If you look at what’s been happening eBay over the years you will see it has reached a tipping point.
When it started, revenue grew by growing the business – getting more sellers to list more goods so buyer had the greatest online selection to choose from equals more fees.
However all markets are infinite. Therefore at some time every business reaches a point where it simply can’t increase revenue by increasing market share, and it is what a company does at this point which distinguishes the truly great from those who were once there, but there no longer.
The truly great companies accept that the market is finite. Therefore, once you have reached the point where you can grow now more, you shift focus from growth to retention. That is guard and retain the slice you already have and be happy with the steady flow of profits that that share the market generates. When looking at businesses in which to invest, these are the ones I look for.
Unfortunately, a lot of business, though they accept the market is finite, believe in infinite revenue growth - and executive salaries and bonuses are tailored to achieving that outcome. Now executives are by and large a self-serving lot. So if they can’t increase profits by growing the business they will look at other means, means which they know will ultimately not be in the long terms interests the company, but ensures bonuses continue to flow – over the medium term at least. So how do increase profit without increasing market share? You guessed it – increase fees.
Now of course the problem with increasing fees is you start losing customers (sellers), which means there is a reduction in selection, which means buyers start looking elsewhere, which means sales go down, which means fee revenue is down, which means you have to increase fees to compensate; and this vicious cycle repeats itself until you reach the point where you are at risk of pricing yourself out of the marketplace, which is the point which eBay is now at. That is, fees are now so high that should they try to increase them it could cause the collapse of the business due to a mass walkout of sellers.
It is at this point that the panic sets in. That is, if there is no longer any scope to increase profit by increasing fees and if bonuses are directly tied to increase in profit, then the only alternative left is to attempt to regrow the business to its former glory, or, it will, at some point in time, cease to exist; and this is the point which eBay is now at. That is the new initiative is nothing more than a lame first attempt to claw back market share by improving buyer confidence, which in turn should translate into improving market share by getting more seller’s to use the site to sell their goods, thus generating more fee revenue. Unfortunately I think it is doomed to fail.
The market now is vastly different to when eBay first start. Whereas, when they start the landscape was, for want of better term virgin ground, now there is real competition out there and it is growing. Furthermore the whole strategy is based on getting more sellers - buyers don’t pay fees - but sellers consider eBay a hostile environment, so the last thing they should be doing now is making it even more hostile.
So my view is, if you own shares in eBay, this might be a good time to rethink your investment portfolio.
