Freebay or Toast? The Contrarian Argument

There has been much articulate commentary lately arguing that unless eBay makes its listings free--and freely searchable by Google--it is toast (see Marc Pincus, Fred Wilson, John Battelle, Bill Burnham and others).  The presumed killers?  GoogleBase, Craigslist, the free web, et al. At first blush, this argument seems a slam dunk: free seems a hard price to beat.  As yet, anyway, I'm not convinced.

The first point that trips me up is that I have heard (and initially believed) this argument before, way back in the mid-to-late-1990s, when eBay had just gone public and the biggest concern among investors was that Yahoo! was going into the auction business--and that its listings, unlike eBay's, would be free.  As one of my colleagues put it, "free's not a bad price," especially when offered by a company as prominent and reputable as Yahoo!.  And Yahoo! made its announcement and its listings were free, and eBay's stock temporarily took it on the chin.  But then, lo and behold, although Yahoo! immediately amassed jillions of listings, eBay's seller and buyer communities stayed put (and its revenue and profit continued to soar).  A few years later, throwing in the towel on free, Yahoo! started charging fees.  That didn't work, either.  So now they're back to free.

In this and other cases, eBay was able to defend itself because of the network effect: without the buyers, it was hard to retain sellers, etc.  In Yahoo!'s case, moreover, it seemed that free listings actually made the experience worse for users: because sellers didn't have skin in the game, they would list pure junk just to see if it would sell, and buyers would have to sift through reams of crap listings to find the few that were worth anything.  And, as time progressed, it also seemed that eBay's intense focus on auctions (and, later, commerce) allowed it to introduce ancillary services that Yahoo! couldn't keep up with, etc., all of which made eBay's fees worth the price.   

I realize that today, the situation is slightly different: now that we have Google, the theory goes, we can search the entire non-eBay web, and soon eBay's listings will be a tiny fraction of the total readily available to a buyer (and, if eBay refuses to allow Google to index its listings, eBay may even be invisible--the "dark web" theory).  This, the Freebay folks argue, will negate the network effect, and sellers will no longer have any reason to use eBay.

For this to happen, though, two things must be (or become) true.  First, eBay's listings must, in fact, be a fraction of the total available on the web in any given category (I suspect that this is not the case, but I haven't tested the theory).  Second, and just as important, the non-eBay listings have to be just as high-quality, fresh, and trustworthy as eBay's, or buyers will be reluctant to depend on them. 

I realize that Craigslist has fanatical supporters who loathe eBay (even though eBay owns 25% of the company) and that there will always be a segment of the web population that considers it the deepest of insults to ever be asked to pay for something.  The web being what it is, these folks will always have free marketplaces or communities where they can trade with one another. 

After watching eBay's experience over the last (near) decade, however, I am skeptical that the majority of sellers who absolutely positively need to 1) sell the item, and 2) get the highest possible price for it, will try to save the 10% or so by uprooting and moving to a free site.  Especially if they have to buy Google keywords--or share revenue with Google--to show up in its search results.

This does not mean that eBay will grow 30% a year forever.  It also does not mean that eBay can keep jacking up prices: the near-revolt that followed the last increase demonstrated that this source of growth has come to an end.  It may mean, as some have suggested, that eBay has to start offering volume discounts, better all-web promotions, cheaper listings in exchange for higher-priced ancillary services, etc.  It may also mean that eBay will forever have to persuade sellers that, although free is a viable option, it's worth paying for eBay. 

In any case, I think the consensus that eBay either 1) goes free, or 2) is toast, may be a rush to judgment that will later prove wrong (or at least prove a vast over-statement).  I don't think the "paid model is dying," as Fred succinctly put it, just as I don't think free office suites will suddenly take over the world.  I think the two models will continue to co-exist, just as they have since the beginning. But I'm happy to be persuaded otherwise.

Comments

[Margaret]

EBay forces sellers to list only things they have, and otherwise follow basic seller rules. I recently bought something on eBay for $15.00, a price I normally don't think worth the hassle of an auction. It's a slightly out of date cell phone accessory, and I ordered it twice from on line stores only to get "oops, sorry, we don't have it afterall" emails. That doesn't happen on eBay.

My interest in free auction listings, as a buyer and a seller, is pretty minimal.

[hong]

I think Ebay's advantage is customer base and efficient transaction process. Once I list my item in craigslist, I feel like living in a dark box, I have no idea who & how many visitors are interested, afterwards we have to discuss on the payment, shipping or delivery, etc. While all of this is not a worry on ebay.
Price wise usually the power sellers like to mark their goods 10% or so below marketing price, although frequently I can find a better deal through extensive search, sometimes they just hope buyers are not that prepared & educated. But for used goods from smaller seller like Mr. hong who offers garage sale price tags, there is no competition.
Ebay does pay google to have their listing shown up on the first page, although to me it's pretty useless.
In China, Ebay is struggling with a strong competitor http://www.taobao.com/ which offers free listing, I have no idea how Ebay lost customers from acquired eachnet.com to taobao, so Yahoo's example may just be a history.

[Brendan]

I agree with your point about free office suites, but I think the analogy is a bit loose. I've yet to encounter any decent retailer who is willing to appear extremely cheap in front of customers. I mean there's no such thing as free rent on Main Street. And it doesn't reflect well on the health of a business if the merchant goes looking for the cheapest way to sell something online.

My money says Google and Craigslist will duke it out over every used futon and old pair of bowling shoes in the land. EBay is where the serious folks will be, for the foreseeable future.

[dmart]

I generally agree with that view but why consider the doomsday scenario when reality is exactly what you allude to; lower growth rates, better user experience and more value-added services. In essence a company defending its turf against a formidable foe.

I have no doubt that auction-application-technology will become a non-factor, the question remains what would it take for the entrenched eBayers to move on? One key thing would be disenchantment with the marketplace. eBay is now turning into a SuperMall with commercial-class players staking the landscape. In middle of the road to higher priced items, 80% of the time, you will be dealing with a pro (a store, a reseller or even a manufacturer of goods). These guys dictate to a great degree how eBay evolves.

If you raise the argument that Google for all intents and purposes is a one-product company then it's most definitely less so than eBay! Which brings us back to the question: if you wanted to own one of these two, would you buy eBay over Google?

[ipo4]

I am trying to sell a grand piano for $39,000. I am using Craig's List, Ebay, and have placed an ad in the NY Times Classifieds.

So far, Craig's List has generated the most interest. I have had 2 contacts from Ebay and none from the New York Times.

Craig's List is free, Ebay cost about $6 for the 10 day listing and New York Times cost $125 for one Sunday.

Do you see where this is going? Now, Google is going to be operating a classifieds service.

[Steve D]

this is quite interesting:

Microsoft worked closely with eBay through the eBay Developers Program to enable Office Small Business Accounting 2007 users to list and sell items on eBay from within their accounting software. Working with PayPal, Microsoft will provide two new payment services: Invoice Payment Service and Merchant Processing Service, both within Office Small Business Accounting 2007

http://biz.yahoo.com/prnews/060524/sfw043.html?.v=63

[Network]

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