EBay's biggest challenge:

Elise Ackerman
San Jose Mercury News (MCT)

SAN JOSE, Calif. - Walt Kolenda, also known by the handle "Auction Wally," began selling antiques and collectibles on eBay 10 years ago.

But when Kolenda shops online, he goes to Kolenda isn't one of those disaffected eBay sellers upset about recent changes in the online marketplace. He is just being practical.

"Almost without fail, the best price will come up on Amazon," says the longtime antique dealer and auctioneer, whose recent purchases range from office supplies to a bass guitar.

EBay sellers made headlines in the spring when they rebelled against policies put in place by eBay's new chief executive, John Donahoe. The griping continued this month, with the start of a new rule that prevents identical listings from overwhelming eBay browsers.

But the disenchantment of eBay sellers, vociferous as it has been, poses a much smaller threat to eBay than the draw of Amazon holds for buyers. Like Kolenda, these online shoppers are attracted by low prices and a less cluttered, more predictable shopping experience.

Once the undisputed leader in e-commerce, eBay is increasingly in danger of being eclipsed by its more nimble rival. Even as eBay tries to be more like Amazon - by pushing fixed-price listings and emphasizing trust and safety - Amazon is becoming more like eBay. For example, in addition to expanding beyond books and offering used items,

Amazon just launched a checkout service that will compete with eBay's PayPal.

And Amazon has had some success: Shoppers are flocking to its site, while visits to eBay have fallen over the past year.

Analysts fear the competition between the sites, combined with the economic downturn, could bruise eBay's business and batter its share price. Tim Boyd, an analyst with American Technology Research, is going so far as to advise investors to sell eBay and predicts its shares, down 38 percent from a high of $40.60 in October, could fall an additional 20 percent this year.

"EBay is hemorrhaging market share to competitors such as Amazon," Boyd wrote in a research report, noting that the value of the goods sold on eBay's marketplace had increased only 8 percent compared with the previous year.

In contrast, Amazon saw a comparable figure, its gross sales, vault by 41 percent.

EBay, based in San Jose, declined to make executives available to talk about the challenge it faces from Seattle-based Amazon. A spokesman emphasized that eBay's business, a three-legged combination of e-commerce, online payments and the Skype communication service, is unique.

Still, Donahoe is quietly tweaking eBay to make its marketplace more like Amazon. The challenge he faces is that every change aggravates eBay's seething mass of sellers just a little more. For instance, an adjustment to eBay's feedback system so that sellers can leave only positive feedback about buyers sparked a huge outcry.

The move was intended to fight fraud, but it struck sellers as unfair. So did a special deal eBay made with that is designed to give shoppers a choice of more items at fixed prices, with free delivery.

With 84 million users in 39 markets around the world, eBay can still boast of being the biggest online marketplace, but Amazon is quickly catching up.

According to comScore, a leading measurement firm, visits to eBay's U.S. marketplace began declining for the first time in August. Numbers continued to slip throughout the past year. In June, visits plunged 10 percent, to 73 million.

In comparison, Amazon grew, mostly in double digits. In June, eBay's worst month, visits to Amazon rose 7 percent to 57 million.

", to us, is the highest-quality company that we follow and could be building the most durable and sustainable competitive advantage," analyst Scott Devitt of Stifel Nicolaus wrote in a recent report.

EBay used to get these kinds of mash notes. Analysts gushed about the beauty of eBay's business model, which allowed it to become a top Internet retailer without ever holding any inventory itself. The darling of the dot-com bust, eBay's stock more than doubled from 2003 to 2005.

But what was once seen as eBay's strength is now regarded as a weakness. As a virtual player, eBay has limited control over transactions on its site. EBay can fight against dishonest sellers and deadbeat buyers. Ultimately, however, its marketplace is built on trust.

Amazon took a different and more costly approach. It built its own warehouses and a massive distribution network. As a result, Amazon can guarantee delivery. For buyers, that has made a big difference.

"Amazon is a retailer; it understands online commerce," said Derek Brown, an analyst with Cantor Fitzgerald, who was the first to warn investors of eBay's weakness. "They own the experience from start to finish."

Brown gives Donahoe credit for taking action but says he will have to do much more to fend off Amazon. "I do believe it's a fixable business," Brown said. "It's a question of how long it will take and how much it will cost."






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