Tuesday, July 15, 2008

Will the Market Weigh-in on the Buy.com Deal?

When I originally posted about the Buy.com deal back in early May, I sent several emails to my analyst contacts to get their take. I was underwhelmed with replies, mostly because they didn't believe it was material -- One deal would have little to no impact on the company.

Well now, with the Q2 earnings call just a day away and the NY Times (requires registration)writing about the deal, perhaps Wall Street is changing their tune a little bit.

I came across this quote from a Reuters article this morning:

"Analyst Stephen Ju said the agreement with Buy.com could be only the first of such deals, adding that he expects the company to post a slight acceleration in U.S. gross merchandise volume in the second quarter.

Gross merchandise volume, or GMV, is the total value of goods and services sold on eBay sites -- on which eBay takes a cut in the form of transaction fees.

"Over the next few quarters, these deals may have the effect of replacing high-rent with low-rent tenants and average take-rates may begin to compress," Ju said in a note to clients.

As a result, the effect on the company's revenue may be more muted despite a modest rise in GMV, said the analyst, who maintained his "sector perform" rating on the stock."

A single deal is not material, but more deals like this replacing high take-rate business with low take-rate business certainly could have a material impact on eBay's business.

Just my 12%


David said...

This is very dangerous for eBay IMO.

They feel that buy.com will provide better customer service. That is probably true.

What happens if all of the "smaller" sellers (and when I say that I say anybody who isn't a diamond powerseller) leave eBay in place of these diamond powersellers who aren't paying any listing fees?

I think eBay is playing with fire.

ms.pat said...

I still don't understand the goal of replacing sellers who bring in a lot more revenue with special deals with sellers like buy.com and their reduced fees and miserable sell-thru rate. Can anyone please explain? Also, ebay doesn't seem to care that as the sellers leave they take a large portion of ebay's buyers with them. What happens then?


Matt with BumbleZine.com said...

This looks like the beginning of a series of short-sighted changes, something eBay has increasingly excelled at doing. There will likely be analysts who applaud these decisions, because unfortunately many analysts are also short-sighted. Unlike many others, I don't live in awe of Wall Street analysts (some are great, but not all of them) who sometimes have a bit too much in common with weather analysts.

eBay will continue to have ups and downs but the overall trend downward is not going to change until they make some drastic changes to undo the tremendous damage they've done this year. And John Donahoe cannot remain as CEO unless the goal is to sink the company.

ms.pat said...

They do seem to be the perfect example of what not to do with a company. As for wall street, I'm convinced they simply repeat whatever ebay tells them. I've left comments on their articles and the answers I get are simply dense! Where in the world has good common sense logic gone?

Anonymous said...

Fellow sellers, once and for all, the concept of "Sell-thru rate" only refers to ebay sellers who have to pay insertion fees. It is a useful metric for large sellers to weigh their conversions (fees versus sales versus listing volume, etc).

Corporate sellers on ebay like Buy, likely pay no insertion fees whatsoever. The concept of "sell through rate" has no bearing on evaluating the success of their ebay sales. None whatsoever. No insertion fees equals no risk to throw a virtual inventory listing up.

Only ebay themselves and Buy themselves are in a fit position to judge the success of their net sales and net profits. Terapeak is great for the rest of us to see their grosses and GMV but seeing "a low sell through rate" is illusory.

Randy Smythe said...

Stephen, thanks for the comment, yes sell-thru rate means nothing when you don't pay listing fees, but eBay may feel the drag from a lower take-rate.

It is very manageable with just one seller, but if the Buy deal is not growing GMV in those categories, all it does is take higher take-rate business away from other sellers and give it to the lower take-rate Buy.com

The key will be if Buy.com's listings are actually growing GMV in those categories, then it just become a numbers game to see where the ROI is.

Teckwave said...

If we assume an average 15% profit margin on the technology items that Buy.com sells then for every $1MM in GMV Buy and eBay will have $150k to split. Buy needs to pay for shipping so figure a 60-40 split. eBay makes 40% of $150k which is $60k. I know eBay collected WAY more than $60k in fees from all the technology sellers who were fairly competing among each other in Stores.

Without economically viable access to Core few of these sellers will survive in the long term.

