Microsoft and eBay Team Up: Desperate or Brilliant?

by: Boaz Berkowitz December 01, 2008 | about stocks: AMZN / EBAY / MSFT    

Boaz Berkowitz

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I used to spend a lot of time on eBay (EBAY), but haven’t in quite a while. So I found myself rather surprised when I purchased nearly all of my holidays gifts on eBay last night. What caused this unexpected departure? An unlikely deal between eBay and Microsoft (MSFT) in which Microsoft will actually pay me to shop on eBay.

How much will they pay me? At first they advertised 10% of my purchase price in a cash back rebate, then I noticed it went up to 25%, and last night it was a whopping 30%! That’s pretty impressive and enough to get even a busy guy like me on eBay’s site for several hours checking out possible gift ideas.

Think of the season’s best sellers. Want to buy a PlayStation 3 game system by Sony (SNE)? You could go to Circuit City (CCTYQ.PK) and spend $400 plus tax or go to eBay, and “buy it now” for $400 with free shipping, no sales tax and now get 30% off. Total price: $280! That’s nothing to laugh at.

Even better, many eBay users were also given an additional 10% off coupon which would make the final price $240 (yes, both percentages were off the original price, maximizing the buyer’s savings). Who can resist a deal like that? Was this true brilliance on eBay’s part? If so, it would be a welcome change to the downhill spiral the company has been facing lately.

But wait a minute. Who is footing the bill for these losses? If the seller gets his full $400, but the buyer only pays $240 or $280, who is making up the difference? I am far from the only person who went on a spending spree with eBay. The forums are abuzz about this deal and even smart sellers have started advertising the cash back on their own listings, so we are talking about millions of dollars here. There are, of course, a few catches: the 30% cash back is only good on Buy It Now eBay listings as opposed to auctions, and payment must be made through PayPal, eBay’s in-house payment system. The promotion is limited to $2,500 a year per account. Even so, this is a deal that will not be easy to beat. (See terms and conditions).

First a little background: eBay, like many sites, has affiliate programs which will pay a third party site for referring customers to them. Microsoft’s search engine, Live.com, has taken advantage of this by combining its search engine capabilities with various affiliate programs. When a buyer searches for an item, finds the item on Live.com and then purchases it, Microsoft gets paid a commission for the referral. Microsoft launched its “Cashback” Program on May 21, 2008, enabling registered users to get some or all of that commission money returned in the form of a rebate. Some of the refunds are instantaneous; others can take up to 60 days to be eligible for withdrawal.

This concept may sound groundbreaking but it is nothing new. Various sites such as Ebates.com, Mrrebates.com, Fatwallet.com and Penniesatatime.com have been doing this for years. It costs nothing but a few extra seconds to make a purchase from your preferred seller by going through these third party sites first. In exchange you make a few extra dollars. But the “cashback” offered by all of these sites, including Microsoft, is usually minimal, around 2% of your purchase price. So you would get $4 cash back from your $400 PlayStation purchase. Not the $120 that Microsoft is currently promising. So where is this money coming from? Presumably from eBay, Microsoft or both.

Both companies will surely benefit from this arrangement. Microsoft wants to expose Live.com to more users and this will certainly have that effect. Whether the users will turn out to be “sticky” is less certain. Live.com is certainly no Google (GOOG) killer. eBay, whose sales have been slipping, will benefit even more. For a while now I’ve noticed that eBay has been moving away from the business model that made it great and seems to be trying to emulate Amazon (AMZN) more and more. For one thing, I’ve seen countless promotions to encourage its sellers to offer “free shipping” and “Buy It Now” listings.

Amazon is famous for its free shipping. Being one of the first innovators of this concept helped make the site a premier destination for shoppers. eBay, on the other hand, became infamous for outrageous shipping fees. eBay charges the seller a percentage fee on the sale price but nothing on the shipping price. It wasn’t uncommon to see people trying to circumnavigate these fees by selling one of Apple’s (AAPL) iPods for $1 with a $250 shipping charge. eBay has tried to clamp down on this for years and recently implemented fixed shipping costs on some listings, similar to Amazon’s marketplace rules. This for example would limit the shipping charge on an iPod to something more realistic such as $5. Additionally, eBay started out with listing only auctions but has been pushing “Buy It Now” items where there is a set price and customers can choose to either buy the item or not. This sounds a lot more like Amazon.

