eBay talk at Goldman – quick notes/observations

Yesterday in SFO, eBay’s CEO, John Donahoe (JD) and Bob Swan (SWAN), CFO, presented to the lunch-time audience at the annual Goldman Sachs Technology and Internet Conference in what Goldman calls a ‘fireside chat’ format.  These are my notes.  It was largely Q+A – with the early Q’s coming from analyst James Mitchell and also from the audience.

There are some interesting tidbits in here to think about:
  • It was crystal clear that eBay is distancing itself from auctions as quickly as possible and even the marketplace to some extent.
  • Feels like they would sell Skype if the right buyer came along
  • Paypal has room for 20% more on-eBay penetration
  • They are feeling really good about BML (BillMeLater)
  • They view that they’ve made big transitions in marketplace biz last year (I disagree on this one as you’ve seen in the past series)
  • eBay is married to the advertising business (high margin crack) and I suspect we’ll see lots more banner ads and sponsored listings in 09 (check out UK for what that looks/feels like).
  • They downplayed the risk from the search companies getting into the eBay biz by saying buyers don’t want to click on URLs.  Guess they haven’t seen Google Product Search lately.
  • 15% of eBay is cross border trade (CBT) (new datapoint I haven’t heard, not clear what period of time was discussed or any trend).
  • They talked about local more than I have heard before (in context of classifieds)  – mentioned that it’s growing 50% y/y.
Fireside chat notes
On with the notes: (I typed these quickly so please don’t take this as a transcript. I linked to the audio program above so you can listen to it yourself if you need clarification)
JD started with their top priorities and a little bit of background, citing that many people don’t know all about the eBay of today and think of it as more of an auction company.
He mentioned that they have four businesses in the portfolio and threw in some tidbits about each that are largely review:
  • eBay – Auction only represents 25-35% of entire business today (50% of marketplace, 25-35% of entire portfolio to clarify)
    • Laid foundation for turning around in 08
    • Heavy lifting left to be done in 09
  • Paypal – 33% of revenue , half of which is off-eBay
    • Off-eBay- $1B business – grew at 50% off eBay
    • BML coming soon
  • Marketing services/alternative formats (classifieds, stubhub) – $1B business
  • Skype
This is a strong portfolio, we will strengthen this year.
Q: Does Skype fit?
A: It’s a great standalone business.  When we bought it we thought there were synergies, we were wrong, there aren’t.  BUT it’s a great business, accelerating metrics – users up 70% in Q4, increasing margins, great management team.  We’ll continue to do what it takes to grow the Skype business.
Q: Will you sell skype?
A: As I said, it’s a great stand-alone business, that doesn’t distract us.  We’ll pursue whatever path that allows us to realise the maximum value for shareholders from Skype.
Q: What initiatives are generating the best results? seller-facing of buyer-facing?
A: In a marketplace you have both.  WE MUST IMPROVE TRUST ON EBAY- I’m tired of the user experience being suboptimal,  We are going to continue to improve search.  We have a marketplace now with both auctions and fixed-price.  We’re going to do more around category shopping experiences.
Q: On coupons – do you worry that you’ve trained the consumer to wait for coupons?  With MS funding a big chunk, will you need to take out that slack on the eBay P+L
A: I want to characterize our couponing into two buckets:
  1. We are focusing more and more on how to drive greater share of wallet in current user base – coupons went to existing users, to try and reactivate, move into other categories, increase frequency.  Tracking short and medium term impact.
  2. In Q4, it was a free-for-all.  We realised that offline retailers were going to be discounting and our small sellers couldn’t compete.  We spent $100m on these kinds of coupons and marketing to help our sellers compete in a brutal holiday season.

Q: Your coupon spend varies a lot intra quarter – what’s up with that?!