Many of these sellers provided excellent customer service. Lots of people prefer working with small businesses where they know their sale counts and they have a real person to deal with on the other end.

The best way for eBay to maximize thier profits would be to allow everyone to list in Core and fix Finding so that buyers can just find the item they are looking for and have auctions on the side in case they want a deal.

To help Finding, sellers should list text and image only descriptions (no HTML) into a dynamic catalog that eBay maintains. Similar to Amazon. So nobody has to enter a description or image twice.

Seller could still express themselves through their About Me pages.

The dynamic catalog would allow eBay to compress ALL identical items into 1 listing for Auction and Fixed price.

Finally, eBay Finding will work properly and they can allow access to Core for all and eliminate Stores to reduce overhead.

No special deals needed and if explained clearly to sellers, they will understand.


David said...

Stephanie Tilenius has a Harvard Business degree.

I'd love to see her start an eBay business from nothing and become a diamond powerseller.

Reading her quotes she makes it sound like every seller has the opportunity to get the buy.com deal.

ms.pat said...

@david - yep - that's kind of like saying to a kid you have an opportunity to be president one day (and just about as much chance as becming a diamond powerseller) LOL

I still can't see how ebay will profit from the buy.com deal. Time will tell I guess.

David said...

ms. pat I don't see how eBay *can't* profit from the buy.com deal.

eBay gets Buy.com the traffic, buy.com does all the work and makes the sale.

The problem is if these diamond powersellers start showing up and replacing other powersellers and eBay's cut gets smaller and smaller.

Anonymous said...

But if the overall aim is to funnel it all thru PayPal and monetize it that way, then any profit at all, over and above that, is gravy.

Ebay pads with PayPal just as vociferously as they claim the sellers pad with shipping.

nadine said...

Gross merchandise volume, or GMV, is the total value of goods and services sold on eBay sites -- on which eBay takes a cut in the form of transaction fees.

As we know, Ebay also takes a cut on the value of goods listed on the site, whether they sell or not - unless it's Buy.com's listings. Question: does Ebay also use GMV for goods that are listed on the site, or is there another acronym? If Buy.com is raising the dollar value of goods listed on the site, but lowering the dollar value of goods sold because of its low STR and chase-away effects, Ebay might well be tempted to 'redefine' GMV.

Just asking.

ms.pat said...

I think we all feel ebay pads listings and manipulates numbers...I just wish somebody could definitely prove it.

Sorry, I'm still not seeing the deal with buy.com as being profitable for ebay. If you have a thousand items from sellers who are paying full fees and with the customary 30 percent sell thru rate, they have got to be making more revenue for ebay than 1,000 items from buy.com who isn't paying full fees and has a dismal sell-thru rate. If Ebay is only making money if buy.com sells then how can they be profiting all that much? Sorry, I can't grasp what you are all trying to say.

Kilo said...

Nobody on this site has ever studied the psychology of buying.

Buy.com is not an aggressive seller. They list everything at full price and their conversion rate demonstrates this. With a conversion rate in the single-digits, they are nearly (if not completely) insignificant to eBay GMV.

However, and this is where eBay outwits everybody, Buy.com actually helps other competing merchants sell MORE. Yes, you heard me right. When a buyer sees a Buy.com listing and a competitors for a lower price, they are more likely to buy the competitor's product than if the Buy.com listing had not been there. There is the revelation (or the illusion) of value!

So eBay's overall GMV with Buy.com is actually higher than without Buy.com even though it ain't coming from Buy.com conversions.

You may ask why I know this. It is because I am an active seller for a few small niches that Buy.com is listing in. Ever since they arrived, those niches have actually done better than my other areas. This deal has ended up being great for the real "value" sellers.

Randy Smythe said...

There seems to be some confusion about the financial impact of the Buy.com deal.

I'll put together a post on it later today hopefully.

Basically, eBay can only lose if GMV decreases so It can't be a bad deal for eBay and Buy gets $3 million more per month in sales than they had before, so they should be happy.

Anonymous said...

Plus, the competing sellers are still listing. They haven't left so ebay is still getting their insertion fees PLUS buy's sales.

ms.pat said...

Enough sellers left to make the core auction part of Ebay look weak to wall street. The stock lost a whopping 7.00 after hours today.

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