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Can higher fees save the day for eBay?

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EBay ignited quite a storm of controversy among its users when it announced coming changes to its fee structure. On August 22, eBay Inc. is going to start raising it's fees in hopes of boosting the companies growth. EBay (EBAY) is going to raise the fees paid by sellers using online stores with the hope that many of these sellers will revert back to using traditional auction listings.

This past January, eBay decided that it would be a good move to reduce rates for it's approximate 500,000 online stores to enhance this part of their business. This mistake proved costly to the online auctioneer's growth. As a result of this pricing change, statistics showed that earlier this year around 83% of all the items listed on eBay came from stores, but this only accounted for 9% of all sales made on the site.

Sellers aren't happy with the changes, but, according to Chief Executive Meg Whitman, the overall eBay experience took a turn for the worse as the site became overrun with listings that were often duplicate items priced to move. Last month Whitman explained that "the marketplace has been overwhelmed with identical, often poorly priced items that have diluted the magic of the eBay experience."

The end result... slower growth than either eBay or Wall Street was expecting.
First Global Securities analyst Devina Mehra agreed with this recent price shift, stating that "We believe eBay is moving in the right direction towards restoring its growth trajectory."

What will the fee change mean to sellers? The ultimate impact of the rate hike should not be too heavy on sellers, (in some cases amounting to around $1.20 per item) but of course there is already a lot resentment and of course, eBay boycotts. Under the old rules, store items cost 27% less to list than auction items, but after next Tuesday the difference is going to fall to around 3%.

As much as eBay sellers complain about the new rate changes, in the end I think that they will all still be on the site, selling the same goods that they currently are through their online stores. They will just have to go back to doing business the old fashioned way. Robert Peck, an analyst with Bear Stearns said in a note to his clients that "Sellers, while they may not like paying more for the same service, usually choose to do what is most economic to them - and in this case, the volume of dollars generated from eBay is usually too significant to walk away from."

Time will tell if this rate change will put the company (whose stock price has fallen around 40% this year) back on track, but for the time being Wall Street seems to be taking a favorable view on the recent developments. Shares of eBay have traded up 6.1% on the day so far to $27.40, picking up $1.58.

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Last updated: November 27, 2009: 03:48 AM

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