A: Q4 was unique.  Typically in Q3, it will be driven by buyer-lifecycle.  We have data to now do couponing when it makes sense.
Q: The macro shift from TV to couponing – is that temporary while you fix the site or permanent?
A: Not saying we won’t use TV ever again, but our highest short-term growth opportunity is to grow wallet with existing buyers.  Those things will also help attract new buyers so we’re really focus on it – trust, ease of use, etc.
(SWAN) – I’ll add that more of our marketing is going to expanding buying vs. attracting new users. (JD) so we’re reallocating marketing dollars to
Q: You send out surveys to your sellers, we read them – one thing that you sent out was around eBay offering fulfilment.  Are you going there?
A: (Joking) – since the day I joined eBay, my biggest desire is to have more bricks and mortars.  In this environment, that is a HUGE disadvantage.  What we WILL do is provide tools and incentives for our sellers to provide great shipping.
(SWAN) – To the extent we can, how can we leverage the collective horsepower of $60B goods going through systems.
Q: If you look at the buyer mix, I assume there are more casual vs. regular.  Is there a risk to eBay that power-buyers move to a service like Prime?
A: Powerbuyers look at the total cost. They aren’t fooled by free shipping, they look at total cost.  At eBay we went from 2% free shipping to 34% by encouraging our sellers to offer free shipping.  The casual buyer is more likely to be fooled by free shipping.
Q: PayPal – Rapid growth, some slow-down on ebay marketplace TPV, how do you think about how deep you can go ‘on-eBay’ and ‘off-eBay’, funding mix, etc.
A: Last year PayPal grew 9% penetration on eBay.  We think there’s another 15-20% penetration potential.  Off-eBay it’s really experiencing explosive growth around the world.  Becoming THE way to enable all ecommerce payments.
(SWAN) Funding mix – profitability is driven by:
  1. take rate
  2. cost of transaction
  3. manage fraud loss.
Despite all the growth, margins haven’t changed much.  Lots of options for consumers to fund transaction at low cost. BML is great for that.  Fraud loss – how do we get smarter, use data, etc.  We’ve made huge progress here and reinvesting it into programs to encourage buyers to shop online.
Q: BML is great for the consumer, but eBay has to provide it off the balance sheet, to what extent do you worry about that fact slowing the growth?
A: (SWAN) It helps to have a great balance sheet with strong cash flow.  So BML gives us a unique ability to leverage that.   JD jokes – if that fails, we could always go get TARP money.  I’m kind of joking, but we have an interesting way to offer credit in real-time.  We are not near needing TARP, but we have a lot of potential in this business.  We both feel better about this business than the day we bought it.
Q: Do you worry that BML hasn’t been through a downturn that it will assess what the bad-debt levels will be?
A: (SWAN) The team’s ability and algorithms have demonstrated the ability to manage credit more effective than anyone else.  Credit is granted on transaction by transaction basis.
Q: If I were an investor new to eBay – I might come away with the impression that you have protected margin in the core business vs. growth.
A: Our focus is in driving value – improving competitive position and growing.  That’s not at odds with reducing costs.  Examples: BML will impact PayPal’s margin, will bring it down, but it’s the right investment to make.  Skype we made a tradeoff in ubiquity and margin.  In core eBay we’ve funded the investments through efficiencies.  Going forward we’ll do what it takes to improve competitive position.
Q: Out of the three businesses – it feels like you have prioritized growth in paypal/skype vs. cash in marketplaces.
A: No, I was clear when I took over that marketplaces needed to make some fundamental changes to improve it’s position.  That’s what we did last year.  Some would say, you should have gone further.  Our community said, ‘you’re going to fast’. We’ll continue to be aggressive.
(SWAN) this is a business that’s doubled size, cashflow in last three years and yet is more diverse.  We’ve done this with advertising that is very high margin and helps buyers find things when we don’t have the selection they are looking for.
Q: It would be nice to bring that European cash back and do a share buyback.
A: (SWAN) we have a little over $3b in cash, but it all sits off-shore.  We spent $1.6b to strengthen our businesses.  We bought back $2.2b of stock last year.  You can expect that kind of activity from us going forward too.
(JD) no repatriation coming.
Q: (audience) You did buybacks when stock was at $50 – it wasn’t very effective with stock under $12.  Skype – when do you really fish or cut bait on this?
A: (JD) Skype biz is getting stronger. We’ll maximise its success and value.  No hurry to do anything other than grow.
(SWAN – joking) Thanks for reminding us that we overpaid in the buyback (laughter).
Q: (audience) The next speaker is Microsoft – how do you think eBay survives being usurped from a Google, Microsoft, Y! brand – how can eBay survive with these bigger companies?
A: When we look at the market we see several thing son the ‘net:
1. Finding things on the net – microsoft, google investing here.
2. Buying things – search is a bad way to buy things, doesn’t give you a great experience.  We see online/ecommerce moving to the offline model.  If you think about wal-mart, they are largest in world and only have 4% share.  So we don’t see ecommerce being winner take all.  We will be a winner.
3. Pay – payments will go the way of offline – with only a few networks.  PayPal
4. Entertain – we don’t play here.
5. Communicate – Skype is a player, not sure how this plays out, but we have a bet here.
Q: Feels like search+buying are blurring
A: Our job is to make it more fun to shop and have a great buyer experience.  With our unique formats, we have shopping experiences that aren’t replicated in search. Buyers don’t want to click on a bunch of URLs to search.
Q: When do you think your search engine will be at the level that sellers could list near infinite inventory?
A: We laid important foundation in 08 with Finding 2.0+BestMatch.  Even more importantly we reduced insertion fees on fp30 in-essence down to zero, or minimal.  So now sellers can very cost effectively load ALL of their inventory.  In fact our selection is way up.   We just enabled search to be sorted by popularity.  We’ll get better and better at using data to factor in which items to put at the top of results.
Q: Is being close to zero optimal vs. zero?
A: A little bit of skin in the game from a seller is very important to drive quality listings.
Q: Are we at the end point of that, or is the end-point zero, vary by category+country or ?
A: It won’t go up, but there’s nothing planned this year on this front.
Q: Analyst day is March 11th, should I still come?
A: Yes!
Q: China strategy, will Alibaba compete with you elsewhere – say Japan?
A: Our China strategy is to JV with Tom Online. CBT (cross border trade) from China is exploding, slowing down a little bit now, but Paypal is on-fire.  Jack Ma has done a great job in China, can’t speculate on their plans outside of China.  We have the best CBT model around thanks to Paypal and eBay.  15% of eBay is CBT (new metric for me)
Q: (audience) What about local?
A: Online classifieds are growing aggressively.  We own 28% of craigslist in the US. Outside the US we are the leading classifieds player in several countries. Saw 50% growth in the business.  We’ll focus a lot more attention on the area of local – natural extension of online.
Q: Do you see the GMV split between auction/fp moving to overwhelmingly fp?
A: As you said, consumers are driving how they want to buy.  The fact we are 50/50 is what consumer drove.  We held it back up until last year.  In order to have best marketplace, we need multi-formats.  What we’re seeing more and more is Local.  Our approach is to try and expand the number of formats to give buyers and sellers greatest choice.  The choice will be driven by buyers and sellers.   This is a big change from what was an auction business to a multi-format marketplace.
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