Thursday, November 13, 2008

Tuesday, October 14, 2008

Two-Pizza Teams

Ron Kohavi (from Microsoft) made a recent visit to eBay. From his description, Amazon has an efficient organization in some aspects and does well evaluating certain metrics and making certain kinds of advancements. Part of this success is driven by their "two-pizza" team culture of 8-person teams with group goals.

However, I think the grass isn't always greener. Amazon is limited in its exploration of spaces which require a breadth of functions and cooperation across teams larger than 8 people. Amazon has limited cross-border trade, and I would expect their attempts to compete with PayPal to be less effective. Teams pushing broad kinds of products have trouble if limited to 8 people, given the diversity of merchants. Amazon's stumbles in auctions and initial attempts at zShops I think reflected a lack of breadth.

Not every project fits in an 8-man box, or is easily sliced into that level of atomic components. Part of eBay's challenges are fitting *some* projects to smaller (narrower) teams. Part of Amazon's challenges are building larger teams for some projects. The Manhattan project in WWII, or the Apollo program, would have taken much longer if only 8 people could communicate amongst themselves. The iPhone, new versions of Microsoft products, and broad visionary products often are better served by less insular teams. Bezos' statement: "You can't do big, clean-sheet invention unless you are willing to invest for long periods of time" shows a subtle limitation in his thinking and in his company. I believe it is possible to do big, clean-sheet invention through shorter term and broader investment. Technology is an amplifier and compresses time, large important clean sheet inventions involve effort, and a *LOT* of imagination.

Saturday, October 11, 2008

My Colleague Raghav Gupta Leaves eBay

Raghav was and is a dear professional and personal friend. I enjoyed every conversation and moment I spent with him and the years having him in the cube next to mine only deepened my respect for him. I miss seeing him every day and wish him the best in his continued endeavors.

Monday, October 6, 2008

Peter Norvig, Product Managers and Engineers

Peter Norvig spoke at a panel at eBay ResearchFest 2008 titled "Corporate Research Labs - Challenges and Technologies" on September 29, 2008 - "One very specific part of the problem is how do you get the engineers to talk to the product managers? At Google we solve that by mostly hiring product managers that have computer science degrees."

Engineer or MBA?

Interesting article from Forbes today:

Says Wingo, "eBay needs to drop its obsession with return on investment metrics and think more iteratively and innovatively." He adds: "Engineers should be calling the strategy shots at eBay, not M.B.A.s."

I was unable to independently confirm this attribution from another source, so I hope to confirm this statement at some point.

Friday, September 19, 2008

Four Changes which Reset Recency Metric for Sort Order

As was mentioned at eBay Live in one of the seller panels: if a seller changes any of these it creates a resetting of the recency metric for preference in sort order:

Title
Category
Price Increase
Item Condition

I have not had a chance to test this in any way, but it seemed quite interesting to me at the time.

Friday, September 5, 2008

Incremental Changes vs. Large Changes to UI

What is the correct level of granularity for changes to a user interface or policy? A price increase to subscription fees may best be done slowly, and a price decrease done quickly to make it more dramatic. But a UI change can have significant and startling effects. Users habituate their UI behavior. A link with a name change, such as having a link to a subsite with automotive content in 12 point font change to a link for an express general sales format, may divert folks unexpectedly who have habituated clicking on the automotive link.

I saw a site which made a change so that it moved it's "donate money" box and button to the part of the page where the mouse would be on the previous page clicked through. Remarkably effective, I did donate! The box was moved directly, not incrementally.

Users sometimes complain about incremental changes when they can't aggregate because of it. An example is policy changes every few months requiring changes to submitted content. If a change requires a change to user behavior to accommodate it, such as needing to remove email addresses from pages, and then a later policy change to require elimination of JS, then larger, infrequent changes may be more appropriate.

Mean or Median?

Sometimes data is so noisy that the mean may vary significantly because of outliers. Although the use of median loses some of the data from mean, if the ratio of mean to median remains relatively stable over time (or within a scaled index) is median a valid metric? Generally a company wants to improve total (and mean) metrics for something like revenue. The danger of moving median solely is that the outliers (which may provide significant upside), are lost or deemphasized.

