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Summary:

The thing about corporate turnarounds is that they’re supposed to turn a company around — as in 180 degrees — not stop halfway and let the company drift sideways. But something like that is happening to eBay: Its long, slow turnaround is, well, turning flat.

eBay CEO John Donahoe

The thing about corporate turnarounds is that they’re supposed to turn a company around. As in 180 degrees. They’re not supposed to stop halfway and let the company drift sideways. But something like that is happening to eBay: Its long, slow turnaround is, well, turning flat.

For the past couple of years, the online marketplace and payments company has been engineering a return to growth under the guidance of CEO John Donahoe, who took over from Meg Whitman in March of 2008. Donahoe embarked upon an aggressive and risky effort to transition eBay from an auction house for garage clutter to a marketplace centered on larger sellers and fixed-price goods like bulk inventory.

At first, the makeover seemed to hurt eBay’s growth. But last summer, after reporting second-quarter earnings, investors began to believe in the turnaround, sending the stock rallying. But since then eBay’s stock has stalled, rising just 0.3 percent, while the Nasdaq has gained 14.6 percent and shares of Amazon have surged 30.3 percent. Back in January, there were signs that the turnaround was in jeopardy, and further evidence implies that is in fact the case.

According to data from ChannelAdvisor, an online retail services company, same-store sales at eBay declined 4 percent in May from a year earlier, the first annual decline for eBay since last summer. In a post discussing the data ChannelAdvisor CEO Scott Wingo tied the decline to yet another round of changes last March to the way items are listed and priced.

Early on, sellers were reporting that the listing changes in particular were hurting their sales. Even worse, according to Wingo, the new search results appear to be confusing buyers — for some reason (Wingo himself says he’s baffled) serving up many more auctioned items rather than fixed-price ones. Which is sort of the opposite of what Donahoe was going for.

In Donahoe’s defense, Whitman steered eBay from one of the most dynamic and successful startups in the history of Silicon Valley into a fragmented, sclerotic tech company. Her handling of the Skype deal left eBay paying too much for a company that had little in common with its other businesses, and didn’t even buy control of its P2P technology. After buying StumbleUpon in 2007, eBay smothered the innovative startup under its wings. As Om noted recently, StumbleUpon has thrived since eBay spun it off.

I’ve long wondered whether eBay wouldn’t be better off broken up into pieces. If the turnaround continues to fizzle out, I suspect investors will lose patience and agree. Even some who are bullish on the stock because it’s undervalued acknowledge that the company is worth more than the sum of its parts.

If so, why not sell off each piece to companies that can offer more compatibility than the tepid synergy that eBay’s fragmented empire has tried to create? eBay’s marketplace with a global reach would be a tight fit with another retail giant. It’s hard to imagine Amazon making a bid, but the growing Japanese e-tailer Rakuten has been on a buying spree, most recently picking up Buy.com.

Similarly, PayPal might better achieve the ambitions — outlined by Donahoe at the D8 conference this month — of becoming a payment provider for digital content if the subsidiary were bought by a company that was just starting to move into selling and streaming content like music. A company like, say, Google, which right now strikes me as a better partner for PayPal than eBay’s stagnant bulk inventory marketplace.

Whatever value remains in PayPal and other properties like StubHub will continue to be weighted down by the eBay marketplace business — a business that is, according to ThinkEquity analyst Aaron Kessler, continuing to lose market share. If Donahoe can’t jump-start the recovery of the marketplace soon, he may be hearing more calls for him to unlock the company’s hidden value by breaking it up.

Image courtesy of Wikimedia Commons.

  1. Patrice Anderson Smith Saturday, June 26, 2010

    Whatever happens to Ebay in the months ahead, it will change. Definitely not the turnaround Donahoe wants but it will change or it will die! Simple as that. For over 2 1/2 years he has been promising a turnaround and a big change….that is NOT happening. Ebay has stagnated from quarterly report to quarterly report and now depends heavily on Paypal’s success (which also is not forever). At this point about the only hope Ebay has is to oust present management and his team and hire people experienced in online sales and what it takes to make those sales (the latter being the most important). Donahoe relies on Ebay’s name and since that isn’t working he probably doesn’t know which way to turn at this point. The result is nothingness…a stagnation that will kill. If it were my site I would immediately divide it like Overstock…with the diamond sellers on one side selling retail and the small sellers on the other side selling auctions and BIN’s. Its Ebay’s only hope and that hope is fading as days go by. Sellers are leaving and other sides ARE getting a foothold – whether Ebay wants to admit that or not! Ebay needs to bring community and fun back to the auction side. They need to let up on some of those draconian policies that are chasing sellers away. Take the power to destroy sellers out of buyers’ hands and make that an administrative decision! Get rid of the childish DSR’s and go back to relying on feedback and that percentage figure of negs and neutrals. Ebay needs to get their hands dirty – get into the trenches and work with buyers and sellers. Time is gone where they could simply sit back and rack in the money….they need to realize this.

    12 year ex-ebay seller

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  2. Yeah, eBay sucks, I pretty much never go there anymore. I think the problem is that the market for people interested in “Garage sale auctions” is not the same as the market for “bulk knockoff crap from China”. They really should have just left ebay as primarily an auction site that everyone knew and put all of the bulk junk off on it’s own website so it can be more easily avoided.

