Seething Sellers

People like this helped eBay book $4.6 billion in sales last year. However, the consequence of running such a large, community-based organization is the scrutiny that comes along with it. Whenever eBay does something to boost its bottom line and make shareholders happier, there is usually some sort of hell to pay with its sellers. The rate hike on merchants running online stores that eBay is putting in effect today is no different, and it begs the question of whether eBay can afford to alienate the very community that helped make it an empire.

Store owners, who offer their wares at a fixed price as opposed to opening the floor up for bidding, will now have to pay 10 cents (five cents if the item is priced under $25) for listing an item on the site. That's up from two cents. Commission, or "final value," fees have also gone up. For items under $25, the fee has been raised to 10% from 8%; for items between $25.01 and $100, the commission is now 7%, up from 5%.

The hikes will raise costs for sellers by about 6% on average, says company spokesman Hani Durzy. But, in some cases, those costs could climb 500%. Merchants selling books, DVDs, videogames and music, which make up about 43% of listings, will be hit hardest because they tend to have smaller profit margins on larger volumes, explains Lehman Brothers analyst Douglas Anmuth, in an Aug. 17 research report. (Anmuth has an Equal Weight rating on the shares and his firm makes a market in eBay's stock.)

The company says it's raising the rates to "rebalance" the site and push sellers to use the more lucrative "core" auction format. Durzy says the company made a mistake a couple of years ago by lowering the barrier to entry for sellers to open online stores. The listing fees, at a mere two cents per item, were a pittance compared with the 20 cents to $4.80 that people pay to list an item in the auction format. Now there are 514,000 online stores accounting for 83% of the company's listings. But as eBay is quick to point out, those items are only accounting for 9% of the gross dollar amount of goods selling on the site. CEO Meg Whitman said last month that the stores had become "overwhelmed with identical, often poorly priced items that have diluted the magic of the eBay experience."

That experience ultimately caters to the buyers hunting for bargains on, say, a Pottery Barn floor lamp. "If we can improve that value proposition to buyers, that's a good thing to sellers," says spokesman Durzy, who admits that the more things move on the site, the better it is for eBay as well.

Many merchants don't agree with that take, though. In fact, some of eBay's biggest sellers say they are boycotting the site. One such boycott was staged in the U.K. last week and now sellers in Australia and the U.S. are organizing their own. It isn't the first time sellers threatened to leave eBay. Bob Lee launched a web site called PowerSellersUnite.com in February 2005 in order to organize a boycott after eBay's last fee hike, which raised the monthly dues for store owners from $9.95 to $15.95 a month.

Lee, who runs a videogame store in Columbus, Ohio, used to be a "PowerSeller" on eBay, meaning he had consistent volume of monthly sales and a 98% or better positive customer-feedback rating. But he has since taken his business elsewhere. His web site now gives members tips on alternative auction sites for them to sell their goods. Perusing the message boards of PowerSellersUnite, it's clear that many merchants feel as if eBay has betrayed them.

One of the biggest complaints is that eBay is pushing them into auctions so it can ring up "relisting fees." The listing fee for an auction lasts roughly seven days while the listing fee for online stores last 30 days. "With the significantly higher listing fees of an auction listing, profit evaporates for low priced items that don't sell. Relisting often results in a financial loss on the item even if it sells," writes one seller with the handle "artstampn" on Lee's site.

When boycotts were held last year it was little more than a blip on the radar screen for eBay, especially financially. What eBay management did notice was just how upset its outspoken sellers got. "We didn't do a good job of managing that communication and we took a beating from that," says Durzy. Nevertheless, after all the hubbub and talk of boycotts was over, store listings continued to increase.

That's partly because there just aren't a lot of viable choices for sellers. World-wide, 1.3 million people make all or part of their living off eBay and, for some sellers, the site has become a version of golden handcuffs. Nowhere else can they get the kind of exposure that eBay provides and that's ultimately why their boycotts have had little to no impact on the bottom line. On PowerSellersUnite, posters say there will be a mass exodus in February after the holiday season has come and gone. By then though, I imagine that the hoopla will have died down.

But eBay shouldn't feel 100% secure in its position. There's a little company called Google (GOOG) to think about. Sellers are hoping Google has plans to launch an auction site of its own. The world's leading search engine already has its own version of PayPal and its own shopping engine, and it makes sense to these sellers that auctions will be next.

EBay's stock has fallen almost 40% since the beginning of the year as investors watch the company's once phenomenal profit and sales growth slow, so it's no wonder the company is looking for ways to boost profits. EBay's conundrum, though, is this: Boost the bottom line or cater to the community of sellers. The two ideas — at least for eBay — have now become mutually exclusive. For investors, any way to propel eBay's slowing sales is a good thing. But if the company alienates its sellers enough and another site — like Google — begins gaining traction, I believe eBay just might start feeling the impact of those boycotts.