This past summer eBay made a huge departure from its business model when it struck a deal with Buy.com, one of Amazon’s stronger competitors. This deal gave Buy.com a lower fee structure for posting hundreds of thousands of items on eBay, ushering in a new era for the company. It eliminated the "level playing field" concept that made eBay a success in the first place, angering many of its users. eBay made its mark by giving the little guys a chance to compete against the major players. Everyone was charged the same fees to compete in what has become the world’s largest market place. Giving powerhouses like Buy.com a price advantage in the form of lower fees for high-volume inventories is a complete about-face of this concept. It also makes eBay more like Amazon Marketplace.

But back to the story at hand. This latest deal will help position eBay as a stronger alternative to its competitors. It encourages buyers to shop the site, and encourages sellers to offer “Buy It Now” and “Free Shipping” items for sale similar to Amazon (the “cashback” doesn’t apply to shipping charges).

But I think eBay would do better if it stayed true to its roots instead of constantly trying to beat Amazon at a game it can’t win. Many new customers may like eBay and Live.com enough to return. But certainly not all. Will it be worth the cost? I’ve never quit eBay completely, but my visits have decreased considerably over recent years. And I’ve never used Live.com before. When the 30% off deal disappears, my recent increased patronage will likely disappear right along with it. In the end, Microsoft and eBay may gain nothing but big losses from this promotion. The only ones sure to gain will be shoppers this holiday season and for now, that’s enough for me.

Disclosure: The author is Seeking Alpha's director of contributor relations, and owns stock in eBay and Amazon.

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This article has 28 comments:

  •  
    Dec 01 03:08 PM
    Answer:

    DESPERATE
    Reply | Link to Comment
  •  
    Dec 01 04:46 PM
    The columnist states "I think eBay would do better if stayed true to its roots, instead of constantly trying to beat Amazon...". Then, in the same paragraph, states "I've never quit eBay completely, but my visits have decreased considerably over recent years."
    Reply | Link to Comment
  •  
    Dec 01 05:36 PM




    MSFT and EBAY have offering from 7% to 35% since before the SUMMER!!!!!!
    The 10% promo is also older than jesus. Wow next you will be telling us about a great new machine from apple called the Lisa.
    Reply | Link to Comment
  •  
    Dec 01 06:55 PM
    Great....Wonderful.......
    So the Other TENS of THOUSANDS of us that used to make just Enough to Get By (100% positive feedback with over 580 clients) and had our Businesses SLAUGHTERED to death, so that Giddy, Happy - Go - Lucky / "I Want Something for Practically Nothing AND DON'T CHARGE ME SHIPPING & HANDLING" , can have their CHINESE CRAP SHOPPING SPREE.
    Eff Ewe !
    The LABOR CAMP is in order for these little ingrates.
    Work 'em hard 'til they Drop.
    nymarts.com
    Reply | Link to Comment
  •  
    Dec 01 07:09 PM
    Also, Mr. Boaz Berkowitz is correct.
    The reallity of it is:

    Ebay HAS NO COMPETITION.
    It's a Special Place to get Very Very Special Things.
    It's just temporarily being Scuttled by Bonehead C.E.O. John Donahoe.

