EBay not bullish about business for the coming year

Online auction company eBay warned in its annual report that it faces risks that could hurt its business operations in the coming year.


Online auction company eBay warned in its annual report that it faces risks that could hurt its business operations in the coming year.

In its annual shareholder filing with the US Securities and Exchange Commission on Friday, eBay cited a number of risks to its business that are a sign of "changing customer demands."

Some of the factors that could affect its operating results include its ability to retain active users and attract new users, as well as to encourage existing users to list items for sale, purchase items through its websites or use its payment service.

EBay also said it faces such challenges in the US, the UK and Germany, its largest markets.

"[The] growth of listings, active users and GMV on the eBay.com platform in those countries has slowed," the company said in the filing. GMV is gross merchandise volume, the total value of goods and services sold on eBay sites. EBay gets a piece of the action in the form of transaction fees. If the total value of goods and services sold declines, eBay loses money.

Not only will consumers spend less in each of these three major markets, but overall growth in the e-commerce market is expected to continue to decline, eBay said.

The risks also affect payment transaction service PayPal, which is owned by eBay. A large percentage of PayPal transactions originate on the eBay platform, and declines in growth rates in its Marketplaces business will also adversely affect PayPal's growth rate, eBay said.

The auction company also acknowledged that recent changes to its fee structure and feedback policy, such as eBay's decision not to allow sellers to leave negative feedback for buyers, could have a detrimental effect on its business.

"If these changes cause sellers to move their business away from our sites or otherwise fail to improve gross merchandise volume or the number of successful listings, our operating results and profitability will be harmed," according to the report.

EBay said its continued profitability and growth will depend, in part, on its ability to attract new users, keep existing users active and increase the activity levels of its active users, react to changing customer demands and develop new services as well as new sources of revenue from its existing services. In addition, eBay said it had to effectively manage the costs of its business, including employee costs, customer support, user protection programs and product development.

The listing or sale by its users of pirated or counterfeit items could also harm its business, the company said.

"We have received in the past, and we anticipate receiving in the future, communications alleging that certain items listed or sold through our service by our users infringe third-party copyrights, trademarks and trade names, or other intellectual property rights," eBay said. "Although we have sought to work actively with the owners of intellectual property rights to eliminate listings offering infringing items on our Web sites, some rights owners have expressed the view that our efforts are insufficient."

According to the report, allegations of infringement of intellectual property rights have resulted in costly litigation against eBay and PayPal, and could lead to more lawsuits in the future.

"Litigation and negative publicity has increased as our websites gain prominence in markets outside of the US, where the laws may be unsettled or less favourable to us," the filing stated. "Such litigation is costly for us, could result in damage awards, injunctive relief, or increased costs of doing business through adverse judgement or settlement, could require us to change our business practices in expensive ways, or could otherwise harm our business. In addition, a public perception that counterfeit or pirated items are commonplace on our site could damage our reputation and our business."

In a research report Thursday, Mark Mahaney, an analyst with Citigroup, gave eBay a high risk rating, in part, because it faces very significant competition from such companies as Amazon.com, Google, Yahoo other online retailers, comparison shopping engines and broad multichannel retailers. In addition, Mahaney pointed to eBay's loss of business in the US, the UK and Germany, as well as its increased operating costs and risks related to its acquisitions, including Skype and Shopping.com.

"If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our target price [$31 per share]," Mahaney said in his report.

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