 years?  Will they still be around in 20 years?  Most definitely.  I suspect they will look a little different however, (maybe even bought out under another brand) and the auction company?  It may still be the core of eBay, but the eBay Universe will look a lot bigger in coming years.    Have you seen the eBay neighborhoods yet?  Pretty cool… only been going a couple of days and already the niche corners are filling up.   I’m not really concerned about metrics that compare slight percentages of growth or loss in auction sales and listings from quarter to quarter.  I think too many analysts focus on such discrete aspects of the company and are missing the Big Brand and potential over time.  For eBay I think we need to focus on year-to-year metrics at a minimum, and consider factors such as brand awareness, economic integration and market penetration.  It’s just not a simple proposition, but I guess you have to start somewhere.  Then again I have a hard time understanding why the market has Amazon (AMZN) carrying a P/E of 129 to eBay’s (EBAY) 40.  Personally I’d rather be on the eBay side of that trade.

     How about new tools and products?  I’ll just say that the eBay Desktop is pretty neat and works very well. It’s what I use for eBay search now- faster, simpler and the search listings are better than they used to be.   eBay is also coming out with a some new tools for users that may prove helpful.  Some of the other eBay products such as Stumble Upon and StubHub are really doing well. I’m not so sure about Kijiji… time will tell.  I’m also not sure about the other stuff, but they seem to be working hard at the eBay house.

Something that never really caught on was the Windorphin campaign. I think it was a cute idea that never really had any purpose- so people wondered what the heck do you do with these things?  What™s it about?   A lesson revisited¦ just because you have a creative idea doesn™t mean it™s a good one.  It might still be, but I™d rather not see a company spending money on stuff that really isn™t going anywhere. The advertising aspect was a little strange.   Of course I had to check it out and make my own Windorphin¦ which, considering my blog™s name is Sushi Money isn™t such a strange thing.   I kind of like the little guy.

Do you know what I would like?  A nice, slim, mobile eBay application for my cell phone.  Among all the other mini apps on mobile phones it would be fun to explore what eBay has to offer.  Might not be easy to make it efficient and usable, but I think they could do it.   Start integrating PayPal Mobile a little more and now we™re really talking.  Maybe they already have it, and I™m just clueless.  But if they took eBay Mobile, PayPal and the Windorphin campaigns?  I think they could do something cool¦ I™d use that icon above for a mobile signature or for other eBay stuff.  Lots of sellers do that now.

     So where is eBay falling down?  Where do they need more focus?  What can they do better?  You tell me¦   One area they need to focus on (heck, countless internet and brick & mortar companies need to focus on), is the changing demographics across the nation (and world).  Over the next 30-40 years the U.S. will become a nation focused on the needs of older adults, especially the retiring Baby Boomers.  This is a huge market for retailers, and those companies that leverage their brand toward helping older adults use or access services, information and products will see enormous growth.  And that also goes for cross-cultural expansion.  We are equally becoming a more diverse society.  

     I like the company enough that I invested in it last year, and hope to stay with it for a few years at least.  I haven™t seen anything to be concerned about over the long-term.  Are valuations attractive today?  For a long-term buy I believe they are.  But like the economy and the stock market, eBay will trend up and down over time, sometimes with great volatility.  Last year I considered it a value play in the technology sector.  It™s more fairly valued today.  Say what you will about eBay, but there™s something electric about the company and their vision from my perspective.  What’s yours?

Full Disclosure: I own eBay stock at the time of writing.

I almost typed “PayPal Growing Fat” and corrected my mistake… but then again, that title works just as well. eBay’s PayPal is going in many directions these days- and now with PayPal Mobile they will continue to leverage their traditional internet success. Mobile internet capable device users can now see a PayPal button when shopping, and can quickly make payment for many different services. Heck, I even read today that both Southwest and Northwest Airlines are even accepting PayPal. I’m not sure how many people will do that from their cell phone, but it’s an option now. Will people really use their cell phone or Treo to buy things? I can think of a few things, such as pizza or other food delivery services that would fit very well. Maybe if I had an iPhone I would try it out… I have used PayPal many times in the past to purchase and sell items on eBay, but I’ve never used it for anything else yet. I’m still long on eBay (EBAY) stock, so whatever they do to improve margins and increase profits is fine by me. Should be interesting to watch!

