Red Ink Diary

Counting on my fingers I have been off eBay for 3-1/3 years. I don’t even think about eBay most days but there are constant small reminders. For example, I sew every day on a machine I bought on eBay and I collect eggs every day in a vintage wire egg basket I bought on eBay. I bought my favorite tea mug on eBay, the list goes on.

Strong words that resonate

I read an article on Sunday by Chris Dawson, the UK based seller who writes the historically pro-eBay blog TameBay. I have respect for Chris, even though when it comes to eBay we are often poles apart.(def.# 9) This is a well written, reasoned article by someone who is not a small seller in the sense I use the word, he makes his living on the site and has been a stalwart (def.# 3,5) eBay cheerleader for years. He asks “Could a statistical blip put you out of business?” and it is not a rhetorical question.

“In order to run a business a company needs a level of certainty that they’ll be able to continue trading and currently eBay still don’t appear to be able to provide this.”

Chris goes on to discuss statistical probabilities of receiving bad feedback and includes an eyeopening screen shot of feedback from a ‘new to eBay’ buyer.

“Sellers need certainty on eBay. Sellers have mortgages to pay, warehouses to run, employees to take care of and bills to pay. Sellers often have to order stock months in advance and they need to know that they will still be in business when the stock arrives and invoices become due.”

Is anybody listening at eBay?

High speed goal posts or time-warp?

Back in September 2007 eBay CEO John Donahoe spoke at a top level leadership forum at which he revealed the existence of a three year plan.

“We set out a year ago to think about how we could change before we are forced to change. . . . By using a real focus on the customer, we embarked on a series of fundamental changes that will ultimately span a three year period. We started by creating a future vision. This was critical because not everyone felt the impetus to change, given the amount of success we were experiencing.”

Count with me, in 2007, “a year ago” was 2006, to 2007, 2008, 2009, three years, done. Even if you didn’t actually start the three year turmoil plan until 2007 it should have been done by 2010. Right? Got that?
Bloomberg business news, April 28th 2011 “EBay’s Sales Forecast Exceeds Estimates as CEO Revamps Site”

“Chief Executive Officer John Donahoe, two-thirds of the way through a three-year turnaround plan, has bought at least seven businesses in the past year to help revive sales growth and revamp EBay’s main marketplace.”

The Bloomberg article is nicely padded with eBay spin but appears to be missing its #NotIntendedToBeAFactualStatement. Donahoe changed the search engine to help buyers find items and after auctions fell out of favor he began steering the company toward fixed-price listings.

Five years later eBay is still only two thirds of the way through its three year plan? Anybody should be able to count that out without even taking off their socks! Is anybody listening to eBay?

Y’all come back!

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Yesterday Ina Steiner of AuctionBytes wrote “How eBay nearly missed out on it’s mobile advantage“. She said

“Given the importance eBay is placing on mobile sales these days, it’s surprising to learn the company nearly missed the boat on mobile.”

and then went on to quote Alan Lewis, one of eBay’s senior managers who was responsible for the eBay Desktop, among other things.

A week earlier Ina asked “Did eBay blunder with its digital content strategy?” This is of course a rhetorical (def. #1) question! You betcha eBay blundered, but, I would respectfully disagree that this information is in any way surprising.

Almost exactly two years ago I wrote a post entitled “The Long and Winding Road” in which I also quoted Alan Lewis. There was always a culture of discretion and loyalty amongst departing eBay employees so at the time it was surprising that Mr Lewis should be even the slightest bit critical. I suspect it was done out of love for the eBay that was fast disappearing (if not actually gone).

“Love!” you say? Yes, a lot of us loved and had pride in eBay for it’s community spirit not to mention that anybody with good packing skills and a decent work ethic could make a very nice living on eBay in those days.

Lurching off at a tangent

I saved an article about Blockbuster from the October 11th 2010 issue of Time by Stephen Gandel. His well written concluding paragraph neatly summarized what I have been thinking for several years and was unable to articulate (def. #4) nearly as well. Bolding is mine.

