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The Securities and
Exchange
Commission prohibits
companies going
public from
disclosing material
information not on a
prospectus from the
time an underwriter is
hired until 25 days
after the stock starts
trading.
Although its definition
and intent continue to
be hotly debated, this
so-called "quiet
period" in effect
keeps company
executives from
speaking to the press
at all.
After 25 days, though,
they're fair game.
Here's an edited
transcript of our Q&A
with one company that
recently went public.
Company
eBay
We Talked To
Meg Whitman , CEO
IPO Date
September 24
Offering Price
$18
Stock High
64 5/16
Stock Low
25 1/4
Last Update: 4:46 PM ET Oct 26, 1998
Profile: San Jose, Calif.-based eBay (EBAY) operates a person-to-person
auction service on the Internet that allows users to buy and sell goods with
each other
Notable: eBay sold 3.5 million shares in an IPO headed by Goldman Sachs.
The stock took off, closing its first day of trading at 47 3/8.
The company has received strong recommendations from all of the analysts
working at the investment banks handling the offering. Goldman Sachs
analysts Rakesh Sood and Michael Parekh, for instance, put eBay on the
brokerage's recommended list, saying that "eBay's unique and scaleable
business model best exploits the characteristics of the Internet medium, while
its financial model provides a predictable revenue stream and high margins."
The company even received an unusual thumbs-up from Mary Meeker, the
high-profile Internet analyst at Morgan Stanley Dean Witter, which was not
in on the IPO. On the day eBay came public, Meeker issued a bullish research
report on the stock.
And DLJ Internet analyst Jamie Kiggen this week started coverage of eBay at
a "buy," setting an $100 12-month target price for the stock.
* * *
What were the feelings going through your head on the day of the
IPO?
Whitman: We were obviously very excited because we thought that the road
show had gone well. That morning, we got up and went down to, first,
Nasdaq and that was fun to see the entire Nasdaq operations, which I had
never seen before. And then we went over to Goldman to watch the stock
open, and it was exciting. It was just incredible to see the activity on the
trading floor and it was exciting when eBay came across that ticker.
One of the interesting things that happened just prior to your IPO
was that Onsale and Yahoo announced a new competing person-to-person
auction service which is free for their users. I'm just curious -- what did you
think of the timing of their announcement and why do you think you'll be
able to maintain the fees you do charge?
Whitman: First on the timing of the announcement, I think they thought it
would be an effective time to launch their service given the press that the
eBay IPO was likely to receive. And you know what, the Internet space is
very competitive, and they're competing the best they know how. So I don't
think we were entirely surprised. The good news is, we had an incredibly
successful IPO.
In terms of price, I think there's a couple of important things to remember.
That sellers are attracted to places where two things occur. And first is they
want to have a very good chance of selling their item. And on eBay, 60
percent of all auctions result in a sale, and in fact, 75 percent of all items that
are listed for the first time actually sell ... Even if a site is free, if the item
doesn't sell, the seller has wasted a lot of time and effort to put that item up
for sale. So the thing to look at is, on all the different sites -- ours and the
competitors -- is what is what we call the conversion rate, that percentage of
items that actually sell. And right now, eBay by far and away has the highest
conversion rate.
Part of that is due to an issue of numbers. Your site has attracted by
far the largest audience in this space. But Yahoo and Excite have resources
and a pretty impressive reach. Don't you fear if they really wanted to get in
this space and compete that they could?
Whitman: Well, I think they're both competing pretty vigorously right now.
Excite and Onsale Exchange -- when Onsale Exchange started a year ago,
they started with a free site, and Excite is still free and neither of those two
were able to really make headway. I think one of the reasons that Onsale
Exchange decided to partner with Yahoo! is that they had been facing some
difficulties on their own.
Our point of view is that free is not necessarily the entire answer. Because in
addition to conversion rate, sellers want to get highest price for their items.
Because we have the largest number of buyers, sellers tell us they get really
good prices on eBay today.
I think the other thing to think about in free, is it doesn't encourage buyers
and sellers to take the transaction seriously. In a free environment, you see a
higher level of transactions that are not consummated because sometimes free
is too easy.
Then lastly, free encourages sellers to list anything. There's no barrier at all.
The average quality of items on the site also tend to be lower when it's
entirely free.
Now you guys also were free for a while ... and then started
charging. Do you sense that because of these issues that the other sites will
eventually see a need or desire to charge?
Whitman: Do I think they will ultimately start charging? I don't know.
Maybe.
I was just wondering whether that would be the progression because
in most cases, prices tend to come down as competition increases and gets
more vigorous. I was just wondering if this model is something you consider
different than other retail models.
Whitman: In this model, there are things that matter more than free. The
actual fees that eBay charges they're very small, both from a listing fee as
well as a final value fee, certainly versus regular auction houses. The main
two things that sellers are interested in -- did their item sell and did they get
the highest price they possible could have for the item. I think those are the
things that they care about and if they get those two things and have to pay a
small price to do it, they're happy to, relative to not getting those two things
and have it be free.
Your model is very attractive as far as margins are concerned, and
you've been profitable for a long time, but now you are projected by the
analysts to fall into the red for a couple of quarters as you try to gain market
share and spend some money in the advertising space. What kind of initiatives
do you have planned to get your name out there?
Whitman: They fall into three categories. The first initiatives is to continue
to do Internet marketing partnerships with folks like AOL, HotBot, Xoom, a
whole host of Internet sites.
