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Is ebaY Another Enron?

IS ebaY an Enron Waiting to Happen?

Editorial
11 Feb 2002
Updated 12 Feb 2002
Updated 19 Feb 2002

TAG feels that ebaY IS an Enron waiting to happen, and that if something causes the ebaY stock to fall precipitately, we speculate the ensuing investigation will reveal many Enron like similarities and philosophies. This statement is based on gut feeling as a result of long and intensely observed ebaY behavior. Unfortunately, ebaY is very secretive, so facts about what really goes on in the company are hard to come by, but TAG believes that from the few facts available and observable, we can point to many similarities with Enron. It must also be noted that exactly what happened at Enron is still under intense investigation, so that, too, remains unknown. The bottom line is that TAG sees both companies as putting their focus on appearing to make a profit at any cost, regardless of what they have to do to keep up that appearance.

ebaY demonstrates their 'appearance of profit at any cost' philosophy through proforma accounting methods, creative account receivables management, and a whole scale of unknowable accounting and partnership agreements, that we are suspicious of, but can't get facts about. Though there might not be anything illegal about these practices, and we are not corporate lawyers or accountants by any means, the methods appear sleazy and not ethical to our middle class sensibilities.

For example, by observing the way the accounts of the sellers who staff TAG and the ones sent to TAG by TAG subscribers, we know that on free listing days, ebaY charges the listings to the seller, and then goes back and refunds the fees separately. We also know that when a seller revises an auction, the listing fee is charged again, and then refunded. In addition, we know that when the seller account is charged, the gross (total fees before any credits or refunds) is shown on the sellers bill, but the net is what is charged to the sellers charge card. This might be completely normal business practice, but this practice makes us wonder WHAT is being reported as income, and if ebaY is using creative methods to show this income more than once.

ebaY has made many purchases on a very grand scale. They have purchased auction houses, Butterfields ($260 mil), and Kruse ($150 mil). They have purchased or opened online international auction sites, iBazar ($100 mil), Korea's Internet Auction ($120 mil), Japan (this year recognized as having lost out to Yahoo Japan), etc. Though these purchases make ebaY appear to be a growing and viable company, they have been very expensive purchases for very little return, with the majority of these purchases being short term (at the least) failures. The number of listings and sales on the international sites is very small as compared to the US site and should be generating lots of red ink all over the ebaY earnings sheets. Butterfields has been a complete failure. There have also been investments in or purchases of companies such as Billpoint, eStamp, iEscrow, ReturnBuy, Homes Direct, Keen.Com, Blackthorne etc, and those have also been either partial or total failures and should also be showing much red ink.

ebaY has been making partnerships with many corporations that are selling on the ebaY site. The press releases and statements made by ebaY, and news articles on the subject, appear to say ebaY is charging these corporate partners the same to list and sell on the ebaY site as the smaller person to person sellers. Is this really true? TAG suspects that there are all kinds of special deals with these corporations that ebaY is hiding. The only factual things we can see, is the special treatment these companies receive in direct violation of the ebaY user agreement, but is this just the tip of the iceberg? It sure makes us suspect that there is more going on in these agreements, and the secrecy makes us suspect that not all of it is ethical or above board.

ebaY insiders regularly sell large amounts of stock. A recent tally done by TAG, shows ebaY insiders selling 25.63 million shares of stock in the past year (28 Jan 01 to 3 Jan 02). By comparison Yahoo insiders sold 9.2 million shares during the same time frame (18 Jan 01 to 4 Dec 01). Why do ebaY insiders unload their stock at what appears to be every opportunity? Shouldn't this raise questions about the motivation of ebaY insiders? Shouldn't it raise questions about the long term worth of the company, judged by those who best know what is really happening behind the closed boardroom doors?

We also know that ebaY blatantly lies about some key indicators.

The first item ebaY lies about is their up time, where they claim a better than 99% up time. In the 24/7 online environment, the industry average and standard is 99% up time based on a 168 hour week. No site but ebaY takes their site down for hours of weekly scheduled maintenance, and this maintenance time alone takes ebaY down to a 99% up time rate, removing the "better than" from the equation right from the start. Even with ebaY creatively defining up time, TAG holds that when a key function on the site, namely the ability to search, to bid or to access My ebaY (due to the watch feature in My ebaY that buyers require to track auctions they are bidding on) is down, then ebaY is down. The ability to access pages on the site and look at them does NOT mean the site is up unless items can be found and bids can be placed.

The ability to sell items is specifically what seller's pay for, and if those functions do not work, for all intents and purposes the site is down. We are actually being generous, because images are critical to sales and we are not even counting the ebaY picture services iPix downtime, in this criticism.

Anyone who wants to see how much down time ebaY actually experiences, needs merely to read about the daily site outages recorded in TAGnotes. We have been tracking these outages since Sep 1999 and ebaY's uptime rates range from 90 to 98%. Though an extra one percent down time sounds minor, it reflects lost sales for thousands of sellers whose auctions end during one of these outages and who miss out on the critical last few minutes of bidding.

