Why eBay Will Never Be Great Again

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There was a time when eBay (EBAY) was the cool place to shop.

When Tickle Me Elmo dolls, classic vinyl records, and Beanie Babies ran scarce at area retailers, folks would flock to the auction marketplace to see if they could outlast rival bidders to victoriously nab hot items.

This doesn't mean eBay isn't popular these days. eBay's marketplace helped sellers move $14.7 billion in gross merchandise, excluding cars, in its latest quarter. The company's PayPal juggernaut is now up to 100.3 million active registered accounts, serving as the middleman for $28.7 billion worth of net payments during the second quarter alone.

Bigger isn't necessarily better, though.

Shares of eBay are trading essentially where they were five years ago. The world has passed eBay by, and the next five years aren't likely to be much better.

eBay Was a Hotbed for Cottage Industries -- Until It Went Condo

Browsing through eBay.com used to be like strolling through an artisan garage sale. These days, it's loaded mostly with cookie-cutter merchandise.

The homogenization of eBay is a sad thing. Original arts and crafts have been replaced by the art of crafty merchants selling the same stuff from drop-shipping companies as everybody else.

Where did the magic go? The flagship site has been pulled like taffy in different directions. Escalating fees, PayPal platform requirements, and listing tweaks repelled many longtime sellers. The leveling of the dot-com playing field also wooed away popular Power Sellers.

Niche specialty sites such as Etsy for crafts attracted some of the sellers behind the more distinctive items that used to populate eBay's listings. It also has become easier to get noticed without a conglomerate marketplace. Skillful self-promoters can milk Twitter missives, Facebook fan pages, and Wordpress blogs to drum up sales. Those willing to spend on promotion can bid pennies for leads through search engine keywords.

Entrepreneurial sellers no longer needed eBay. eBay, in turn, decided that it really didn't need entrepreneurial sellers.

Auction Apathy vs. Instant Gratification

After watching Amazon.com (AMZN) deliver year after year of heartier growth than itself, eBay began to embrace many of the e-commerce giant's characteristics.

Sellers were encouraged to offer "free shipping" promotions, even if it meant sacrificing margins. The thrilling ride to the finish line could now be interrupted with "Buy it Now" prices for folks who didn't mind paying up for instant gratification.

Companies evolve, and not every change at eBay has been for the worse. However, it's telling that just 37% of eBay's marketplace volume came from the United States in its latest quarter. Acquisitions and international expansion have helped mask a company that while growing -- even domestically -- is actually dying inside.

Robbing Peter to PayPal Paul

PayPal has been the best -- if not the only -- reason to invest in eBay in recent years. Despite recent signs of life in eBay's marketplace business, PayPal remains the real driver here.

Things seem to be going well for the Web-based financial transaction facilitator, and eBay revealed in its most recent conference call that it will begin testing point-of-sale integration with a major U.S. retailer later this year. If things go well, PayPal hopes to add as many as 20 national retailers by the end of 2012.

If Visa (V), MasterCard (MA), and American Express (AXP) weren't threatened by PayPal before, they will be taking the fast-growing platform more seriously now. Credit card marketers and issuers know the juicy transaction fees and interest payments that are at stake.

If they don't do something about neutralizing PayPal, technology probably will.

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If you're not already familiar with near-field communications -- or NFC -- you will be soon. More and more smartphones are coming out with NFC chips, simplifying mobile payments for goods and services. eBay is no dummy: PayPal is testing its own NFC applications. However, the flip side here is that NFC will also help traditional credit card companies catch up to PayPal when it comes to electronic transactions.

In the past, PayPal could count on users to treat idle cash in their accounts as "found money" when they hit an online checkout screen. Unfortunately, eBay killed the PayPal Money Market Fund this summer, giving accountholders one less reason to keep dormant funds there.

Where is the "Sell it Now" Button?

This may seem to be the wrong time to be writing about eBay's demise: Revenue in its latest quarter soared 25%, to $2.76 billion, though net margins narrowed.

It's also not as if eBay shares are overly expensive. The stock is trading at a reasonable 14 times this year's projected profitability. However, it's hard to see eBay's marketplace continue to be relevant once it runs out of companies to buy. PayPal will be challenged. It sold its majority stake in Skype too soon.

When's the last time you bought something cool on eBay? It was probably around the same time that you should have sold the stock and moved on.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of eBay, Google, and Visa.

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