    I have Every Faith that Ebay will "Be Returned to Us".
    It's just a matter of a few months.
    Ebay has an INdelable Reputation.
    nymarts.com
    Reply | Link to Comment
  •  
    Dec 01 07:24 PM
    Excellent article and thanks for the holiday saving tip! I agree completely. Ebay was an awesome site until they decided to try to be more like amazon and less like Ebay. And yes, they totally screwed us sellers in order to kow tow to the buy.coms of the world. We worked and slaved to make Ebay what it is today and they tossed us to the wolves. They raise our fees while lower buy.com's. What is up with that????
    Reply | Link to Comment
  •  
    Dec 01 07:56 PM
    It was a little tricky figuring out the 30% savings but I got it. Thanks! As for Desperate or brilliant, i also vote desperate. I think you hit the nail on the head - microsoft and ebay are tossing money out the window. Microsoft's Live service will never beat out Google. And ebay will never beat out Amazon this holiday season. They may have enticed some of us to defect short terms but at a high price. ebay has really pissed off both its buyers and sellers the last few years. Yes, ebay may have won a Pyrrhic victory with this promotion but they'll lose the war. They should go back to what they did well and stop trying to play in Amazon's sandbox.
    Reply | Link to Comment
  •  
    Dec 01 09:03 PM
    i *COMPLETELY* agree with the author - and I've saved >$1000 myself over this weekend only. Now, about who pays - a very valid question. I think, if eBay pays to M$ anything less than the FVF, PP and other fees eBay makes living off, it's BRILLIANT for eBay. And honestly, I can't imagine eBay paying more than it's making, it'd then make little sense going via M$ search. So my conclusion is: DESPERATE for M$, BRILLIANT for eBay.

    Reply | Link to Comment
  •  
    Dec 01 10:10 PM
    Saved myself over $200 so far.

    It really is tempting to buy even more.
    Reply | Link to Comment
  •  
    Dec 01 10:58 PM
    I've been buying silver rounds -- silver American Eagles and silver Canadian Maple Leafs. I've gotten more than $1000 back through this program. The money would hit my PayPal account, and I'd just spend it right back out on another eBay silver purchase, which would plunk yet more cash into my PayPal account. And something durable like silver can be sold immediately for nearly the same price, which means I'm just taking money from Microsoft. Why are they doing this?! Seems like a terribly ill-conceived marketing gimmick. But it's their millions to waste if they want to.
    Reply | Link to Comment
  •  
    Dec 02 07:42 AM
    God bless you Mr. Berkowitz for writing this article and God bless Seeking Alpha. A friend forwarded me this link and it saved our Christmas! I recently had to take a pay cut and my husband was laid off. I didn't know how we would afford to pay for the children's gifts this year and then I read your article. I have used ebay once or twice to find exotic items and even got one of their rare 10% off coupons this season. But 10% is nothing and I hate using ebay. But once I signed up for the cashback service and combined them, I was able to save 40% off one item and 30% off everything else. Don't listen to commenter Jackdee (aka The Grinch). You are our hero!
    Reply | Link to Comment
  •  
    Dec 02 08:09 AM
    Thanks for the tip! Time to go shopping...
    Reply | Link to Comment
  •  
    Dec 02 09:08 AM
    Don't you hate it when uneducated readers leave incompetent comments becuase they don't bother to read the articles?

    "Jackdee" - You are da chump! Berkowitz never said this was a new program, he clearly said the program started on May 21, 2008. He also said "this concept may sound groundbreaking but it is nothing new, various other sites... have been doing this for years." Why don't you read what he wrote before you leave obnoxious comments that only serve to embarrass you.

    Jack, you have to look at the bigger picture. The point is that while Microsoft may have offered similar promotions before (which Berkowitz said) I don't think you could ever get 40% the way I just did (well 30% - I didn't get the stakable coupon from Ebay). And even if you could, the fact that this promotion is NOW will have a major impact on the companies' profit statements. The holiday season was just launched and now is when people will be spending money (albeit less than in previous years0. We are also in the middle of a financial crises, the worst since the great depression. Now is when people will be trying to save as much as possible. Ebay and microsoft maybe getting a huge part of the pie this year. Of course, I think the author is right: but at what cost and what is the cost? Who who is going to take the hit of absorbing the hundreds of millions of dollars that will be lost, Microsoft or Eebay. Ebay will make a ton of sales and will make money off those sales. But was does Microsoft get? Nothing but its15 minutes of fame and then they are back to where they started. Live.com will never beat Google. Therefore I think ebay is taking most of the hit. If so, they are probably losing more than they are getting. So yes, this promotion is an act of desperation and something they will likely regret (though they can for sure afford it). But I got 30% off my gifts so their folly is my gain!


