Should Facebook Buy eBay?

People talk a lot about the tech giants that got their start in garages.

Larry Page and Sergey Brin started the GOOG in friend Susan Wojcicki’s garage in 1998. Jeff Bezos started Amazon in his Bellevue garage in 1994. And perhaps the most famous garage startup story ever is that of Bill Hewlett and David Packard and the garage they rented in 1939 to start the electronics company that would later bear their names. That garage is now a private museum and is listed on the National Register of Historic Places.

It turns out a lot of other important tech giants got their start in a more respectable part of the house — the living room.

That’s where Reid Hoffman hatched the idea for LinkedIn in 2003 after inviting hundreds of his friends to create online profiles to get his idea for a professional online networking site off the ground.

It’s also where Airbnb, quite literally, got its start. After hearing that a big conference was coming to San Francisco and that hotel rooms were totally sold out, two 27-year-old guys, who were living there in 2007 and struggling to pay rent, bought three airbeds and turned their living room into a makeshift bed and breakfast. Six days and a website called later, three people had paid Joe Gebbia and Brian Chesky $80 a night to sleep on those air mattresses on their living room floor and eat the breakfast they cooked for them the next morning. Airbnb was launched a year later.

Over Labor Day weekend in 1995, Pierre Omidyar wrote the original code in his living room for the company that would later become known as eBay. “AuctionWeb” was the name of the site, and its first listed item wasn’t a Pez dispenser but a laser pointer that Omidyar had purchased for $30 and later broke. He advertised it as broken, set the starting bid at $1.00 and watched the bidding frenzy begin: The pointer sold for $14.83. Omidyar was said to have been so stunned that someone would actually pay money for a broken laser pointer that he became convinced that an online marketplace where people could buy and sell collectibles — even broken ones — held great promise.

Almost twenty-two years later, another startup founded in 2004 in a living room (of sorts) — a dorm on the campus of Harvard University — could end up being eBay’s most promising buyer ever: Facebook.

From the Living Room to the Basement

For much of its first decade, eBay was on a roll.

Two years after the successful sale of that broken laser pointer, Omidyar raised $6.7 million from Benchmark Capital and changed its name to eBay. A year later, in March of 1998, Meg Whitman was hired as president and CEO. In September of that year, eBay went public.

On its first day of trading, eBay closed at $53.50 — nearly three times its target share price. Four years later, in 2002, eBay announced that it would buy PayPal for $1.5 billion dollars in an effort to eliminate the friction associated with paying sellers for their stuff, which, unbelievably, was done by check most of the time.

Almost overnight, eBay became the “it” site for collectors and bargain hunters — the “Craigslist killer,” as it was called — expanding internationally to 27 countries. In August of 2001, The Industry Standard published a piece describing the firm as “unstoppable,” given its power as a platform that simply facilitated the sale of goods between buyers and sellers without taking possession of any inventory.  They wrote then that “what started as a quaint auctioneer of useless collectibles has grown into a commerce powerhouse … arguably the only large, unquestionably successful consumer internet survivor.”

In 2004, Fortune published an article lauding eBay as the fastest-growing company in history eight years in — faster than Dell or Microsoft had grown over a similar period of time. That piece chronicled eBay’s growth from its humble beginnings of $5.7 million in revenues to $3.2 billion in just an eight-year span of time.

But it would be over the next four years that eBay would find itself increasingly pulled into a riptide of changing market dynamics.

Consumers were getting tired of auctions, which made it harder to attract and keep sellers. Consumers also found eBay’s site difficult to navigate because of its clunky search function — not exactly a great characteristic when a key driver of success is finding the right item quickly. Consumers also began complaining about the quality of goods sold to them and the relatively poor customer service they received when they reported that the items they purchased weren’t the real deal.

Sellers had their own complaints about payment terms, which they said were too high. Sellers also grumbled and fretted about the sharp drop-offs in traffic to their pages and sales as a result of buyer auction fatigue and the growing crop of competition from other online players — including Amazon — that offered new products at a discount on a site that was easier to buy from and navigate.

So, eBay set in motion a number of things in an attempt to blunt the impact of these shifts and to bring new buyers and sellers into the mix.

The auction model was largely disbanded over time in exchange for a “Buy It Now” option and fixed price listings. E-Bay acquired online ticket exchange, StubHub, in 2007. And, in 2011, eBay acquired eCommerce tech platforms GSI Commerce and Magento to create more synergies with the online retailers that were its customers.

Speaking of online retailers, eBay went all out to court them. In 2012, eBay CEO John Donahoe, who had taken over from Meg Whitman in 2008, more or less told retailers that “Amazon is your enemy, eBay is your friend” to persuade them to upload their product catalogues to branded eBay storefronts. That year, it was reported by Reuters that 50,000-plus stores in the U.S. had done so, including Home Depot, Neiman Marcus, Lowe’s, JCPenney, Barnes & Noble, Best Buy, Target and GNC — all using eBay as a way to sell inventory that hadn’t moved in other channels and could be sold at a discount to eBay’s buyers.