Merging and Splitting Social Networks

Digital social networks and communities have the same property as the stock market - in the words of Alan Greenspan "They will fluctuate." One challenge of managing these networks is managing the connectivity as they grow or shrink. If the network is too large and/or too broad, the relevance of the network to the participants may be hindered. Creating "shards" - smaller communities where people can recognize each other reliably, is one technique. Local trading communities like the city sites of Craigslist are essentially "shards," verticalizing one aspect of the users. In this case "cities" are a type of category and each site is essentially a "local" category. World of Warcraft is a different type of "shard." Although the players are relatively homogenous, the population is arbitrarily by default separated and placed in distinct servers, with no ability to trade virtual goods between servers. Other marketplaces like Amazon do no sharding whatsoever, preferring to keep the inventory universally displayed and available for all users.

There is a technology benefit to sharding - managing scalability is much easier. With a population of 10,000,000 active users and about 100 servers, WoW has 100,000 users or so in each of its shards. Perhaps a few hundred or thousand are active at any time, keeping the connectivity scalable for a single server (or a few/backup servers). Since the servers are independent any failure or crash is localized. Additionally, Blizzard/Activision can deploy new code on a few servers instead of universally, and examine both the technical and community impact on a microcosm scale.

Amazon's changes, on the other hand, may affect the entire site and community inadvertently. Even a test where 1% of users are exposed to a function can have a huge effect. If that 1% happens to include a large seller who is now in a test group with a functionality that allows spamming of listings, or undercutting of prices instantly, that one account can quickly dominate the entire community. Shards allow containment, universal marketplaces do not.

Another technology challenge is scale. In essence a completely connected community requires the bandwidth of a full crossbar. Even the attempts at heuristics like a benes network have worst case complexity of n^2 where n = the number of users. For s = number of shards, compare that to the (s * (n/s)^2) scalability of sharded communities. Assume Amazon and WoW have 10M monthly active users. If we just consider that 1% of these users may be active at a given time, Amazon requires a non-blocking full crossbar of scale 100,000^2 = 10,000,000,000, whereas Blizzard needs 100 full crossbars of size 1,000^2. That's just 100 x 1,000,000 = 100,000,000 total. Blizzard (and by extension Craigslist) needs crossbar connectivity that is 100 times less. This may partially explain why Craigslist has dozens of employees and Amazon has thousands.

The drawbacks of shards may be an issue however. In the case of WoW, it may be difficult to find another player who wants to group for a certain objective, while across other servers there are many other players wanting to play with you. Blizzard has designed special servers, essentially hybrids, where players can group (but NOT trade virtual goods). In this hybrid model players are still able to communicate with their "home" server while playing, but are accessing a special "group" server for the most bandwidth for a few minutes to an hour. The hybrid temporary community on it's own server ensures the wait to find other players for the group is not excessive.

The sharded marketplace, Craigslist, does not have a way to search across communities by default. If a good is fairly rare, it may not exist on one particular city site, and the user needs to search on all the different sites. There is no functionality to do a cross-city search.

Friday, August 22, 2008

Latest Analyst Notes About eBay Q2 Earnings Report

Banc of America - BUY
Brian J Pitz
We believe investors were surprised by the magnitude of the listing fee reduction, which is not entirely offset by increased final value fees. Our view remains that eBay’s strategy, including coupons, fee changes and incentives to provide free shipping, can increase the company’s eCommerce market share. Further, we believe the company remains relatively well positioned in a consumer downturn, as it is the primary channel for cost-conscious consumers to purchase and sell used goods.
In-line with eBay’s goal of improving the buyer experience, sellers who do not meet a minimum threshold of customer satisfaction (as reflected by buyer ratings called DSR) will no longer appear on the site. We believe these sellers (DSR<4.3) contribute a small percentage of total GMV, but have a disproportionate ability to impact the buyer experience.
eBay announced it will double the powerseller DSR discounts for qualifying sellers who offer free shipping. Recall these discounts range from 5-20% for Powersellers based on DSR, and the change implies fee discounts of up to 40%. We view offering free shipping as a meaningful way for eBay to increase its market share of eCommerce.
Price Target: $38