Next week I’ll be hosting the 18th Carnival of Money Stories. The focus is for real-life stories and examples that relate to money, described at the carnival site as seeking the “…personal experiences or the experiences of others on saving, investing, finance, money management, money generating, business ventures, success and tales of struggle. We would love to hear how you are handling your financial and business challenges as well as your opinions on money news and stories you come across.” Here is the article submission link… I look forward to hosting!

Full Disclosure: Long eBay at time of writing.

Kept very busy last week, and then we took a three-day weekend camping and boating with relatives.  We took a trip to a lake a few hours from home, and enjoyed the water, and hanging around the fire at night.  It was really nice to just relax and enjoy some time away with good food and fun with the kids.  We really don’t have to spend a fortune, and can find many fun things to do not far from home to enjoy visiting together.  We had a 6-year old, an 11-year old and a 17-year old with us, and they loved the trip.  Life passes too quickly to not enjoy the time we have with family and friends.   I realized I’ve only seen my brothers a few times in over the past few years, so I was glad we could get together.  I watched my son run around for hours catching fireflies, and putting them in plastic bottles for home-made flashlights.  Roasting marshmellows and making “smores” put a smile on the kids faces.  And then at 5:30 one morning… “Rise and shine!” came the call from the 6-year old as he peeked into our tent… with a growly reply of ”Go back to bed!” from Dad who didn’t go to sleep until after midnight!

But gas prices are pretty dang high for tourist travel, especially in areas where the gas stations have a monopoly on prices.  On the lake we visited the boat marinas were charging almost $4.00 for a gallon of fuel!  I filled up before hand and didn’t have to purchase at that level.  But driving somewhere is about twice as expensive these days than it was just a few years ago, so we’re glad we can find nice places within a few hours drive.  And we always find more things to do than we realized.  Even so, I was struck by how depressed some of the rural areas were for people who live there.  Many smaller towns are no longer growing, and they lack business growth to provide jobs for local residents.  Tourist areas that are “out-of-the-way” are not receiving as many visitors either.  I’ve been studying Family Economics recently and was suprised that in my home state rural poverty rates are much higher than metropolitan poverty rates in the larger cities.  I thought it was the other way around, but after driving through the country this weekend it makes more sense.  And where do the younger folks go for jobs?  Not in the smaller towns… they have to find places that provide education and a good future, and that’s usually near the larger towns and cities.   But technology provides opportunity, and even in some of the small towns I noted “eBay Drop-off” stores that some people have used to start their own businesses.

And how about that move on GE today?  I can’t pretend to know why at this point, but the company has been making some good moves shedding businesses that don’t contribute to their goals for growth.  I’ve thought GE was undervalued for several years now, and purchased shares accordingly.  It will continue to be a long-term position for me, and I like to think it will double over the next five years.  Either way, I like the dividends and reduced taxation.  Yet all of that pales in comparison to the “value” of spending time with family.  It’s just not something one can quantify.  But it is something we can do…

“Four things come not back: the spoken word, the sped arrow, the past life, and the neglected opportunity.”

                                                                                                                     Omar Idn Al-Halif

That’s a pretty good maxim for saving and investing… especially in one’s family.

The market has been on the move forward this week, a little at a time.  We’re due for a pullback- wouldn’t surprise me if it was pretty volatile.  I find it very interesting that the U.S. dollar is at a multi-year low against the Euro with many unkowns in the economy right now, and yet the market still moves forward.  I’m certainly not complaining, but I’m not sure that the “rising tide” is “lifting all boats” this time.  Morningstar recently put out an article describing the market as close to fairly valued, with the DOW undervalued by almost 7%.  Essentially the view indicates investor expectations for “modest returns this year.”  I was surprised by that analysis because the market just seems overvalued to me after a pretty good run since late summer of ‘06.  How do they do it?  From the Morningstar article, “We can compute an aggregate fair value for the market by calculating a market-cap-weighted average of our fair value estimates for the stocks in an index. To determine if the market is over- or undervalued, we then compare the indexes’ aggregate fair values to their current market prices.”    So it’s Morningstar’s analysis that provides the basis.  I’ve always enjoyed their research, I don’t always agree with their views.   It’s going to take a lot more upside earnings numbers and strength in the economy before I see upside.  But how about that eBay?!  Pretty decent earnings… I just love a company that earns money through leveraging the passions of other people.  Speaking of the passions of other people.. I’ve been waiting for a good entry point for Altria and this week may provide one.  They just posted a first-quarter decline of 21% of net profits… although international growth is strong and their forecasts are positive.  Should be an interesting week.