There are few aneurysms in American business. Few companies drop dead. Instead, most endure a long slide into the grave. Harvard professor Clayton Christensen, who has studied technological change and its effect on large companies, says many of the decisions that led Blockbuster to bankruptcy might have appeared rational at the time. “But when faced with a threat by disruptive competitors like Netflix, the circumstances were different,” says Christensen. “Decisions that in other circumstances would have made sense, instead drove the company into the ground.” Into the ground Blockbuster went.

Well looky there!

Poke that old anthill with a sharp stick, stir it around a little and out pops Professor Clayton Christensen! John Donahoe’s guru. Another example of 20/20 vision with hindsight. “Decisions that in other circumstances would have made sense . . . ” Fancy that.

The thing is, there were many straws that broke the camel’s (small eBay sellers) back and each and every one was loudly debated by the ‘noise’ at the time. Although we were ‘heard’ nobody was actually listening. You see, we weren’t MBAs, but looking in the rear view mirror I think we were right.

Pointing the finger

eBay is still managed by the ‘throw spaghetti on the wall and if it sticks it is done’ method. John Donahoe was always quite open about it starting in September 2007 when he said “”We’ve had the disruption, now we must disrupt our own disruption . . . We need to drive these principles of disruption at the same time that we’re executing a very successful business.” What is off about this image of executing a successful business? Pardon the pun. It has been a lingering deathbed that is for sure.

I am not sure when the long slide started for eBay.

• Maybe the “a monkey could drive this train” era and Meg believing her own schtick went out and hired a bunch of monkeys.
• Maybe as Alan Lewis said “Working at eBay without using the site is like being a chef who won’t eat what they cook.” Who knew the food tasted horrible?
• Maybe it was simply a case of company wide kennel blindness, petty empire building by mid level management who were unable to see how their actions affected the whole picture beyond their own little domain (def. #2) Classic example, Brian Burke, the man who thought neutrals were negatives because they are not positives.
• Maybe a failure at the top, recognizing that eBay was by internet standards a very mature enterprise but not grasping the true macroeconomic forces of creating new markets.

So, (as we say on eBay) how do you feel about all that? I really haven’t had any interest in eBay for a while. I feel . . . indifferent.

Y’all come back!

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So, (as we say on eBay) everything is wonderful on the bay! There was much repetition, the odd comedic moment, a few genuine clues, subtle contradictions and lots of filler.

“So our Lorrie Norrington and our U.S. team are very on top of executing between now and the remainder of the year.”

Stylistically I noted an increasing tendency towards nosism, but the undoubted word of the quarter is “our”. Things were so jolly I almost expected one of those vintage postcards saying “Wish you were here”.

There are few surprises in eBay’s second quarter 2010 (Q2-10) report. In the interests of economy and being green CEO John Donahoe recycled his Q1-10 opening remarks.

Q1-10 “First, we are becoming a more customer focused company. We are driving improvements to our user experience and we are measuring our success with three customer oriented metrics; net promoter score, velocity and market share. I have tied a portion of our leadership compensation to customer satisfaction… Second, we are becoming a more technology driven company and we are increasing our commitment to innovation.” SeekingAlpha

Q2-10 “First, we’re becoming a more customer-driven organization. We have three clear customer metrics, net promoter score, velocity and market share, and we’ve tied a portion of management’s compensation to customer satisfaction… Second, we’re becoming a more technology-driven company with an increasing commitment to innovation.” SeekingAlpha

Factoids

• 60% of the eBay marketplace revenue was generated outside the U.S.
• marketplace revenue up 11% year-over-year
• Net promoter scores up for top and active buyers in the U.S., U.K. and Germany,
• Sold item growth continued to be strong at 11% globally.
• cross border trade is down except China and the UK
• the U.S. grew more slowly than the market
• active users increased to 92 million
• classifieds business was up 7% in Q2
• U.S. core GMV was 2% in the quarter, down 4 points from Q1 driven by lower ASPs due to broader selection of well priced inventory

Basis point or point: One hundredth of 1 percent (0.01%). Each percentage point of yield equals 100 basis points. Gross Merchandise Value - GMV

Presumably we would never have guessed scores are not up for low grade and inactive buyers?

Clues and contradictions

It is entirely possible I am being dim here, if so please enlighten in the comments.