Bernstein Research - BUY
Jeffrey Lindsay
We see the current price restructuring moves by eBay management as a net positive change. We believe that they amount to approximately a 15% price reduction overall in the listing fees for fixed price goods but believe that they will stimulate a corresponding increase in total number of listings. Although we expect a fall in conversion rates for these new listings as happened after the 1Q:08 price restructuring, we expect the overall result to be neutral to eBay's projected revenues and understand that management has already factored this change into their 3Q:08 and full-year guidance. Strategically we see this as a necessary change that will enable eBay to maintain growth and cash generation, especially in the domestic market where there are few alternatives for reinvigorating growth in the core business. We believe the expected increase in listings will increase the likelihood of some upside revenue growth over our previous estimates but will decrease the probability of a positive surprise in earnings.
Although listing fees for fixed price goods have been reduced by over 70%, we estimate that with the increase in final value fees the overall discount for fixed price goods is just under 15%.
As a result, we expect that total listings (both fixed price and normal auctions) will increase to 38% year on year in 4Q:08.
We do not expect the new listings growth to translate directly into sales growth, however, and expect sales conversion rates to drop by a further -15% year on year, resulting in a net 17% year on year increase in items sold.
Overall, we expect the fee changes to result in a 25 to 50 bps reduction in eBay's overall take rate which is currently 7.86%.
We believe that this fee restructuring is motivated by management's need to overcome consumer resistance to the auction format. In a survey we conducted in 1Q:08, we found the largest resistance factors to using eBay among non-users were: "too complicated" (19%), "don't like auction format" (27%), and fear of fraud (23%). As eBay becomes more of a fixed-price player, it should be able to convert some of those potential customers into actual customers
We believe that management is in the middle of a number of initiatives intended to reinvigorate the core business by: (a) offering customers a fixed price alternative to auctions; (b) reducing fraud; and (c) improving customer service and satisfaction.
The key issue for us is whether or not it is too little too late, especially given the large lead in growth that Amazon has been allowed to establish. On balance we think these changes, especially initiative (a) which is the focus of this current fee restructuring, have come in the nick of time and are likely to stimulate much-needed new growth in eBay's core business.
We do not see this shift as a desperate reaction to falling sales or falling traffic. We would argue that eBay's 2Q:08 performance showed several elements of improvement over the same period in 2007, and the current push into fixed price is management's best option to restore core growth to former levels.
eBay continues to push through a number of changes that are unpopular with some in the seller community, such as restructuring seller feedback and introducing detailer seller reviews, but which are necessary to restore profitable future growth.
We do not expect the current push in fixed price goods to impact margins negatively per se but we do expect some incremental pressure on margins going forward
EBay has to contend with a number of factors that could impact margins negatively, these are:
(a) eBay's overall average take rate has been slightly diluted by the current fee change – it is currently 7.86% – we think this will be partially offset by increased volumes but not completely;
(b) the strengthening dollar which could reduce the company’s overseas currency benefits starting in late 2008 and persisting into 2009;
(c) PayPal's rapid growth but lower margins blending down average margins for the company; and (d) the need for eBay to spend more on customer service and platform improvements to keep pace with Amazon.
Offsetting this, however, will be two factors:
(a) a significant saving in sales & marketing expense associated with promoting eBay Express and
(b) additional revenues coming from the increased use of PayPal by eBay customers taking advantage of its transaction guarantees and customer service.
Price Target: $38