The second item ebaY lies about is the number of users on the site. ebaY claimed 42.2 million "confirmed" users in their last quarters report. TAG is researching user IDs on ebaY, and in preliminary findings, have determined that ebaY users have an average of 3 user ID's. This immediately takes ebaY from their claimed 42.2 million users to 14.1 million users. We can't tell if ebaY is including NARU (not a registered user) users in their 42.2 million, because NARU accounts still show up on the site. If ebaY IS including them, more than 3% of users appearing in feedback profiles are NARU. Their exclusion takes the total number of registered users down to approximately 13.7 million.


We have not even started to look at inactive user IDs - those that have not been used for at least 12 months. TAG would think there would be great concern amongst stock holders, advertisers and corporate sellers, if instead of 42.2 million folks potentially using the site, the number is more likely 7 to 9 million. Though ebaY might claim they don't know how many actual individual humans are registered on their site, and can only report user IDs, ebaY could easily make public the number of invoices it sends out each month. That would be an excellent and factual indicator of site users, at least covering all sellers, but ebaY chooses to hide that information. An even more valuable number would be the number of active users on the site, with quarter to quarter comparisons, but we doubt ebaY would be willing to voluntarily disclose that information.

The other areas that raise questions of ebaY's veracity and which bear looking into are the 'why' 'ifs'.

If ebaY has increased its user base significantly over the last 18 months, why have listings been virtually stagnant at around 5.5 million during that same time period? One must remember that this same time period included the addition of double category listings - which doubled the count on all listings using the double category feature (approx 5.2% during TAG's last count), the addition of a large influx of corporate sellers who list thousands of auctions at a time, and the addition of several international sites where many of the auctions also show up on the US site.

If ebaY has increased its user base significantly over the last few years, why has overall sell through rates gone from approx 70% to approx 40%? A recent research tool is showing early results that appear to reduce that rate to 20% in certain categories. TAG hopes to have more detail on this in the near future..

If ebaY has increased its user base significantly over the last few years, why has the research by TIAS.Com, shown prices significantly decreased on antiques and collectibles, and other anecdotal information reflecting the same on all items sold on ebaY?

And if all the points we have made above are taken into account, HOW is ebaY showing legitimate increases in profitability, when all these indicators would logically reflect something very different? Enron showed profits that turned out to be false, and based on those falsehoods, their stockholders bought stock and their employees did the same, with a net result that the company is bankrupt, the stockholders have lost billions and a large number of their employees have also been bankrupted and had their retirement accounts wiped out in addition to losing their jobs. Yet their insiders sold millions of shares of stock, received millions in bonuses, and netted millions in profits, right up to their crash. Enron did all kinds of things to make it look as if their company was profitable, when it was not. In an interesting quote about Enron and similar asset-light companies, CBS MarketWatch Gadfly Michael Collins said, "If the company shows it's making big profits, but we can't understand why, it's probably time to sell the stock and take the profit before everyone else figures out that there's funny business going on." Given all the items we have mentioned above, does it not appear that ebaY is doing a similar thing? If what TAG senses is true, it might be time for the SEC to investigate ebaY and possibly prevent a similar crash, or time for ebaY to clean up its own act.

TAG's focus is not on investors, but on the users of the online auction and trading industry (OAI/OTI). So TAG would add that for all the aforementioned reasons, OAI/OTI users who have ebaY as the underpinning for their OAI/OTI businesses, should build an alternative online infrastructure. This should consist of a combination of independent web sites and use of alternative auction and trading sites, in addition to ebaY. This framework should be able to stand securely, even if ebaY is completely removed from the structure. This is as true for the small seller, who uses their ebaY income to supplement other forms of income as it is for businesses whose entire structure currently depends on ebaY's viability. In a word, DIVERSIFY.


Information for this article came from many sources many of which are readily accessible on the net -

TAGnotes - Sep 1999 to present in searchable format

ebaY Auction Count Trends

ebaY Insider Trading

Yahoo Insider Trading

TIAS price drop report

ebaY Investment Info

ebaY Japan vs Yahoo Japan

ProForma Earning Debate
"TheStreet.Com: So far this earnings season, have there been any really egregious examples of misleading pro forma reporting?

Brotman: Well, it's funny because [on Wednesday] CNBC was talking about eBay's (Nasdaq: EBAY - news) numbers"

Editorial updated to correct errors, clarify some points add links and because we do have a sense of humor.

"The truth will set you free. But first, it will piss you off." Gloria Steinem
"Cautious, careful people, always casting about to preserve their reputations... can never effect a reform." -- Susan B. Anthony

We realize this editorial might be controversial. We are interested in hearing other viewpoints and voices than ours, and our readers are usually inclined in the same way. If you would like to comment on this editorial, we welcome your comments. Please send comments to auctionvoice@theauctionguild.com Comments may be published electronically in TAGnotes or on the TAG website, but we will ask permission first.

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