Saturday, January 30, 2010

More Unintended Consequences at EBay

Three years after eBay launched its makeover plan, the results are mixed: revenue and profit are down, but at least the company is still there. The plan was to turn what had been the world’s go-to auction site into a retail aggregator along the lines of EBay started by booting out about half of its sellers. It raised fees to discourage those that remained. It replaced the sellers by launching strategic arrangements with a handful of big corporations, though not as many as it had planned on — competing with is not as easy as it looks. The challenge it faces now, though, is how to replace the buyers it lost along the way.

Customer traffic on eBay is starting to come back, and in the December rush, it finally came close to what it had been at its 2005-2006 peak. The problem is that most of the site visitors are browsing, but not buying anything. And there are good reasons for that, especially in the Christmas 2009 shopping season. Shoppers went to eBay looking for the bargains that they could not find in local stores, but they could not find them on eBay either. The rush of traffic to eBay last month could prove to be a mixed blessing. Some customers ended up buying something, to be sure, but millions who hadn’t kept up with the site found out that eBay is no longer a place where you can find interesting things at low prices.

It is hard to fault eBay for moving away from auctions to the more traditional fixed-price listings of a retail aggregator. Most auctions were an abuse of buyers’ attention. A buyer might spend 15 minutes evaluating an item and a seller in order to place a bid, when in most cases they had no chance of winning the item. But one of the unintended consequences of fixed-price listings is obvious if you take a quick look at the listings on eBay. A significant fraction of items, in some categories more than a fourth, are listed at sucker prices, three to twenty times what the item is worth on the open market. Sellers list thousands of items, hoping that careless buyers will come along and buy one of them by accident every now and then. (It may be, also, that a seller is too busy to set prices for its miscellaneous items, and is using a computer program to determine the prices.) Used books that sell for $5 elsewhere list for twice the new price. Much of the clothing is at the original retail price or higher at the same time that it is 70 percent off in the stores. The auction format at the old eBay, with the large number of active listings, at least gave buyers a way to gauge the value of an item. The new word on eBay is buyer beware, at least when it comes to prices.

The large number of junk listings on eBay is another regrettable consequence of its change in strategy. It used to be that sellers listed items on eBay in order to sell them, and the listings, even if renewed, expired in less than a month. Now only a tiny fraction of listings result in sales. EBay’s insider sellers can list thousands of items that probably no one will ever want, at least at the prices that are offered, and the listings stay there seemingly forever. EBay’s retail customers can also list a few items per month at no charge, and many of these listing are equally dubious, yet seem to come back month after month.

EBay continues its efforts to increase the number of listings, and the numbers say it is succeeding in changing this one metric. The changes would not seem to benefit buyers, though — there are actually fewer things to buy on eBay because the sellers that sold all the interesting items are gone, and it abuses buyers’ time in a new way to force them to sift through all the junk listings. Worse for eBay, the large number of long-term, inactive listings for products gives the site an air of stagnation. If you visit a category on eBay and see the exact same listings as the year before, you tend to get the feeling that this is a site where nothing ever really sells. That isn’t really true — a large seller may have 10,000 units of an item to sell, and it could take years to sell them all, but you can’t tell that by looking at the listings. People who are expecting to find the old eBay can imagine they are looking at a listing for a single unit of an item that no one is interested in. The result is a site where there is no longer any urgency to buy anything. If anything, the eBay experience now encourages buyers to wait if they can, in the hope that sellers might lower their prices.

I visited a flea market in December too, and it didn’t have the air of activity that a flea market traditionally is supposed to have. There were lots of things you could buy, but the prices weren’t particularly low, and a lot of the items seemed to be the same ones I had seen the year before. There were a handful of shoppers looking around but I didn’t see anyone actually buying anything. That’s basically what eBay looks like now.

A recent story sought to follow up on a sellers’ boycott of eBay two years ago. While the story mischaracterizes the boycott and the issues involved — it was not really about the feedback system, but about a disparity in fees that gave large corporate sellers an enormous advantage over small-business sellers — it does give you an idea of how eBay is doing now. It has fallen behind Amazon in buyer awareness, and its small-business sellers find themselves wishing another company would come along to replace it:

More than half of those polled had a negative opinion of eBay. While a majority called Amazon an “excellent” channel to drive sales, only 23% felt the same way about eBay.

And remember, this is eBay’s reputation among its current pro sellers. Try to imagine how its former sellers, in both the pro and household categories, feel about it — and that’s a considerably larger group, numbering in the millions.

EBay’s prospects are not as favorable as its financial results suggest. It reports only a slight decline in revenue, but fee increases and gains in its PayPal subsidiary and foreign operations obscure a downward trend in U.S. marketplace transactions. EBay’s novelty effect will wear off in other countries too. Its cost structure is too high for it to ever regain the low-price position in any market — sellers have to sell at higher prices on eBay to cover the high fees. At this point, eBay is still searching for a strategy that will allow it to remain relevant in the long run.