Classifieds grew 20% in 2009, showed a 14% gain year over year in Q1-10 and slowed to 7% in Q2-10. Advertising revenue growth is slower at 9% for the quarter from 12% in Q1-10.

Whatever happened to Shopping.com? Has it turned into the red headed stepchild of eBay Inc?

G-Market acquired at a cost of $1.2 billion in 2009 is conspicuous by its absence from Q2-10.   In Q1-2010 CFO Robert Swan said “our acquisition of G-Market increased growth by four points resulting in organic revenue growth of 11%. ” His Q2-10 statement

“Marketplaces segment margin was 40% in the quarter, down 220 basis points from a year ago. The main drivers of the change include increased investments to continue to build trust, value and selection, as well as, the inclusion of Gmarket” SeekingAlpha

In Q1 Swan excused decreases in Marketplaces segment margin with ‘investing in a lower take rate’ and ‘new Buyer Protection programs’. In Q2, surprise!

“The take rate increase was driven by higher velocity on lower priced items and lower power seller discounts versus last year … along with a shift of much of the cost of our Buyer Protection Program from PayPal to marketplaces”

Donahoe says velocity is down, sold item growth was 5% in the U.S. Swan says it is up, on lower priced items. Donahoe is going to fix it.

“we’re in the midst of making some adjustments in the format mix of auctions and fixed price … we’re now going to be increasing gently the fixed price exposure, as well as, ensuring that higher ASP items are getting appropriate visibility.”

Velocity is an expression of conversion measurement, stock into sales. Inventory turnover ratio (ITR) measures the velocity or speed of conversion of stock into sales. It is important to realize that a high inventory turnover ratio may not be accompanied by high profits. Margin at its simplest is another word for profit, more cultured.

Decoding the BaySpeak

Secondary markets are so last year, we prefer “off-price inventory”.

Delicate fine tuning of search with a pitchfork and shovel is taking place, expect the excavator later.

Once again decreases in eBay fees resulted in increased costs for eBay sellers, what a surprise, (not). “a shift of much of the cost of our Buyer Protection Program” is coming out of seller hides too. Think payment hold, rolling reserves, and coming soon, pre-authorized direct debit from your bank account and/or charges to your credit card. Bet you can’t wait.

Cheap stuff is selling, mainly from stagnant and previously invisible stores inventory, but I wonder if that inventory is being replenished.

The Emperor has spoken, it would be nice if you did too in the comments.

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Once upon a time, long long ago, eBay had a feedback system which worked. It was flawed in that it could be, (and sometimes was) abused by sellers who used automated systems, but overall it was a two-way (def. #2) frame of reference which enabled both buyer and seller to gauge (def. #2) the character of the person they were contemplating doing business with.

Under CEO John Donahoe eBay has ‘improved’ the feedback experience to the point that buyers are expected to perform the equivalent of completing a marketing survey for each purchase. Surprise! Most of them don’t bother any more, but you can bet your reputation an unhappy customer will jump through all the hoops to leave bad feedback, and enjoy the experience, that is human nature.

There is no mechanism for eBay sellers to leave feedback for eBay, other than to leave. Cheerleaders aren’t cheering or even very cheery about eBay these days. Seller disillusionment and glitches are probably the second highest growth factor on eBay, advertising being the highest.

Folk wisdom says a happy customer will tell three friends but an unhappy one will tell ten. In today’s internet society that unhappy customer is more likely to tell hundreds if not thousands.

Connections, Harvard, Bain & Co and the Old School Tie

Meg Whitman, graduate of Harvard Business School, worked for Bain & Co., a consulting firm, as a senior Vice President before moving on to other challenges. Her chosen successor John Donahoe went to Bain straight out of Stanford and became a partner in 1992.  President of eBay Marketplaces in February 2005 was his second job.  He tells the story.

“Meg rang me. She needed a successor. She said ‘everyone is rich and tired’. They knew they needed to make a transition. I just fell in love with the values of the company.”

Other HBS graduates high up in eBay management include Lorrie Norrington and former senior vice president of eBay North America and Global Product Stephanie Tilenius, now at Google. Bill Cobb who was passed over in favor of Donahoe has no connection with Harvard or Bain.

