The death spiral is starting for EBay.
First the company announces earnings that would be the envy of any smokestack company, but the stock gets hammered. Guidance is very circumspect, the company admits that its recent inclusion of “online store” listings in auction results has been a failure, and reveals Is there really any organic connection between online auctions, electronic commerce, and making a phone call? that it has new security and verification services in the wings as a result of a rising tide of complaints.
Then the WSJ (subscribers only) and the London Times report that the flea market company has been in talks with the two other also-rans of search—Yahoo and MSN—to try and figure out some kind of strategic alliance to blunt Google. The problem apparently: A cadre of McKinsey dweebs told the brilliant leadership of EBay a few years back that Google would leave them alone. So the company pumped up ad spending on Google only to see the search giant introduce electronic payment and classified ad services—built around Google Base--that threaten its very existence.
Welcome to the 21st century. This reminds me of what happened when Microsoft took over the world in the 1990s. Companies like Sun and IBM and Apple wrung their hands over the firm’s aggressive tactics, instead of trying to build better products, and then leaned on the US Government to do their bidding. Bemoaning a new competitive threat, looking for some grand alliance to fight it off, and generally playing “woe is me” is a prescription for failure. And it leads to big strategic mistakes by searching for acquisitions out of fear, rather than based on opportunity and the right fit.
The problem is simple: EBay created a brand name for itself as a place to go and have a chance at a “perfect” market for anything you wanted to buy. Bid against others, and maybe get a good deal. No more. Now, EBay has lost its way, become a haven for shills and scamsters, forgotten who pays the bills, added thousands of undifferentiated “stores” selling exactly the same things, and introduced a scheme called “Second Chance” that subverts its roots by smoking out your highest bid and then lets unscrupulous sellers sell to you at that price.
The problem isn’t with Google. The problem is at EBay, where the fear of competition and pursuit of growth at all costs has taken the company’s eyeballs off improving, enhancing and extending its core business proposition, and sent it reeling into uncharted territory: Skype and the delivery of VOIP services. Is there really any organic connection between online auctions, electronic commerce, and making a phone call? You can get your knickers into a twist finding one like Meg Whitman did when she tried to justify the payment of $2.6 billion for a company with less than $200 million in annual revenues by claiming that buyers and sellers would have an easier time talking with each other, or argue like Henry Blodget that voice calls is a great standalone business opportunity (like auctions and electronic commerce), but there is no connection here. This is the Wall Street Disease: beat the pushes for high growth and the Next Big Thing, satisfy the voracious appetites of hedge fund managers and in the process forget about your customers and that old dead boring core business. Another big McKinsey failure—Enron--took this even further, as Om points out. I mean, energy and bandwidth arbitrage? Online auctions and electronic payments, ok; but phone calls too? Pahleeze…
Contrast that with Google, where the natural connection between searching for something, seeing ads for a similar products, and closing the deal makes for a perfect storm of opportunity—as this article in Forbes pointed out a few weeks ago. So far, there hasn’t been much evidence of the impact of management consultants at Google—who needs ‘em when you know you’re smarter and richer than the rest of the world? Google Base is a product competing against Craigslist, Microsoft Live, and dozens of other Internet startups, where you’re only a click away from oblivion so you’d better offer something that makes customers keep coming back.
EBay has been insulated from this rough-and-tumble world for too long. Flea markets were a natural online monopoly, that quickly settled on one gorilla. Paypal was a good and strategic addition; Skype is not. Now the ape has fallen asleep under the Flame tree and is hibernating, instead of evolving.
Unless the company, its managers, directors, and investors wake up soon, EBay is going to lose this war. Or find that its only option is to be acquired by Yahoo, the only credible partner as this EBay watcher points out.
Capitalist Darwinism continues unabated. Praise the lord.