At the same time, consumers found other places online to buy the things that eBay’s marketplace had once dominated.

Etsy, founded in 2005, had grown from a place online that only hosted artisans selling one-of-a-kind handmade goods to a destination for buying vintage collectibles. Online consignment shops like The RealReal, Poshmark (both founded in 2011) and Tradesy (founded in 2012) became the destination for women (mostly) who wanted to scratch their luxury, high-end designer consignment itch, given the quality of the merchandise they listed. Gilt Groupe and Rue La La, both founded in 2007, sold new designer merchandise at deeply discounted prices with inventory replenished daily. Zulily, founded in 2009, became a favorite platform for moms who wanted to buy stuff for their kids and loved the surprise of seeing new selections and flash sale options every day.

Meanwhile, stalwart eBay-ers really didn’t know what to make of eBay anymore.

Its once seemingly impervious reputation as the go-to for quality collectibles of all kinds — a reputation that eBay was simultaneously working hard to shake — seemed a bit tattered. Collectibles now included too much junky stuff that stretched the definition of “vintage” or “antique.”

Buyers that were attracted to eBay to buy new merchandise — clothes, electronics, toys — found themselves comparing those deals with a number of other online sites, including Amazon, that offered better prices, in some cases, and better and more predictable delivery windows, too.

Yet eBay’s marketplace problem had been largely masked by the performance of the entire portfolio of businesses that eBay had bought and had been built up over the years — PayPal and StubHub in particular. Post the PayPal split, it became the only thing on which that analysts and investors focused. (eBay also spun out eBay Enterprise in 2015.) Seven months after the eBay/PayPal split, eBay’s disappointing earnings performance drove a 13 percent sell-off in its stock, with analysts citing marginal growth in both revenues and active buyers.

Unfortunately, eBay has had a tough go of it ever since.

The company has seen five straight quarters of declining consumer spend — now at $41.30 per month and dropping. During its Q2 2017 earnings call, CEO Devin Wenig reported that revenues from its marketplace grew at a modest 4 percent and that two million active buyers were added last quarter, bringing its total to 171 million active buyers worldwide. Wenig also reported that StubHub, which had always been the counterweight to eBay marketplace’s slowing growth — accounting for approximately 9 percent of sales and 34 percent annual growth — saw its own performance soften: GMV (gross merchandise volume) was down 5 percent and revenue was up only 5 percent, due to increasing competition and a secular slowdown in the events business. While, on average, the eCommerce sector overall has seen a gain of 46.4 percent year to date, eBay’s seen gains of only 18.7 percent.

And eBay’s operating margins seem headed in the wrong direction, too: down from a high of 50 percent in 2012 to 38 percent in 2016 to 20.5 percent in eBay’s Q2 2017 earnings call. That was down from 23.8 percent from the same period a year ago.  Margins have taken a hit at the hands of investments in marketing, seller services and the core product to keep sellers on board, new buyers coming and existing ones spending. Many believe that initiatives like its newly launched Price Match Guarantee on 80,000 deals worldwide will only add more pressure to those softening margins.

The bright spot? Classifieds: a small but growing part of the eBay platform worldwide. Reported revenues of $216 million for the quarter were up 6 percent, Wenig said, on strong traffic and user engagement.

Exactly the type of business that Facebook has been trying (unsuccessfully) to ignite since 2004.

From the Basement to the Penthouse?

Facebook has had eCommerce ambitions from the get-go.

It created its first “marketplace” for classified listings in 2007. It was a long and largely unsuccessful slog for seven years, with a business that failed to get any significant traction at all. It was shuttered in 2014.

Facebook Stores was launched in 2009 as a way for online retailers to sell to the fans who “liked” them. Or so they thought. The agency-driven campaigns that retailers spent a fortune funding, on the premise that fans would easily convert to buyers, found they didn’t even convert to fans. Only 4 percent of consumers who liked a brand as a result of a campaign ever returned to that brand’s page again.

But so what, you say, since 99.5 percent of user engagement happens in the News Feed anyway — and a “like” is the ticket to getting content in the News Feed. Well, not exactly.

What Facebook Storefront shopkeepers didn’t know at the time (this was before Facebook went public and its algorithms were explained) was that Facebook’s algorithms kept that from happening. The only way to reliably get into the News Feed and get noticed by users was to buy advertising and hope that enough consumers saw an ad, clicked and then clicked again to buy.

Most users didn’t.