Flawed Measurements

Fred Reichheld is also a Harvard graduate & past Bain director, thus passing the old school tie presumptive credibility check for eBay.   Reichheld wrote “The Ultimate Question: Driving Good Profits and True Growth” published by Harvard Business School (HBS) Press in 2006 which touted his (disputed) Net Promoter Score theory. Quoting from the publisher’s promotional text,

“CEOs regularly announce ambitious growth targets, then fail to achieve them. The reason? Their growing addiction to bad profits. These corporate steroids boost short-term earnings but alienate customers. They undermine growth by creating legions of detractors–customers who complain loudly about the company and switch to competitors at the earliest opportunity.”

Oh exquisite irony! eBay has been dedicated to ‘bad profits’ for years, viz. Meg Whitman’s lever pulling quarter to quarter management system. Did nobody notice?

Other marketing experts say that Net Promoter scores are seriously flawed using phrases like “… poison management practices and affect the bottom line”. For example in Loyalty Myths: Hyped Strategies That Will Put You Out of Business (see the ‘I am reading’ link in the right navigation bar)

“… the concept of net promoters is a bad idea that would not likely have seen the light of day had it not come from such a respected individual.”

A further quote from the same book, (bold-ing is mine):

“The difficult truth regarding customer loyalty is that how it links to growth and profitability is far more complex than we have been led to believe. An improperly directed program can result in keeping the wrong customers and ironically deflating an organization’s profitability. A blind pursuit of customer loyalty is at best a case of misallocated resources. But at worst it is a recipe for financial disaster.“

Rebuilding eBay

eBay CEO John Donahoe is a great believer in Fred Reichheld’s  Net Promoter Score system referring to ‘net promoter’ more than once in his introduction to the analyst call for Q1-10. The entire NPS theory is predicated (def. #2a) on one single question “How likely is it that you would recommend _____ to a friend or colleague?”

For an eBay buyer this is on the level of asking a business rival to share their merchandise sources. I am sure as heck not going to tell you where I buy my good stuff!

Auntie May, (who did not attend Harvard Business School and has no association with Bain) says  “Only a foolish man builds his house on sand.”

Has John Donahoe rebuilt eBay on sand? Or, is he just trying to remodel Meg Whitman’s work using the same defective foundation?

On the Street

Wall Street that is. The second financial quarter ends June 30th. eBay will announce results July 21st. Today eBay shares closed at $19.69, after dipping to $19.54  the share price reflects an 11% decline for the year.

On CNBC’s Options Action Carter Worth of Oppenheimer said eBay’s 150-day moving average has turned down, and the stock has gaps and drops. “eBay’s relative strength is a disaster. It is under performing retailers, tech and the market.” Mike Khouw of Cantor Fitzgerald added that the only area of real growth for EBAY is its advertising business, and this segment is not EBAY’s core business.

Jeetil Patel of Deutsche Bank repeats his Sell rating on the stock, trimming his target to $16, from $18. “We remain sellers of shares of eBay, as a combination of U.S. dollar strength, weak U.S. sales activity and discontinuation of the Microsoft Bing Cash Back program, which drove extra traffic to the site, will likely result in lowered earnings guidance for 2010,” he writes.

In the Marketplace

A quote from Scot Wingo, who, as CEO of ChannelAdvisor is uniquely better placed for access to raw data than any non eBay observer of the marketplace.

“eBay declined in May to -4% y/y vs. April which was flat at 0%.”

It is important to note that Scot is comparing CA seller’s data on eBay for April and May 2009; which was arguably the weakest year in eCommerce to date; to the same months in 2010, not to eBay as a whole.

In conclusion

I anticipate Q2-10 results with interest! Given eBay’s historical confusion as to who their customers are, (as opposed to the buyers who visit the site) I wonder if eBay are blindly pursuing and measuring loyalties of the wrong group of users. What do you think?

Y’all come back!

Further reading:

GigaOm.com :: eBay’s Crossroads: Turn Around or Break Up, Kevin Kelleher June 26th 2010
AuctionBytes.com :: eBay Survey Measures Perceptions about Top Rated Sellers, Ina Steiner June 28th 2010