    On Dec 01 05:36 PM jackdee wrote:

    > What a chump.
    >
    > MSFT and EBAY have offering this... since before the SUMMER!!!!!! .... The 10% promo is also older than jesus...
    >
    Reply | Link to Comment
  •  
    Dec 02 09:17 AM
    When will the promotion end? I need to think if there is anything else I want to buy!
    Reply | Link to Comment
  •  
    Dec 02 09:22 AM
    You caN BUY A GOLD ONE OUNCE COIN FOR LESS THAN MELT WITH THE REBATE.
    Reply | Link to Comment
  •  
    Dec 02 09:26 AM
    To Mr. Hernje, I'm afraid I don't really understand your comment. My apologies if my writing was not clear. What I meant is that I like eBay for being eBay and Amazon for being Amazon and I shop accordingly. I feel that eBay is trying to compete head to head against Amazon and is changing their business model to be more like them. I have bought and sold items on eBay both personally and professionally for over 10 years and believe I have a good understanding of the way the company works. But in recent years, I have become increasingly dissastisfied with the way they have run their business and over that time, I have been using their site considerably less. The majority of my dissatisfaction has come with the changes that have impacted sellers rather than buyers though. eBay is still my best bet if I'm looking to buy or sell an obscure item. Otherwise I'm more likely to use Amazon. Or at least I was until they started charging sales tax. But that's a different story which can be found here: seekingalpha.com/artic...
    Reply | Link to Comment
  •  
    Dec 02 09:29 AM
    eBay is becoming / building a search engine. Sellers/advertisers will someday be charged click through fees rather than listing fees or FV Fees and eBay will potentially increase its PayPal cut a little bit to make up for the difference. They will also split up auction listings from fixed price listings somehow and the "new eBay" will be seperated from the "old eBay" to allow the "old eBay" to thrive again. eBay (and its stock) will rise again, it just may take a while. These things that they are doing are starting to work, and they are starting to actually repair the damage that has been done so that many will be able to succeed again. The whole key to eBay is that many can succeed, not how many sales they can produce for a small number of sellers. And I think they are starting to realize this.
    Reply | Link to Comment
  •  
    Dec 02 09:41 AM
    To Mr Jackdee
    I enjoyed your comment very much as it gave me a chuckle, I like your sense of humor. But just to clarify, as I said in the article, this promotion isn't new in itself nor did I ever claim that a 10% promo coupon was something new (though it is rare to receive one - my wife received a coupon, I did not and rarely have). I believe others have expounded upon the deeper issues that I touched upon so I don't feel obligated to repeat them again here. But there is another issue you have missed: While you and I may have known about the promotion, I believe by far the majority of Americans did not and I wanted to help spread the holiday cheer. Of course there are some who may agree with you and turn their noses up when offered 30-40% off their holiday shopping bills. But I think most Americans would be very happy to save so much, this season more so than ever before. Times are tough these days and I'd like to think that maybe my article helped make them a little brighter for some.

    Though caveat emptor- some ebay sellers have started raising their prices now that they are aware of the cashback program. Make sure your final price is still a deal.

    Now tell me, where can I find me one of those new Lisa computers you were talking about?
    Reply | Link to Comment
  •  
    Dec 02 11:28 AM
    Ive been using it to buy .999 Pure Silver Coins and Rounds at SPOT price, which is almost unheard of and with FREE SHIPPING. 20 American Eagle coins are about $355 on eBay ($17.75 per ounce of Silver) and with a 10% coupon and 30% off with Live.com, it comes to $213 which is about $10.65 per ounce.. about a $1 over price. Such a no-brainer.. Nice Article!!
    Reply | Link to Comment
  •  
    Dec 02 07:52 PM
    Thanks for a great article.
    I've known about the live promotion, ever since it went, well... live!
    But i have to complement your article, because it explains everything in a nutshell, on how everyone stays happy.
    What drew me to your article was a google news search for "microsoft and ebay"
    I just feel beyond the shopping and the deals.. microsoft is courting/evaulating ebay, for a greater association. Yes the deals can't last, but "the deal" may yet happen.
    Reply | Link to Comment
  •  
    Dec 02 09:16 PM
    Nice article. I agree with the comment "But I think eBay would do better if it stayed true to its roots". That's how they came to be, equalizing the marketplace; however, their missteps/mistakes will open up a void for another player to come in. For a while, I thought Google was going to do that ( when the first rumors started about Google Wallet ).

