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Competition, fraud may harm eBay

Source: Star-Telegram.com
By Wendy Tanaka
Date: July 5, 2003

Stop Internet Fraud At the moment, Wall Street says eBay, the online auction giant, is worth more than Boeing. Or Sears. Or McDonald's. Is this a last gasp of the dot-com craziness of the late 1990s, or does eBay's potential outweigh all the obstacles -- fraud, competition, legal and technological challenges -- that it is facing? Some say eBay's $110.02 stock price is justified by its dominance of the online-auction field, a dominance that routinely and pleasantly surprises its investors. Last year, the San Jose, Calif., company made $250 million on revenue of $1.2 billion, and it projects revenue of $3 billion in 2005. EBay makes money primarily by taking a small chunk of every transaction between the millions of buyers and sellers who use the site to find bargains or get rid of stuff -- from old junk to cars and houses -- every month. Big companies like IBM and Home Depot also use the site to dispose of inventory.

"EBay's performance is better than any Internet company I'm aware of and better than any large-cap company I'm aware of," said Thomas Underwood, an analyst at financial-services company Legg Mason Wood Walker. "It's a very, very good company." EBay says it has 31 million active, registered buyers and sellers. Yet several issues hang over the company. Accounts of online-auction fraud are growing. It recently lost, and plans to appeal, a $35 million patent-infringement judgment. And competition on the eBay site itself, as well as from other sites, could lead to problems.

"There are various things lurking in the background," said David Kathman, an analyst at Morningstar, a mutual-fund research company in Chicago. According to federal authorities, online-auction fraud is the No. 1 Internet-related complaint. Last year, the Federal Trade Commission logged more than 51,000 complaints of online-auction fraud nationwide^; analysts say that as much as 90 percent of online auctions take place on eBay.

The FTC said many of the complaints were from buyers who did not receive goods after paying for them or who received goods that were defective or of a lower quality than advertised. "We have seen a steady flow of [online-auction frauds], even though there have been steps taken in the industry to slow these transactions," said Barry Creany, senior deputy attorney general in the consumer division of the Pennsylvania attorney general's office.

In December, Gordon Cohen, 55, of Philadelphia purchased a used MP3 music player for $150 on eBay. But when it arrived, it didn't work. "I guess the guy knew it was broken," Cohen said.

To combat the rising number of fraud complaints, eBay has beefed up its security measures over the past year and a half, creating proprietary anti-fraud software and hiring former White House cybersecurity adviser Howard Schmidt, eBay spokesman Kevin Pursglove said. Overall, fraud on eBay occurs in less than 0.01 percent of its listings, Pursglove said. Typically, 16 million items are listed for sale daily on eBay.

Kathman, the Morningstar analyst, said incidences of fraud on eBay have been relatively few so far, but one fraudulent act could have a ripple effect. "If people are suddenly spooked on eBay, some could stop" using the site, Kathman said.

"The whole issue of trust is something they need to maintain in this business model. If the trust isn't there, growth could dry up." Scores of mom-and-pop Web sites as well as heavy hitters such as Amazon.com and Yahoo conduct online auctions.

EBay does not take its competitors lightly.
"The competition is quite stiff when you think about it," Pursglove, the eBay spokesman, said.

"We think about it every day. No one really knows where the next new thing is going to come from. ... It's fair to say eBay doesn't know. Nobody saw eBay coming.''

Original article: http://www.dfw.com/mld/dfw/business/6239067.htm

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