eBay’s Long-Term Investment Should Pay Off

eBay sent a message to investors Tuesday that was unmistakable: The
online auction leader is serious about solving the troublesome
technological snafus that have led to numerous outages on its Web site.

Investors reacted in predictably short-sighted fashion, focusing on the
up-front costs of eBay’s infrastructure investment and thus sending
shares of (EBAY) down from Tuesday’s close of 152 to 137 9/16 by Wednesday
afternoon, a drop of nearly 10%.

Yes, infrastructure spending over the next few months will affect eBay’s
earnings and operating margin in the short-term. But eBay is doing the
right thing by attacking its biggest problem head-on, and that should
become clear in the long run.

In the meantime, some facts should be kept in mind:

  • eBay’s third-quarter report, released after trading Tuesday, shows
    revenue of $58.5 million for the quarter ended Sept. 30, an increase of
    170% over the year-ago period, while net income grew 204% to $1.4
    million, or one cent a share. Q3 results met or exceeded analysts’

  • Despite spending $8.8 million on infrastructure upgrades in Q3, the
    company was — and continues to be — profitable.

  • Growth continues unabated. The company reported 7.7 million registered
    users through Sept. 30, up 38% from Q2’s 5.6 million and up an
    incredible 492% from the 1.3 million users registered through 1998’s
    third quarter. The 36.2 million auctions hosted by eBay in Q3 are nearly
    four times the 9.2 million it hosted in the same quarter last year.

  • eBay’s dominance of the online auction market shows no signs of
    diminishing. CEO Margaret Whitman claims the $8 million per day in
    auctions handed in Q3 are at least 15 times any other competitor. I
    can’t verify that figure, but estimates of eBay’s market share continue
    to top 70%.

The company has built this commanding lead in spite of its technological
woes, which have cost it more in terms of bad publicity than lost
revenue or customer defections. That’s because buyers and sellers
realize that, even with the occasional outage, eBay’s is the biggest and
best auction marketplace on the Web.

Much has been made of the threat to eBay from the online auction efforts
of Amazon.com (AMZN), Yahoo! and, most recently, a group of companies led by
Microsoft (MSFT), [email protected] (ATHM) and Lycos (LCOS). But it would take a serious stumble by
eBay for anyone to significantly eat into its market lead.

The best way for eBay to protect its position is to invest in its
infrastructure, even at the expense of short term financial results.
Company executives recognize this. Over time, so will the market.

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