Citigroup - HOLD
Mark Mahaney
Fee Changes Align Format with Consumer Buying Trends — We believe the fixed-price format is more consistent with current buyer trends with consumers migrating away from auctions to more immediate buy-it-now format. We estimate U.S. GMV in auction format was down Y/Y in Q2 and has been stagnant for over a year, while fixed-price has been growing roughly in-line with eCommerce. The changes announced today play into this trend and could reenergize buyer enthusiasm for eBay as an eCommerce destination.
Fee Cuts Only One Part of GMV Growth Turnaround Equation — Earlier fee cuts this year have yet to produce the desired effect of GMV growth acceleration, and site improvements made last year have not translated into an increase in traffic or conversion rates. We remain concerned that this raises the open question of whether eBay has perhaps "waited too long" or is structurally challenged given rising eRetail expectations/requirements. While the emphasis on fixed-price may improve growth picture for one side of the marketplace, we continue to believe the auction side of the business will be an anchor on overall GMV growth.
Tough to Know if This Time eBay Will Succeed — Finally, we believe it will be very hard to know whether this will succeed. Key questions for us are: 1) Can changes drive sustainable reacceleration in GMV growth rates?; 2) Can near-term P&L impact of lower listing revenue be more than offset by higher sales volumes, despite lower conversion rates and lower ASPs? For now we remain unconvinced, so we reiterate our Hold.
Price Target: $33

Cowen and Company - HOLD
Kevin Kopelman
We expect the fee changes, which make eBay more competitive with Amazon’s fee structure, to result in an acceleration in listings on eBay. However, we do not believe the new fee structure dramatically improves the company’s competitive position. We think Amazon offers a more compelling selling platform and buying experience (for example, buyers can choose free shipping options from sellers that use “Fulfillment by Amazon”). In addition, Google allows sellers to upload listings for free, which is likely to weigh on growth. Last, we note that eBay’s strategy of lowering fees to compete with Gmarket in Korea has not been successful.

Goldman Sachs - HOLD
James Mitchell
We view these changes as a step in the right direction inasmuch as eBay requires faster GMV growth (4% yoy constant currency last quarter) to sustain its franchise and competitive position, and lower listing fees may encourage more GMV. However, lower listing fees in April failed to notably stimulate GMV growth in 2Q2008.
eBay states that the basket of changes “does not impact the guidance we have already provided to Wall Street”, while providing three case studies of sellers who will pay it 11%-35% less. We believe that eBay is not changing its guidance because it already incorporated these changes in its forecasts, and because we estimate that eBay’s BIN revenue from the US, UK, and Germany is less than 20% of its total revenue. We estimate that the changes may reduce total revenue by ~2%, prior to any GMV benefits.
We assume that the changes will not hurt Amazon’s competitive position given Amazon’s appeal to buyers as well as sellers, and given Amazon charges zero insertion fees; Amazon’s final value fees are generally comparable to eBay’s after adjusting for credit card / PayPal expenses.
Price Target: $30

Lehman Brothers - HOLD
Douglas Anmuth
We view eBay’s fees changes as modestly positive in aligning marketplace w/varying economics of sellers & providing a more compelling proposition to list in fixed-price, which buyers seem to have embraced. However, we are not certain they will make a material N-T difference on the platform or that they do enough to increase buyer demand.
We believe largest beneficiaries will be sellers w/low conversion rates who frequently re-list products. These changes should be far less beneficial—& perhaps even detrimental—to sellers with high conversion rates, those whose inventory features unique items, & media sellers.
We view changes as attempt to shift certain auction-based & SIF listings into fixed price.
Our seller feedback was mixed & category-specific, but sellers seem to be growing tired of readjusting strategy every several months, & outlook for media biz was not good.
Price Target: $31

Merrill Lynch - HOLD
Justin Post
Moving toward traditional retail: As anticipated, eBay announced a new fixed priced listing format with significantly lower upfront fees that is better suited for retailers looking to use eBay as a channel for new goods, plus other changes to payments and shipping requirements. In the US the new format will be in addition to the auction and stores format and will replace auction/buy-in-now hybrid. We think these change reflect a more discerning eCommerce consumer, weak auction format GMV growth (just 2% in 2Q) and opportunity to increase PayPal adoption.
The take rate impact will depend upon product category, ASP, and conversion rate, and we believe overall take-rates will be lower. This will be offset by greater PayPal penetration. We estimate a negative $125-150mn impact on ’09 revenues assuming about 30% of items move to new format and 10% lower avg. take rates, which should be offset by a $100-150mn PayPal penetration boost.
While an increase in listings in September following fee decrease could be a catalyst, the new listing format alone is unlikely to significantly alter the buying experience, in our view, as inventory availability is not the core issue for eBay. Search improvements remain a wild card, and more uniform shipping fees and fraud prevention should help, but we believe the buying experience will still fall short of other fixed price retailers. At 13x 2009E EPS, we think stock will remain range bound into 2009 guidance (expected in January), which could be below street if changes don’t stabilize GMV growth, in our view.
Price Target: $30