    eBay is in a very sticky situation. The problem is they went public. As a public company, eBay needs to constantly show growth and cater to the share holders. Based on their business model, my father and I knew the only way they could show growth is raise their fees, and that's what they have been doing since going public. The acquisition of PayPal was extremely brilliant and they integrated it very well, but what eBay has been lacking is diversification. As a private company, eBay would be fine, as a public company, there's no easy way to show growth except raise fees or promote more sales. They could issue a dividend, but they refuse to do this.

    eBay should be investing in other areas or other companies. I would think PayPal and the financial sector would have been their most obvious expansion, but this has been going slow and only accelerated a bit when Google started Google Checkout. This current cashback deal is a way to increase revenue (more sales, higher listing and final value fees for the buy-it-now items [prices have also been inflated because of the offers, where sellers are pocketing some of the cashback], collect interest on the cashback [up to 60 day waiting period for cashback], more PayPal fees collected, and not all cashback is being honored [read the horror stories on forums]) and to temporarily, or possibly perpetually, cook the earnings books so to speak (because cashback rewards may take up to 60 days to be granted).

    As a consumer, these rewards are great (as long as they're granted)! Just make sure that you collect the cashback and not the seller, I know of examples where people are paying a 20-30% premium on their purchases on eBay because they're going to get 20-30% cashback...
    Reply | Link to Comment
  •  
    Dec 03 12:20 AM
    Monkeyman - How can you say that the company lacks diversification? Please do your homework. PayPal is a $2+ Billion company. With revenue coming from merchant services business greater than what is being derived from eBay.com. Skype is a $500+million company. More than 54% of revenue comes from outside the U.S.
    Reply | Link to Comment
  •  
    Dec 03 08:31 AM
    AUTHOR'S UPDATE:

    The amount of actual cashback has been fluctuating. After a steady few days at 30%, it fell to 25% last night and 20% this morning. Even more interesting is the questionable practices that a number of eBay sellers have been implementing to abuse the cashback program. For example, I've seen $500 gift cards selling at $600 "Buy It Now" or higher. After all, after a 30% cashback, the buyer would still only be paying $420 for a $500 gift card, but the Seller would be getting $600!

    The forums have interesting stories as well. I read about one enterprising individual who buys items on ebay, gets his cashback and then immediately reposts them on ebay at the original price. He pockets the cashback profit. Sometimes he will even have the original seller ship directly to his buyer and no one is the wiser.

    I also read about one unscrupulous pair of brothers who posted and sold items to eachother. No property actually changed hands but they would split the cashback. So one would post a non-existent item for $500, the other would purchase it immediately and they would split the $150 profit (less any minor ebay/paypal fees).

    This is a complete abuse of the cashback program and may end up hurting ebay much more than it realized!
    Reply | Link to Comment
  •  
    Dec 03 12:25 PM
    shocking how crafty people can be sometimes!
    the cashback is obviously not something that can last at that level but even if you want to enter the affiliate schemes late and catch up with the rest as microsoft has a tendency to do with its other products, it just cannot last.


    On Dec 03 08:31 AM Boaz Berkowitz wrote:

    > AUTHOR'S UPDATE:
    >
    > The amount of actual cashback has been fluctuating. After a steady
    > few days at 30%, it fell to 25% last night and 20% this morning.
    > Even more interesting is the questionable practices that a number
    > of eBay sellers have been implementing to abuse the cashback program.
    > For example, I've seen $500 gift cards selling at $600 "Buy It Now"
    > or higher. After all, after a 30% cashback, the buyer would still
    > only be paying $420 for a $500 gift card, but the Seller would be
    > getting $600!
    >
    > The forums have interesting stories as well. I read about one enterprising
    > individual who buys items on ebay, gets his cashback and then immediately
    > reposts them on ebay at the original price. He pockets the cashback
    > profit. Sometimes he will even have the original seller ship directly
    > to his buyer and no one is the wiser.
    >
    > I also read about one unscrupulous pair of brothers who posted and
    > sold items to eachother. No property actually changed hands but they
    > would split the cashback. So one would post a non-existent item for
    > $500, the other would purchase it immediately and they would split
    > the $150 profit (less any minor ebay/paypal fees).
    >
    > This is a complete abuse of the cashback program and may end up hurting
    > ebay much more than it realized!
    Reply | Link to Comment
  •  
    Dec 03 06:45 PM

    I said "I would think PayPal and the financial sector would have been their most obvious expansion, but this has been going slow and only accelerated a bit when Google started Google Checkout." Most of the growth in Paypal and Skype only started / was scene early-mid 2007.

