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Will changes at eBay hurt the business model?

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Do you like auctions? Personally, I don't. Sure, the stock market is essentially an auction, but it's an auction without a lot of noise (at least on my end). Anyway, this brings me to a BusinessWeek piece on eBay (NASDAQ: EBAY) and its evolution. It looks like auctions are no more fit to survive than the dinosaurs were. Research overwhelmingly shows that users of the most famous online auction destination in the world would rather pay a fixed price for an item than haggle over it like a frantic trader at a busy bazaar.

Now, as one commenter made clear in the article, this changes the essential gene structure of eBay's DNA. But is mutation necessarily bad in this case? Not to my way of thinking. To be honest, I haven't done any eBaying directly; I usually use a friend to acquire an item for me if I'm looking for something. Not only am I too lazy to open an account, but I dread having to play the auction game. Why put up with such nuisance? When I want to buy something, I don't want to compete and see values change. Think about it: when you go to Wal-Mart (NYSE: WMT), do you want to barter over a bar of soap?

Okay, so we're not talking about bars of soap. We're talking about items that, to be fair, do lend themselves to the auction motif. Comic books, autographed photos, rare recordings, and so forth, are definitely fair game for the electronic gavel. Still, it's annoying. Wouldn't you rather know that a rare copy of The Texas Chainsaw Massacre for the Atari 2600 is $200, take it or leave it, and that you didn't need to get down in the pits to start bidding for it?

Maybe I'm exaggerating the kind of frustration that can be encountered on eBay. But it seems like management is willing to bet on a future sans auctions. Actually, it's not so much that they're willing to make a bet on this thesis on their own volition; simply put, the numbers are compelling. People want more of an Amazon (NASDAQ: AMZN) type of experience. They want to simply click, buy, and wait for the item to arrive on their doorstep.

Personally, I think this kind of paradigm shift stands a great chance of being a net positive for eBay. Yes, many sellers will flee; others, however, will take their place. Besides, I've oftentimes noticed that many auctions never have much bid history to them; that isn't an observation based on any scientific collection, but nevertheless, it is one of the reasons why I would support management in reducing exposure to auctions. Shareholders actually should want to see management focus more on the fee structures in place, as many sellers believe there is an inequity when it comes to them.

That's the larger opportunity, and the more important one. Auctions will always remain applicable for many items on eBay (imagine how traders would feel if they didn't have eBay to auction off the next PlayStation iteration!), but if they only comprise a small percentage of revenues, it won't make a difference so long as fixed-price selling becomes the norm.

Disclosure: I don't own shares of any company mentioned here; positions can change at any time.

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Last updated: November 08, 2009: 07:25 PM

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