Higher eBay fees to kick in this week

SAN FRANCISCO — eBay is about to find out whether a fee increase will help the company reverse a strategic error and boost revenue — or drive away some of its highest-volume sellers.

Starting Tuesday, the San Jose, Calif.-based company will raise the fees it charges to those who sell items through any of its approximately 500,000 online stores, which are set up more like a retail site than eBay's traditional auction listings.

The increases come about two years after eBay reduced those same fees to give the feature a boost.

While the increases may appear small — amounting in some cases to as little as $1.20 more per item sold — they've already set off a backlash that has resulted in a boycott among some eBay sellers.

"Rebalance"

eBay hopes the extra fees will encourage a certain amount of store operators to switch back to selling items through auctions, or "rebalance the marketplace," as Chief Executive Meg Whitman said last month.

Investors and analysts will be looking to see if the move can boost growth at eBay.

The new fees initiative comes on the heels of eBay's second-quarter financials, reported in June, in which net income fell by more than half, hurt by the cost of employee stock options and higher operating expenses.

The company's gross margins during the quarter, or revenue minus product costs, and its operating income both fell as a percentage of sales from a year earlier, as it spent more on product development and marketing.

Worries that the company's sales and profit growth are slowing have helped push its shares down 40 percent this year.

"We believe eBay is moving in the right direction towards restoring its growth trajectory," First Global Securities lead analyst Devina Mehra wrote in a note to clients. She rates the stock at market perform.

Repairing error

To a large degree, eBay is using the fee increases to fix a mistake it made in January 2004, when it cut the payments to encourage its high-volume sellers to set up online stores that use eBay technology to sell unlimited quantities of items.

But the move, which made it much cheaper for sellers to sell through the stores rather than auction listings, prompted a huge shift in eBay sales.

At one point earlier this year, some 83 percent of all the listings on eBay's U.S. site came from stores. Yet they only accounted for 9 percent of all sales, which resulted in slower growth than either eBay or Wall Street expected.

Something else was happening, too. According to Whitman, the experience of shopping on eBay was diminished as the stores flooded eBay's listings with what were often duplicate items priced to move.

eBay has already moved to correct the situation. For example, in January it began to no longer include unlimited listings from its stores in the results displayed when users search the eBay site.

Pressure on

On Tuesday, it will increase pressure on high-volume sellers to switch. Under the new fee structure, a $50 item sold through the store will generate $4.46 in fees for eBay, up from $3.27 before the change.

That's going to narrow the gap considerably between how much it costs to list an auction item versus a store item. Under the old rules, store items cost 27 percent less to list than auction items, according to calculations done by Bear Stearns analyst Robert Peck.

As of Tuesday, however, the difference will be just 3 percent.