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eBay: Can it keep customers loyal?

New marketing alliances could help the online auctioneer's bottom line. But will ads turn off users?

eBay doesn't call it advertising, but the online auction giant is steadily building up a group of marketing partnerships to provide services for its massive customer base. The company's biggest challenge, however, is to avoid alienating its fanatically loyal buying community.

The eBay marketing deals aren't like typical banner ad campaigns. They don't clutter up nearly every page on the Web, or urge users to leave wherever they are to visit another home page. These arrangements aren't officially called advertising either, but whether they're referred to as strategic relationships, partnerships or marketing alliances, the logos, icons and links from eBay partners such as e-Stamp, i-Escrow and Kodak PhotoNet are a growing source of revenue for the auction giant.

Like America Online (AOL) and its numerous exclusive, multi-million dollar deals with marketers, eBay is becoming prime real estate for companies willing to pay big bucks for placement on the auction site.

But the question for eBay is how to capitalise on that appeal without alienating its loyal customer base. The online auctioneer has stayed away from traditional Web ads, because it doesn't want to show bias toward a particular business or vendor. Yet at the same time, eBay is the market leader in a cutting edge business with a loyal and growing following. The marketing alliances have been a growing source of revenue. eBay doesn't break out separate revenue categories, although the percent of revenue from these advertising or marketing deals is probably still in the single digits, analysts estimate. Last year, the auctioneer raked in $224.7m (£139.3m) in net revenues.

The company is also looking at ventures with automotive-related companies, such as insurance or financing firms that want exclusive access to the potential car buyers who come to eBay, says Simon Rothman, the Web site's vice president and general manager of automotive.

eBay and used car site AutoTrader.com -- which has listings for 1.5 million autos from private sellers and 40,000 used car dealers -- are developing a co-branded site that launched last week. A complete redesign of the service should roll out in the second quarter, sources say. "We will be introducing related products and services to facilitate transactions for consumers," says Rothman. However, he wouldn't comment on how the two companies would split marketing revenues, but noted, "it's a great financial proposition for both partners."

eBay cut its most significant marketing deal in January -- a three-year pact with E-Stamp, a fast growing computerised postage service. Terms of the deal weren't disclosed, but sources estimated that E-Stamp was paying almost $10m (£6.2m) a year for a prominent link on eBay's home page. However, there is room for growth as eBay forges relationships with other services -- companies that provide shipping insurance, for example -- that would appeal to the Web site's global customer base of buyers and sellers.

Shipping "definitely could become a more significant source of revenue," said analyst Daniel MacKeigan, who follows eBay's business for Friedman, Billings & Ramsay. "They don't want to ruin the viral nature of the community and have ads distracting users, but it makes sense for them to extend their relationships with e-commerce players and retailers [who don't compete with their sellers]," he said..

Advertising is a red flag for eBay and its customers. The Web site carries very little banner advertising on the core site -- less than one half of one percent, according to spokesman Kevin Pursglove. The ad banners that do pop up on selected pages are either eBay promotional offers from marketing partners like Krause Publications (publisher of hobby, arts and crafts books and magazines) or connected to charitable organisations like shareyourlife.org, an organ and tissue donor site. Opening its pages to commercial advertisers is an ongoing debate for eBay, Pursglove acknowledges. "It's an issue we revisit with the community from time to time, but the history is, there's not a strong demand for it," says Pursglove.

However, the main issue isn't whether the community would actually ask for ads, but whether they would tolerate them. That's why eBay executives are closely studying community reaction to the ads on ebay.aol.com, a co-branded venture launched in August, sources say. eBay agreed to pay AOL $75m (£46m) for a multi-year marketing deal that would give the auction site prominent presence on AOL's prime Internet properties, including AOL.com, CompuServe and Netscape Netcenter. In addition, AOL would control all ad sales on the site.

Neither company would divulge ad revenues or traffic figures, but Pursglove says the advertising on ebay.aol.com for marketers such as Crate&Barrel.com, music site Spinner.com and PCMall.com has been "very well received" by users.

There's little doubt that Internet companies and marketers want to be part of eBay; the online auctioneer is the Web's ultimate sticky habit. The average eBay user spends about 55 minutes on the site each visit. (Only AOL beats that time with the average member logging on for 63 minutes per day.) Almost two million deals are transacted daily on eBay. The site racks up 1.5 billion page views a month from at least 10 million people checking on their bids, looking for collectibles, toys or some other little valuable from the more than four million items currently on sale.

While eBay bidders probably won't ever see an ad for BarnesandNoble.com in the auctioneer's book section, for instance, it's possible there will more "closed type" advertisements that would keep users within the network, suggests analyst Steve Weinstein, who covers eBay for Pacific Crest.

"It means a lot of money. It's millions of dollars that are essentially all margin," says Weinstein. "But eBay will always make more driving transactions than they ever will on advertising."

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