    Basically, what I’m saying is, I go to eBay to get a deal on a used item, not to see 1000 overpriced Buy it Now auctions for junk.

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  3. Ebay is the ugliest failure in American tech industry. They had everything going for them. They kicked victory that was offered to them in a platter and are struggling hard to snatch defeat. At first, they started with the perfect formula to become no. 1 in the world. They should have just continued with it, with some minor fine-tuning here and there. Look at Craiglist. That is exactly what they did: stuck to their original formula and they are going as strong as ever. There is no drop in their usage despite all the new companies starting and dying in Silicon Valley.

    IMO, eBay is preventing Paypal from reaching its full potential. With the increase in smartphone sales and the world of mobile apps, Paypal could have been the default payment gateway on all phones. It could have been the no. 1 payment app by now. But that has not happened. The fault lies squarely with eBay. Meanwhile, the window of opportunity for Paypal to succeed on phones is fast fading.

    What a waste!

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  4. Shipwreck Ebay Saturday, June 26, 2010

    Donahoe has put the final stake in Ebays heart,It only took the rest of the world 2 years to see what every ebayer knew in March of 2008!Disruptive innovation? BS, Disruptive inovation was a dream in a mind or a pathetic idiot!Ebay is over!!!

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  5. GIGAOM: What a shame it is that you have a problem publishing facts.

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    1. So what are the facts? Please provide your sources. I’m very interested.

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      1. philipcohen Sunday, June 27, 2010

        An introduction to my criticisms of the unscrupulous machinations of the eBafia Don and his gaggle of other headless turkey henchmen can be found at:
        http://www.auctionbytes.com/forum/phpBB/viewtopic.php?p=6502877

        I really is about time some competent regulatory authority shone a bright light under this slimy rock.

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  6. EBay is an example of how valuation, marketcap, and stock price can ruin a perfectly good business model. For any successful company there’s always a point where investor’s priorities become at odds with long term viability.

    Mr. Kelleher is right in suggesting a breakup my be in the best interest of eBay though at this point it would probably be more akin to a salvage operation. One could only hope that one of the remaining pieces would be an eBay returned to its online auction roots: smaller, wiser, and better positioned for the future (or at least until people no longer have stuff they no longer want.)

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  7. [...] Kelleher offers some interesting insights into the company’s current turn around blues. Here is the link. One thing is pretty clear. EBay has lost its spark. Its reason for being. It no longer generates [...]

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  8. I hate ebay for their lousy service (no offense ,but have faced it) and IMO as you mentioned above Google is one of the best partners that Paypal could have to survive n thrive in such a competitive market.

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  9. Beth Donahue Sunday, June 27, 2010

    More likely more calls and much shriller calling for Donahoe to go…he’s been totally unsuccessful at anything except killing the most vibrant marketplace devised. WHAT credientials did he have to run the company? NONE. And Pierre should be ashamed. I’m 14 years an eBay buyer and seller…no longer investing any time there. Not for either buying or selling…and i”m using Google Checkout on my website.

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  10. AreYouCrazy Sunday, June 27, 2010

    Calling for PayPal to be split-off from the marketplaces is like calling for IE to be split-off from the operating system.

    The ONLY reason PayPal is as large as it is, and is used as often as it is, is because of the Marketplace “halo-effect”.

    Cutting that connection will mean that PayPal would have to spend huge sums (as Visa and MC do) to compete as a viable stand-alone payment option.

    Add those costs in and PayPal becomes unprofitable.

    An unprofitable Paypal is worse than a combined, less-profitable but still hugely proftiable, eBay/PayPal.

    Look at it this way:

    Would you rather have a slower-growing PayPal/eBay combination with fantastic margins?

    Or

    Would you rather have a much faster growing PayPal subsidiary with zero profits (or losses)?

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    1. philipcohen Sunday, June 27, 2010

      Draft Media Release

      “It is with very great sadness that eBay’s Chief Headless Turkey, John Donahoe (aka “Peter Principle”—among many other derogatory terms), announces the probable demise of eBay’s most ugly daughter, PayPal. PayPal is about to be stricken by particularly virulent strains of Visa+CyberSource and Mastercard open platform, aggravated by an insurmountable lack of direct financial institutions participation and a great deal of PayPal user/merchant dissatisfaction, particularly with respect to PayPal’s grossly unfair, “all responsibility avoiding” UA, primitive risk management processes, and totally unprofessional, buyer-biased, fraud-facilitating, transactions mediation.

      “PayPal’s health may therefore be expected to deteriorate and, if ultimately not completely incapacitated, will most likely be eventually confined to its mandatory offering on what little there will be by then left of the Donahoe-devastated eBay marketplaces. There is no cure for this condition, and the “eBafia Don” is particularly saddened by the inevitable presumption that it is unlikely that PayPal will be able to continue to underpin eBay’s sagging bottom line in the future.”

      Also, in Australia, unlike all other payments processors operating here, PayPal has declined to sign up to the payments processors’ “Code of Conduct”. Users beware!

      A detailed examination of and prognosis for PayPal (including a further link to the “PayPal Nightmare Tour”) at
      http://www.auctionbytes.com/forum/phpBB/viewtopic.php?p=6504554

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