Wednesday, December 12, 2007

Bear Stearns Note on Expected eBay Fee Changes.

Investment Bank, Bear Stearns sent a note to investors today discussing the expected fee changes at eBay in Q1 of 08" Here are some of the highlights:

Expected Fee Changes In 1Q Neutral to Slightly Negative

· Drastic Fee Structure Change Expected. We are expecting eBay to make category price changes in early 08 that would lead to a drastic shift in listings fees to final value fees. More specifically, we expect eBay to reduce domestic non-motors, non-real estate, category listings fees by 50% and increase final value fees by 30%. The change would reduce listings fees to ~40% of revenues per listing from ~60% today; shifting the risk in the model to eBay as the company will become more reliant on back-end fees, which are more variable than the front-end guaranteed listings fees.

· Needed to Readjust Seller Economics. We believe that this is something eBay has to do to readjust the seller economics and possibly bring value back to the eBay platform. Our numerous contacts within the industry are in agreement that eBay has no choice but to walk down this path.

· Analysis Shows Modest Negative Impact to Financials. Our analysis of the expected fee change shows that it would lead to a 2% reduction in eBay’s 08 domestic core transactions revenues, or one cent reduction in our non-GAAP EPS estimates, while increasing sellers’ revenues by 4%. A sensitivity analysis incorporating various listings fee and final value fee scenarios, shows that eBay could lose upwards of 27% of its domestic transaction revenues in our most aggressive assumptions but actually increase revenues by 18% in our more optimistic assumptions.

· Satisfy Sellers But Does Not Address Buyer Demand. Overall, we believe that the fee structure change would pacify sellers who are dissatisfied with the economics on eBay, convince them to stay on the platform, and lessen the GMV bleed to other channels. Moreover, eBay can reduce the listings fees and come close to a revenue neutral scenario. However, a fee structure change does little to solve the problem of lack of buyer demand on the platform.

We all know some major fee changes are coming to eBay in Q1 of 08' but will "Seller Fatigue" negate any benefit to eBay. If the last three promos are any indication; sellers just pocketed the savings while overall listings increased just slightly. This is going to be an interesting first quarter.

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