Okay I’ll admit it… I’m getting more defensive.  I’ve always been an optimist and invest on the Bull side, yet perhaps the kind who likes to “make sure” and check on things to ensure their progress is on track.  Lately however I’ve been uneasy.  Why exactly?  A lot of things. I’m no economist so I won’t roll out a bunch of statistics that, although I enjoy reading, I simply don’t enjoy justifying.  But I look at the same news and data that most amateur investors do, and even though I’ve been doing it a long time all I’m sure of is that nothing is for sure.  So with the subprime mortgage woes, the seesaw economy, the new highs for the indexes, the mideast turmoil, and a couple years of heavy political wrangling before an election plays out… I think I finally decided to get more defensive.  I say more because I’ve already been 60/40 stocks to bonds.  But now I’ve rebalanced my portfolio to about 35/65 stocks to bonds.   I still own eBay because I’ve made some nice gains over time and consider it a long-term investment.  I also own GE both because I’ve had it a long time, and it provides a steady dividend return with a company that is probably the broadest reflection of the economy in one stock I can find. It hasn’t shined in quite a few years, but that may be changing soon. Finally I own some ConocoPhillips because I believe they are well positioned over the long-term in the oil sector and can weather a storm should it arise.  Aside from those stocks I own both Balanced and Growth mutual funds in my Roth IRA with more emphasis on the Balanced funds.  My research on the expected yield of my portfolio ranges from 5% to 7.5%.   The Balanced funds may do much better.  But should we tip into a recession, and should the market reverse itself, I’ll be decently positioned to ride it out.  I personally believe we’re going to see about a 5%-7% return over the next couple of years or longer.  I also believe the housing market is going to take 3-5 years to work through the supply and demand curve, with home appreciation stagnating during that time.  When will I become more bullish?  When the mideast issues become clearer in a couple years… when the election is over… when interest rates don’t go up over the next two years… after the market corrects more than 10% at least twice in the next 3 years… when it stops raining…. how the heck do I know!?  But that’s where I am.  I’ve got to honor my gut instincts.  If I’m wrong and miss out on the next leg up?  So be it.  Something else I’m becoming as the years go by?  More patient.

The 92nd Carnival of Personal Finance is hosted by Lazy Man and Money this week with a wonderful line-up of articles.   Some really interesting stuff includes ProBargainHunter’s look at what’s hot on eBay through the new eBay Pop! tool for trending the most popular items.  Great idea… and wouldn’t it be interesting to trend the price averages from month-to-month and year over year?  I know… lets call it the EPI for “eBay Price Index”…  then we can analyze and trend eBay inflation data…. well, they probably do that already somewhere.  Hey, maybe I can coin that term for posterity… has it been done yet?   I’m also a believer in long-term investing to which Fire Finance’s article on Investing- The Mistake of Timing the Market really drove the point home.  I enjoyed BluntMoney’s look at budgeting, or rather a Confession on not budgeting!  I wonder how many people really, truly use a budget?  For many it’s just a reference point… something to aim for.  Like Blunt Money, I use software and tracking tools primarily.  It’s a budget per se, but realistically I operate from a thorough knowledge of where I am at all times.  I may start a more accountable budget this year to see if it makes a difference on the savings end.  It was interesting to read that Online Savings Blog is concerned about moving their IRA’s to Vanguard.  Moving money and retirement accounts around can be intimidating, but I have to say Vanguard is the one place I’ve been most satisfied with over the years.  I think you’ll really be happy after you’ve completed the transfer.  I’ve moved and modified many accounts on Vanguard without a hitch, and it has always been flexible, reliable and staffed with helpful people.  Believe it or not though- I did catch an omission on Vanguard’s part one month a couple years ago.  They somehow forgot a monthly dividend reinvestment on one fund… I looked and looked, and finally called them.  They researched it within a day and said, “You’re right!” and corrected it asap.  So I check my accounts at least every quarter to make sure any dividends and reinvestments are credited properly.  Shows that you can’t, or shouldn’t, simply leave your finances on auto-pilot even with the best of companies… it’s your money, make sure it’s doing what it’s supposed to!  But with Vanguard’s low cost structure and helpful staff, I wouldn’t be anywhere else.  Finally, a shameless plug for Sushi Money’s article Get Ready to Sell That Home.  If you’re a prospective home-seller, do everything you can to stand out from the rest!