Stores have evolved over the years to include buy buttons and partnerships with players like Shopify in an effort to expand the ability for users to “buy” from those Storefronts. And eCommerce has evolved, as well, to include promotions to buy inside the News Feed from retailers who advertise there. But commerce revenues from those efforts on Facebook appear unimpressive, given that Stores/Storefronts and revenue from commerce sales overall have nary a mention on most earnings calls.

Facebook Gifts was launched in 2012, which sounded like a logical slam dunk for a social platform. The feature reminded users that it was a friend’s birthday or other special occasion and a selection of gift cards was presented for that friend to send. But in a case of execution gone badly, at launch the only thing that a user could do was send a physical gift card, sort of defeating the whole point of surprising someone on the day of their special event. A year later, Facebook bagged physical gift cards for virtual ones, but by then the bloom was off that commerce rose. Facebook shuttered Gifts in August of 2014.

In the fall of 2016, Facebook decided to take another swing at Marketplace, launching with a service that the tech press described as “the friendlier Craigslist.”  This P2P marketplace lets people buy and sell the stuff they don’t want anymore — clothes, furniture, collectibles, toy, tickets, even items from retailers — just like Craigslist.

And eBay.

A Match Made in Commerce Heaven?

Last week, Facebook and eBay announced a partnership to show eBay’s Daily Deals on a separate tab in Facebook’s Marketplace section to select mobile users. As part of this test, Facebook users can see the deals but are pushed to eBay’s site to complete the purchase. A few days after than announcement, Facebook said that it was expanding Marketplace to 17 countries throughout Europe and many of the same countries where eBay also has a presence and Daily Deals.

Facebook has found commerce to be illusive because people never came to Facebook to shop — and, according to our own research, don’t trust them to power their commerce experience. There’s something about a social network and storing payments credentials to buy things on a social network that doesn’t — and apparently hasn’t ever — sat well with consumers.

But that hasn’t mattered much to Facebook, since being a commerce kingpin wasn’t its focus. The company has crushed it as an advertising platform and managed the shift to mobile extremely well. According to eMarketer, Facebook will pocket nearly $34 billion in digital ad spend in 2017, and Facebook and Google will account for 46.4 percent of all global digital ad spend this year.

But Facebook and analysts are worried about an impending ad revenue slow down as Facebook runs out of places to stick ads — the News Feed is all out of inventory. Messenger, the once-hailed wunderkind of commerce and chatbots, hasn’t moved the needle much (any?) when it comes to commerce. Even Facebook CEO, Mark Zuckerberg, told investors on its last earnings call that Messenger isn’t moving to a monetization model nearly fast enough. As I wrote a few weeks ago, I’m dubious that it ever will.

That means that Facebook will have to look for new ways to monetize its user base and diversify its revenue risks. Commerce may now be one of the opportunities it wants to pursue seriously. Perhaps leveraging its social networks across all of its platforms around a Marketplace model could be one of those logical paths to explore.

If the past is prologue, it’s not likely to get there without a lot of help.

But eBay could provide that help at the same time Facebook solves several of its own problems: attracting quality sellers and buyers and getting them to transact on its platform.

Two billion people a month and 1.3 billion people a day hanging out on Facebook could increase those odds — attracting eBay buyers that might not have ever considered them an option and sellers who might be intrigued by the possibility of being seen by the largest concentration of human beings ever assembled online.  It’s not as if eBay isn’t growing or adding new active buyers to its platform — it’s that its growth is slowing and has been slowing for quite some time at the same time. And at the same time that the cost of attracting new buyers and sellers is increasing — and so is the competition for both sellers and buyers.

A partnership with Facebook could change that equation, reducing some of its marketing and product investments to bolster its margins. And eBay also comes with a growing global event ticketing business: StubHub acquired Ticketbis last year, and a built-in global buyer and seller base. A partnership with eBay also comes with something else: a number of seller tools and features that also leverage PayPal’s seller services portfolio, including payments, working capital and a global shipping and returns platform.

With a market cap of $37.2 billion and falling, the company could be the ticket for Facebook to get into commerce for real. Perfect — no, because of all the flaws I just talked about. A no-brainer — no, because taking one property that is struggling and combining it with another that hasn’t really gotten commerce off the ground isn’t a sure thing either.

But it is likely to be a lot cheaper for Facebook to build off eBay’s assets, reputation and client base than continuing to build its own commerce capability on a global scale. And it’s a whole lot cheaper than buying Amazon — by about $440 billion. The marriage could be a win for eBay, too, which needs a shot in the arm and could get it from a partnership with Facebook’s enormous global user base, that can also drive  commerce on a local level too.

Now, this is just me talking, after thinking about the eBay Daily Deals/Facebook mashup on one of my morning runs. Plenty of players partner up and a transaction never happens — and most of the time one was never contemplated in the first place.

But this one doesn’t necessarily sound that farfetched either.

Who knows, maybe if Facebook “friends” eBay for life, its third Marketplace revival could be the charm.