eBay's Financial Forecast Calls for Pain

By Kenneth Corbin


All's not well in auction-land.


In an annual report filed with the Securities and Exchange Commission on Friday, eBay warned of numerous risks that its business faces, including its ability to retain buyers and sellers on its sites, in addition to the normal concern of attracting new users.

Attraction and retention were just two of the worries eBay expressed in a laundry list of potential risk factors outlined in the gloomy shareholders' report.

Essentially, eBay realizes that it isn't the only game in town anymore. Citing the "changing demands of the e-commerce marketplace," eBay warned that it was facing increasing competition from Amazon, Buy.com and others, giving consumers more choice — particularly in its fixed-price business lines.

"Growth rates in our most established markets, such as the U.S., Germany and the U.K., have continued to decline," eBay said. "Despite our efforts to stem these declines, growth rates in these and other markets may continue to decline and may become negative."

The increased worries over customer retention and market competition come with the backdrop of a recent sellers' boycott over changes to the listing fees and feedback policies that incoming CEO John Donahoe announced in January.

Those changes increase the fees that some sellers pay and, come May, will prevent sellers from leaving negative feedback about buyers, which is the real pain point that prompted the boycott.

In February, outside tracking groups reported a 13 percent drop in seller listings as a result of the boycott, but eBay maintained that it had seen no appreciable impact. Then in Friday's SEC filing, the company formally acknowledged the potential impact of the new policies.

"If these changes cause sellers to move their business away from our websites or otherwise fail to improve gross merchandise volume or the number of successful listings, our operating results and profitability will be harmed," eBay wrote.

Potential Problems Pile Up
Another risk factor eBay cited is e-commerce taxation. That issue resurfaced recently when the governor of New York proposed a budget that included a provision to require online retailers with affiliate programs to start collecting sales tax on purchases shipped to residents in that state.

Amazon quickly dispatched a vice president to lobby against the measure, claiming that it runs counter to a 1992 Supreme Court ruling. In the Quill decision, the court held that the tangled maze of state and local tax codes puts an unreasonable burden on interstate commerce, so businesses are not required to collect sales taxes in states where they do not have a substantial presence.

Under the mantle of the Streamlined Sales Tax Project, a coordinated initiative to simplify states' tax codes, several bills have been brought before Congress that could end the interstate tax exemption established in the Quill ruling. eBay warned that if any such measure succeeded, it could harm eBay and its small business affiliates.

Other legal and regulatory considerations also threaten eBay's business. Several states and foreign countries have laws on the books governing auctions, pawnbrokers and secondhand dealers, all of which have been variously interpreted as relating to eBay by plaintiffs in lawsuits seeking to extract damages from the company or force it to block certain listings.

"Attempted enforcement of these laws against some of our users appears to be increasing and such attempted enforcements could harm our business," eBay said in the SEC filing.

In one case, the French regulatory body that oversees auctions has claimed that eBay needs to obtain permission to sell items through a bidding process on its Web site in France, just as a conventional auction house does.

Additionally, numerous retailers have brought lawsuits against eBay claiming that it is responsible for third-parties selling counterfeit merchandise. Rolex, Louis Vuitton and several other luxury brands have challenged eBay in Europe seeking injunctive relief and damages for counterfeit goods that have been sold on its sites. A claim filed by Tiffany & Co. on similar charges is awaiting a judge's ruling in federal court in New York.

With a ruling expected shortly, the Tiffany case could set a precedent for how, precisely, eBay's business is defined, according to Geoffrey Potter, an attorney who runs the counterfeit-law practice at Kramer, Levin, Naftalis and Frankel in New York.

In arguing its case, eBay has claimed that it does not operate either an auction house or a flea market, designations which place responsibility on the business to ensure the legitimacy of the merchandise sold under its aegis.

eBay has argued that it is unfeasible to police such a large marketplace. A decision in favor of Tiffany could impose sweeping requirements on eBay to physically inspect the merchandise passing through its sites, a contingency that would cut deeply into eBay's transaction margins.

"A loss is a very bad thing for eBay," Potter told InternetNews.com. "A loss where they have been found to have the obligation to police the auction for trademarked goods would have a tremendous impact on their business."

This article by Kenneth Corbin originally appeared March 3, 2008 at InternetNews.com.