We are also going to continue our traditional marketing efforts in print. You
may know in August we launched a print ad campaign targeted to the special
interest and collector segment. So we launched 14 different ads in about 90
different publications, and that will continue through the remainder of this
year and into next.
Two days ago, we launched a mass-market radio campaign... that will run
through the end of the year. And then also starting November 1, we will
launch a mass market print campaign in publications like People, Time,
Sports Illustrated, Newsweek and Entertainment Weekly.
When investors see that 'Oh my God, they're not profitable any
longer," even if analysts put out those expectations, is that going to be a
concern or do you hope to not post any losses?
Whitman: I think in this space, the investors are interested in top-line
growth and the long-term prospects of the business. So, I think they're more
interested in, 'Are you gaining market share? Are you doing the right
long-term things for the business?' as opposed to the quarterly earnings
target, but as far as forecasting what we're going to do, I can't really do that
right this moment.
You're releasing third-quarter earnings next week?
Whitman: On Tuesday.
Auction Universe, another competitor and Times Mirror
subsidiary, has partnered with newspapers to offer the auction service as an
adjunct to classifieds. One of the benefits that that model seems to bring is
that some items can only really sell if the both the buyers and sellers are in
close to geographical proximity, such as cars. When you get to that point,
how do you handle that problem?
Whitman: You're right that today, most transactions are small, shippable
items. I saw in one of your earlier articles that the average selling price is
$40 and that's correct.
However there are today a percentage of items, like antique cars -- in fact,
there's three or four on the site today -- or artwork, which might require
personal inspection. And today we leave that up to the users to work that out
if they need to see the item. Ultimately, we will offer the capability to search
regionally so that if you are looking for something in your area, perhaps a
big-ticket item, you could search regionally and then figure out with the
other party how to look at that item.
Do you think that your user base will be large enough to make that
a feasible service or are you going to have to pursue a more focused or local
strategy?
Whitman: I don't know the answer to that. I think it will be probably a
combination of those two things. That our user base is obviously growing
exponentially and that we will look at some kind of regional expansion
possibilities as well.
Are you confident in the accuracy of your rating system? When I
was checking out the service, it seemed like there were just a lot of very
positive comments, to the point where something seemed amiss. How do you
ensure that that system is relevant?
Whitman: Our feedback forum is eBay-user generated. eBay does not write
to the feedback, obviously. And I think one of the surprises early on was how
positive the feedback was, because you and I only complain, right ...
But you have to remember that 99.9 percent of the transactions on eBay are
completely without a problem, and eBay users like to leave positive feedback
for each other, and I think that's why you see the vast majority of feedback as
being positive.
The other thing to note is that eBay users with a high negative rating -- a net
negative four -- are actually suspended, so you won't see those people because
they're not actually allowed to use the eBay system anymore. And also people
with substantial negative comments generally leave eBay because their ability
to buy and sell is pretty limited. So in many ways it's a self-selection process
...
You mention that 99.9 percent of the transactions are completed
without a problem. Yet I think there is a concern on people's part of what do
they do if they send a check and nothing gets sent to them or the product is
not what was described. There are issues of reliability that you don't get
buying something from an established company like Amazon.com. What are
you doing to ease people's concerns and how much of an issue do you think it
is?
Whitman: First is, if there is a problem we encourage the buyer and the
seller to work it out among themselves. And that works a tremendous amount
of the time. In other words, if I get something that I don't think was as
described, we often see that the buyer will send it back to the seller, the seller
will give them their money back, and we will of course refund the fees to the
seller ...
Secondarily, we encourage you to report any problems to the National Fraud
Detection Center and then report it to us, and we will in fact suspend the
person if as a user you go and do that. You should know that it's a incredibly
small percentage of items that that actually happens -- only 27 out of every
million transactions ends up with that kind of problem ...
And then we also encourage people to, particularly if they're trading in a
high-ticket item, to keep their wits about them and to make sure they read the
description carefully, call the seller or email the seller ahead of time and
make sure they have an arrangement that they feel comfortable with.
In the prospectus, it mentioned a couple of issues with state
attorneys general looking into the process of either should this be regulated as
a typical auction and also the possibility of complaints that you don't make it
clear that you're not guaranteeing the transactions. Where do those issues
stand?
Whitman: The New York attorney general issue, which was the issue of
whether it was clear that this was a person-to-person auction site, we have not
heard from them. We responded to their complaints, and we do not anticipate
that that's going to be an issue going forward. I think they completely
understood and the issue certainly seems to be on hold from our point of
view.
In terms of whether or not we have to register as an auction house, this has
been fairly well-researched, and I think we are in very good footing that we
are not an auction site, that we simply facilitate transactions between buyers
and sellers, and therefore do not need to be registered as an auction site
because we never take titles to the goods.
Another thing I noticed on the balance sheet, the account receivables
seemed kind of high. What's the reason for that and is that something you
expect to decrease?
Whitman: Well our days sales outstanding is basically 30 to 45 days. We
expect that that will stay roughly that same way. Most of our sellers have
credit cards filed on eBay and we charge their credit card at the end of every
month. So I think that is about what we would expect ...
Will you ever make it mandatory that they need a credit card on
file?
Whitman: I doubt we will ever make it mandatory. We want to make selling
on eBay available to everyone. And there is a percentage of people who don't
have a credit card or don't feel that they want to put it on file with an
Internet company. |
