eBay Retreats From Web Retailing
As Originally Posted at The Wall Street Journal

EBay Inc., a onetime Internet star that thrived with its pioneering auction model, is retreating from its strategy of competing across the board in online retailing as it contends with its own missteps and changing consumer behavior.

EBay Chief Executive John Donahoe told analysts Wednesday that the San Jose, Calif., company plans to focus its online-marketplace business on used and overstocked goods, rather than on the retail market for new goods that is dominated by competitors such as Amazon.com Inc.

EBay's visitor traffic fell over the recent holiday season and the company reported a 16% drop in fourth-quarter revenue for its marketplace business. The online-marketplace business constitutes about half of eBay's $8.5 billion in annual revenue.

EBay's focus on its "secondary market" includes the used and vintage goods that the company is already known for selling, as well as clearance and out-of-season items. The move is a shift from just a few years ago when eBay developed sites such as eBay Express to sell new goods, and when many in the retail industry expected eBay to dominate all forms of online commerce.

"We aren't a retailer," said Mr. Donahoe, who took over as CEO from Meg Whitman early last year. "We're going to focus where we can win." Mr. Donahoe valued the global market for secondary-market goods, online and otherwise, at $500 billion a year.

EBay spent Wednesday trying to persuade analysts that it is no longer just an online auction company and that its greatest hopes for growth rest in PayPal, an online payment company it acquired in 2002 that is able to benefit from overall growth in e-commerce, not just sales on eBay's sites. It announced a deal with Research In Motion Ltd. for PayPal to become the exclusive payment method for the application store on BlackBerry smart phones.

Still, the move amounts to an acknowledgment by eBay that it can't compete with Amazon and other e-commerce companies that represent the online equivalent of a shopping mall. Instead, eBay is returning to its roots as the Web's flea market by focusing on used and overstocked items, albeit with an effort to rethink the classic eBay shopping interface that has grown stale in recent years. EBay had taken off as an early leader in e-commerce in the late 1990s with an auction model that guaranteed consumers could find the best price on many used and leftover items.

But in the last few years, eBay has been felled by a shift in consumer behavior as shoppers revert to the buying habits that were familiar in the pre-Internet era. Before the Web, typical consumers preferred going straight to brand-name stores selling new goods, with the best customer service, to purchase the latest goods. The growth of malls across the nation reflected this preference; flea markets and thrift shops were a small sliver of commerce.

For a while, eBay appeared to cause a blip in that behavior, as new online consumers went to its site to snag deals by outbidding other people. But as the novelty of online auctions wore off -- and as the demographic of online shoppers broadened beyond the adventurous "early adopters" -- consumers began defaulting to huge online retailers like Amazon.com, Buy.com and Wal-Mart.com to buy their items. EBay, too, began shifting its focus to fixed-price sales but wasn't able to keep up with the competition on mainstream retail items.

EBay also is dealing with its own fumbles, many under the leadership of Ms. Whitman, the former CEO. The company rested too long on the laurels of its auction business, even as rivals like Amazon built their online retail offerings. EBay later tried to diversify into other areas for growth, purchasing Internet telephone service Skype Technologies SA for about $2.6 billion in cash and stock in 2005. But the deal didn't result in major revenue or customer growth. EBay later took a write-off on the acquisition, and there has been speculation the company wants to sell Skype. EBay has declined to comment on the speculation.

In addition, eBay is being hurt by the recession. As consumers searched for online deals during the recent holiday shopping season, many gravitated to Amazon.com, which experienced a big jump in visitor traffic and posted a record holiday quarter. But eBay -- which had benefited in the dot-com bust and economic slowdown earlier this decade when many consumers dumped used goods for sale on the site -- saw a drop in traffic, according to figures from comScore Inc.

EBay has been scrambling to reverse its slowing growth. After Ms. Whitman retired last year, her handpicked successor, Mr. Donahoe, made a series of changes. These included emphasizing fixed-price sales and giving preference to merchants who get positive customer ratings.

But the changes have yet to pay off. EBay reported its first-ever quarterly revenue decline, 7%, in the fourth quarter as profit fell 31%. Increasingly, eBay has relied for growth on its nonmarketplace businesses, such as its PayPal unit, which has doubled in revenue over the past 18 months.

EBay's emphasis on the secondary market is an "attempt to differentiate themselves from Amazon," said Scot Wingo, the chief executive of ChannelAdvisor Corp., a company that helps merchants sell across a variety of e-commerce sites, including eBay and Amazon. (EBay has a minority share in the company.) "It was an admission that they have a competitor out there that they previously wouldn't address," Mr. Wingo said.

An Amazon spokesman declined to comment.

As part of its sharpened focus, eBay Wednesday sketched out changes to its marketplace to help bring back shoppers who have migrated to other sites. The company said it is refining its search engine and developing a catalog of its products, which will let shoppers find what they're looking for more easily and choose from different colors or sizes of an item from a single page. EBay also is experimenting with new interfaces that enable shoppers to explore products via photos, based on similarities in color or style.

Such moves, along with growth at PayPal, should boost revenue to between $10 billion and $12 billion in 2011 from $8.5 billion last year, the company said. EBay executives said they expect operating earnings to grow by mid-single digits through 2011.

Still, the company predicted this year will be difficult. Its 2011 revenue goal and prediction that operating earnings would grow in the single digits "assumes that the global economy returns to some sense of normalcy," said eBay Chief Financial Officer Bob Swan.

Mr. Donahoe predicted PayPal will produce revenue of $4 billion to $5 billion by 2011, compared with $2.4 billion last year, and could become the largest portion of eBay's business.

EBay also warned that, as it makes changes to its marketplace, sales in that business will underperform that of other e-commerce companies this year. The company forecast its online-marketplace unit will generate $5 billion to $7 billion in revenue by 2011, suggesting sales could remain flat from $5.6 billion last year.

Mr. Donahoe didn't name companies that he had wooed into using eBay for secondary-market sales, but signaled that they might include some middle-market players that buy overstocked items in bulk. He said his company's "sweet spot is as much with intermediaries as with retailers."

Analysts were receptive to eBay's emphasis on the secondary market. "But it comes down to executing on them," said John Aiken, an analyst with Majestic Research. "If they can make the buyer experience incrementally better, there will be more buyers, and therefore more sellers."