Oppenheimer - BUY
Shawn C. Milne
Pricing changes for key Holiday season as expected. eBay announced its 2nd phase of pricing changes to improve seller economics and the buyer experience: Moving to CPA model by further lowering insertion fees/raising FVF; Extending duration to 30 days enhances fixed priced trading; Category based pricing to better compete with AMZN.
Category based pricing--exactly what sellers need. Establishing category specific pricing in CE, Computers, Cameras and further changes to Media. Take rate going down in hardgoods like CE while rising modestly in Media. Importantly, the changes significantly shift economics to from front-end to back-end.
Price Target: $35

Standard & Poor’s - BUY
We project that net revenues will increase 19%in 2008 and 17% in 2009. For 2008, we foresee 14% growth in marketplaces (including eBay.com), 30% in payments (PayPal), and 45%in communications (Skype). We believe EBAY will generate marketplaces growth in 2009 largely consistent with that of 2008, following material investment and changes
We expect EBAY's non-GAAP operating margin to fall in 2008, reflecting an uncertain economic backdrop, expected notable retooling of and investment in the core marketplaces businesses around the world, and a less favorable revenue mix. We anticipate that this margin will stabilize in 2009.
Risks to our recommendation and target price include a sharp weakening of consumer sentiment/spending, significant and increasing international competition, and potential issues related to a recent adverse French court decision related to the sale of counterfeit items on EBAY's platforms.
Price Target: $35

Thomas Weisel Partners -HOLD
Christa Sober Quarles
Our conclusion is that eBay is doing what it can on the seller front to encourage a more competitive marketplace, but shifting buyer behavior should likely take more time.
Impact to our numbers: Given eBay already included the fee changes in its guidance for 2008; we are not changing our estimates at this time. However, we would argue that the risk to our estimates greatly increases as eBay takes more of the burden if sellers don’t convert in its new model. Even though eBay has tried to account for the impact on its take rates and changes to GMV, the company doesn’t have data on what would happen to its model at scale. In addition, we layer on the added challenges of macroeconomic weakness and a strengthening dollar (which will hurt international growth rates). We don’t believe there’s a lot of margin for error in our forecast.
Price Target: $28

UBS - HOLD
Benjamin A. Schachter
While these changes will increase listings, impact to the demand side of the equation remains to be seen. Single listings for multiple quantities of a good should reduce clutter, but we remain cautious about eBay’s ability to beat its many competitors in the fixed-price space and reignite core GMV growth. We slightly lower our ‘08 and ‘09 estimates to reflect the change and higher uncertainty.
The news signals eBay’s renewed focus on competing w/AMZN/other e-tailers in fixed price, but we still have concerns about eBay’s structural issues in that space. eBay aims to position itself as both an auction site for interesting/used/rare value items, as well as the site for convenient fixed price listings. Clearly, eBay believes it can be both and perhaps they'll prove us wrong, however, until we see a sustained stabilization/reacceleration in core biz growth, we are on the sidelines.
Price Target: $28 (lowered from $30)

William Blair & Company - HOLD
Jack Murphy
EBay announced that it will rebalance the fee structure for the Buy-It-Now format, lowering insertion fees as expected. While this fee change should drive listings growth, we believe improving search remains the key to improving the buyer experience and reaccelerating marketplace revenue growth. In addition to the long-term challenges of maturity in the core business, we also remain concerned about weakening buyer demand. We maintain our Market Perform rating.

Wednesday, May 28, 2008