What is the trouble with eBay? Comments on Steve Woda’s article

Following all the changes to eBay pricing of late, many commentators and sellers have been predicting the downfall of eBay. One of the more interesting articles is by Steve Woda from BuySafe – a US company which provides bonded security against sellers going bust. Similarly to the bond scheme in the travel industry, BuySAFE provides protection to eBay buyers in the event of seller bankruptsy. If an eBay seller goes bust and they are a BuySafe member then buysafe will honour any outstanding sales. This is supposed to raise the level of consumer trust in a marketplace where fraud is rife (my recommendation – if you think it will make a difference, try it out for a month and measure if there is any affect on your STRs and ASPs).

Steve has written two interesting posts on his blog recently. The first entitled What wrong with eBay – it’s simple economics posits that eBay is in all kinds of trouble and the second What is a market for lemons claims that there are more fundamental problems with the platform than bad pricing decisions.

I think that Steve has some interesting points, but I can’t get away from thinking that all his articles are just longs adverts for his company, buySAFE. He also likes to make frequent references to the fact he went to Wharton which is a bit of a bore.

Here are my comments on his posts:

What is wrong with eBay

Amongst others, Steve quotes the following problems with eBay:

• eBay is growing slower than the rest of eCommerce – see Scott Wingo’s Blog
• 41% of eBay’s users apparently quit in 2006 – 56 million active users in 2005 grew to 78 million active users in 2006, but during that time, eBay added 45 million new registered users – again see Scott Wingo’s blog
• 100 of eBay’s top 1,000 U.S. eBay sellers by feedback rating have either quit eBay or gone out of business
• According to Auctionbytes survey 59% of eBay’s sellers apparently plan to stop selling on the eBay platform in the next six months
• eBay prices are lower than other channels
• Fraud is still a major problem
• Tiffany & Co (TIF), Louis Vitton (LVMH), and Christian Dior (DIOR) have all filed lawsuits against eBay suggesting that 90+% of the goods sold on eBay claiming to be produced by these brands are in fact counterfeit
• Buyer/seller information asymmetry – the market for lemons problem.

Although these points are worrying for eBay and its fans, I don’t think that they amount to insurmountable problems for the platform.

Bad seller economics/Sellers deserting eBay

There is no denying that eBay is a place where buyers go to find a bargain. I have talked to several sellers who employ different pricing on their website, as their is less price pressure off eBay. Whilst it is obviously bad for sellers that there is more competition on eBay, this is great for buyers which is why eBay has been such as success. Sellers would obviously like to get the higher prices on eBay but there is no reason why they should not continue to sell on eBay if their margins remain acceptable.

In addition, focusing on solely on the economics of eBay ignores the marketing and brand exposure which eBay affords. The platform is a great way of acquiring customers who can then be upsold to via a separate website.

Sellers going bust

eBay sellers are mainly SMEs, who have a high rate of business failuer – I wonder if this is reflection of their customer base and is not specific to eBay.

Seller deserting eBay

I think that this is just people mouthing off – see my previous post on this issue

Problem with Fraud/Counterfeits

Steve is right that fraud continues to be a big problem. However, fraud is a part of everyday life and is not specific to eBay

I feel that the Luxury brands are shooting themselves in the foot in suing eBay. In the recent book Future Shop , Daniel Nissenoff predicts the rise of auction culture, where buyers will increasingly purchase luxury brands as they wil hold their value more effectively in the secondary market. By encouraging and enabling the sale of their items on eBay (e.g. through certification schemes and approved resellers) the luxury brands can help to encourage sales of their items and build their brands. In future, if an item cannot be sold on eBay, this may negatively affect its price.

A Market for Lemons?

A market for lemons is where the price of a product collapses due to buyer uncertainty about the quality of the items for sale. Sellers with genuine items do not get the prices they want due to fakesor low quality goods flooding the market so remove their products. This process continues until there is only the fake or low quality products (lemons) left.

Woda argues that this is happening on eBay and what is required is a system of seller certification like buySAFE (surprise, surprise!). Although in some categories fakes are frequent, I think that this is not a problems outside luxury goods. I would argue that the following three factors will prevent eBay from becoming a market for lemons

• Feedback – not a perfect system and dismissed by Woda. It is however, still a useful tool for judging buyer trustworthyness
• Branding. On eBay as on other channels a strong brand, and plenty of information about products reassures buyers
• Paypal. Alothough not perfect either, Paypal does afford protection against fraud.