Watchdog chides eBay's 'monopoly'

BY DAVID SPEAKMAN

Doubling revenue annually to gain 90 percent market share, one technology company has left so many competitors in the dust that consumer advocates are crying foul and claiming it’s a monopoly. No, this is not another story about Redmond, Wash.-based Microsoft Corp. It’s the saga of San Jose’s own eBay Inc.

Since its founding in a San Jose living room by entrepreneur Pierre Omidyar in 1995, eBay has grown profitable netting $249.9 million last year, up from a profit of $90.4 million in 2001. If it keeps on this path, it could grow up to be a blue-chip company.

eBay (Nasdaq: EBAY) is one of the few Internet companies in analysts’ good graces. Of the 14 Wall Street brokerages that follow the online auctioneer, 10 rate it a “strong buy” or “buy” while four have a “hold” rating on the stock, which closed Feb. 10 at $73.56 per share.

“We believe that eBay still has multiple layers of growth looking into future quarters,” says Jeetil Patel of Deutsche Bank Securities Inc. in San Francisco, who gives it a “buy” rating.

He believes eBay’s major growth will be generated by being an Internet sales outlet for traditional retailers. According to industry and analyst reports, eBay dominates online auctions with a market share of between 85 and 90 percent, which many consider de facto monopoly status. Other online auctioneers include Yahoo Inc. of Sunnyvale and uBid Inc. of Chicago.

eBay refused to talk about complaints regarding its de facto monopoly.

San Jose State University accounting and finance professor Frank Jones says when a company has strong enough market position to be a de facto monopoly, there are four things to evaluate: competition, corporate structure, monopolistic practices and the markets it serves.

“It seems eBay may end up with a structure that looks like a monopoly,” says Jones. “It doesn’t look like they are engaging in any monopolistic practices like Microsoft was.”

Industry watchdog The Auction Guild Inc. of Fayette, N.Y. disagrees, saying eBay uses software upgrades to disrupt third-party software access to its listing network.

“As for monopolies, it’s probably not as important as the telephone was in the day of AT&T’s Ma Bell or computer operating systems as with Microsoft,” SJSU’s Jones says. “Some would say Microsoft was engaging in monopolistic practices that kept the competition away, and eBay certainly hasn’t done that yet and there is no reason to think they would.”

But The Auction Guild claims eBay is playing a different monopoly game of mergers and acquisitions, which includes eBay’s $1.5 billion purchase of PayPal, an online payment service. The guild lobbied the federal government unsuccessfully to stop the merger.

“PayPal was a biggie,” says Guild CEO Rosalinda Baldwin. “PayPal is more than just eBay. Some of the Guild’s advertisers pay by PayPal. We’re the industry watchdog and now the company we watch the most has sensitive financial information about us that otherwise would be confidential. Customers at other auctions use PayPal too. eBay knows who’s selling on their competitor sites and how much is being sold. That’s the most amazing monopolistic practice; they got handed the bank.”

With a market capitalization of about $22 billion, eBay is valued twice as much as its closest electronic-commerce competitor, USA lnteractive of New York, which owns the Home Shopping Network, Ticketmaster and Expedia.

Since inception eBay has described itself as a consumer market based on the same principles as a stock market. But to the frustration of eBay’s public relations department, the auction giant is lumped into e-commerce.

“Many people still do not understand what eBay does,” says Kevin Pursglove, eBay’s spokesman. “Many people think we are an online retailer, when we are not. We are a marketplace, more like Nasdaq.”

SJSU’s Jones agrees. eBay is not a principal in sales because it doesn’t sell inventory it owns like retailers Amazon.com or Sears, he says. eBay is more like newspaper classified ads with Nasdaq-style auctions, although he believes eBay is more open than Nasdaq.

“The case could be made that eBay is a better market than Nasdaq,” says Jones. “At eBay, a buyer sees all the offers, but that’s not the case at Nasdaq where buyers don’t see all the bids.”

The difficulty of competing against eBay surprises some. World-known, traditional auction giant Sotheby’s Holdings of New York announced recently that it will close its 2-year-old, online auction because it isn’t profitable. eBay, which ran Sothebys.com for a percentage of sales, says it will publicize Sotheby’s live auctions from the eBay Web site.

“It’s amazing that nobody has successfully stepped in and competed with eBay,” Jones says. “It seems like it would be lots easier to do that than it would have been to develop a new operating system to take on Microsoft.”

Meanwhile, with nearly 62 million registered users, eBay’s market share continues to swell.