Open For Business

It's already proven itself adept at hosting auctions, but can the darling of the dot-coms make a profit by providing small businesses with storefront services?

That's the question people are asking about eBay, which in June announced it would offer easy-to-build Web stores and list them on its popular site for $10 per month. EBay's already strong bond with small businesses, which provide a large part of its auction revenue, has led some analysts to conclude the storefront business was a logical next step for one of the country's only profitable dot-coms.

EBay could dominate the market for small and midsize companies looking to sell products online, says Salomon Smith Barney's Tim Albright, an analyst in New York. "They've already got co-branded stores with their partnership with Disney."

But that's not a given. Providing e-commerce services to small businesses has been a tough sell. Many companies have folded, including Intel's high-profile iCat division, while others, such as FreeMerchant.com and Bigstep, are struggling for survival.

Still, eBay and other big Internet names - including Amazon.com, Microsoft and Yahoo! - continue to pursue the marketplace. The reason is simple: market potential. Small businesses are piling onto the Internet in record numbers, and many are already solidly profitable.

In 1998, only 30 percent of small businesses had a home page or Web site. But that number increased to 59 percent in 2000 and is projected to grow to 76 percent by 2003, according to research firm IDC. Another company has an even more optimistic view; Cahners In-Stat Group predicts that 85 percent of small businesses will have an online presence by the end of 2001.

Not only are small businesses moving online in record numbers, they are learning how to use the Internet to grow their businesses, says Ellen Siminoff, Yahoo!'s senior vice president of entertainment and small business.

Yahoo! Stores, which helps small businesses build and maintain Web storefronts for $100 per month, has grown to 14,000 subscribers from 3,000 three years ago, Siminoff says. While many business-to-consumer dot-coms have self-destructed over the past year, including big names like eToys, Pets.com and Webvan Group, the market for selling services to small businesses remains healthy, she says. "We have not seen any effect of the economic downturn."

Market Potential

Siminoff claims that Yahoo!'s storefront business is profitable, but declined to provide details.

Given the market potential, it's not hard to understand eBay's eagerness to try its hand at selling e-commerce services. EBay Stores attempts to make it easier for buyers to browse for merchandise from a particular seller on the site. A seller pays a monthly subscription fee of $9.95 for a storefront, plus an initial fee of 5 cents for every item listed for sale and a commission of 1.25 percent to 5 percent of revenue, depending on the final value an item fetches.

The advantage to eBay of providing hosted storefronts is that it reaches a massive audience. The company already boasts a large number of clients, says Robert Labatt, research director at Gartner.

Influential Partner

Microsoft, which operates bcentral for small businesses, has been working closely with eBay, says Marcus Schmidt, lead product manager of Microsoft bCentral. Microsoft and eBay are already working together to allow bCentral's 1.6 million registered small businesses to list and manage products on eBay's auction site. "The combination of selling on your Web site and selling on a marketplace is not going to go away," Schmidt says. "You need both."

EBay's expansion into an e-commerce platform is a natural extension of what it does, says Carrie Johnson, a Forrester Research analyst who covers online auctions. The company already provides customer service and payment options, and now it is adding a bigger percentage of revenue from each of its auction sellers. "EBay already has the sellers and it's not trying to create something from nothing. It's backing into this space," Johnson says. "EBay is starting with a firmer stake in the ground than some of the other players."

EBay's virtual marketplace created stunning gross margins of 82 percent last quarter. In comparison, Amazon.com, which buys goods and ships them out, has gross margins averaging 20 percent. But in the hosted storefront business, eBay will have to offer greater customer service and support, cutting into profit margins, says Giga Information Group analyst Andrew Bartels.

"You've got to handle a bunch of things that make this a very difficult market," Bartels adds. "There may be customer demand for this, but it's not going to be as attractive as their regular business. I'm not sure this makes economic or business sense for eBay."