    How fast has Google Checkout grown and how fast did the PayPal shopping cart grow? When auction sales slump on eBay, so does the stock price and revenue, ( how much of PayPal's revenue is tied into payments for ebay purchases? ). My argument is that eBay could have grown without raising auction/listing fees or PayPal fees, but that is the route they chose.

    I didn't bother mentioning Skype because of its initial reason for being purchased, to integrate with eBay and provide sellers a communications infrastructure.

    My point has to do more with the how eBay started out and the mantra behind the company to make it an equal market place for both the big and little guys, and this is no longer the case because the auctions are still what define eBay (as a stock), i.e. if there is data showing eBay listings are down and sales are down, the stock is significantly affected.


    On Dec 03 12:20 AM Dan Buchannon wrote:

    > Monkeyman - How can you say that the company lacks diversification?
    > Please do your homework. PayPal is a $2+ Billion company. With revenue
    > coming from merchant services business greater than what is being
    > derived from eBay.com. Skype is a $500+million company. More than
    > 54% of revenue comes from outside the U.S.
    Reply | Link to Comment
  •  
    Dec 04 06:48 AM
    Outstanding article.

    It reminds me of my own experiences during the tech bubble, in 1999. eCommerce companies, public and private, were being judged by (and valued based on) the number of customers they had, not the profits they made. That led to some really weird pricing behaviour. One company, an online drug store that competed with Drugstore.com, offered a $20 voucher and free shipping as long as your purchase was $30 or more. So people I knew purchased $30 of soap, shampoo and other stuff that they'd have to buy anyway. And then they did the same thing for their wives and adult kids.

    But here's where it got really crazy. The online drugstore had really bad logistics, so they'd deliver orders in multiple shipments. To make things worse, the packing boxes were huge -- much larger than was necessary for the items themselves.

    I remember receiving this huge box. We opened it, dug through a mountain of foam beans, and found at the bottom... two bottles of shampoo. The postage on the box was over $10. The next day, another box arrived, and then another. We paid net $10 for our order. But the online drugstore must have lost about $60 on our order. After the end of the "special offer", we never bought another thing from that store.

    That company went backrupt. And the message I took away was that you can't buy repeat customers with one-off, unsustainable discounts or special offers. They'll come for the crazy special offer, and never return afterwards.
    Reply | Link to Comment
  •  
    Dec 04 11:40 AM
    It is worth pointing out that 'Pennies At A Time,' which was mentioned by the author is a great program. If you start your purchases or do Google searches through Pennies At A Time, a portion of your purchase will get donated to your favorite charity! There is NO cost or risk to the users - just FREE money for charity.

    In these difficult financial times, and with the holiday shopping season upon us, this is a GREAT way to give back to charity & supplement your normal donations at NO cost to you!
    Reply | Link to Comment
  •  
    Dec 12 07:22 PM
    Wow. Your information is exceptionally retarded. Go read some SEC filings and cull out some financial data on the companies you reference. Google Check out is a pittance. An absolutely smudge of a business.



    On Dec 03 06:45 PM monkeyman wrote:

    >
    > I said "I would think PayPal and the financial sector would have
    > been their most obvious expansion, but this has been going slow and
    > only accelerated a bit when Google started Google Checkout." Most
    > of the growth in Paypal and Skype only started / was scene early-mid
    > 2007.
    >
    > How fast has Google Checkout grown and how fast did the PayPal shopping
    > cart grow? When auction sales slump on eBay, so does the stock price
    > and revenue, ( how much of PayPal's revenue is tied into payments
    > for ebay purchases? ). My argument is that eBay could have grown
    > without raising auction/listing fees or PayPal fees, but that is
    > the route they chose.
    >
    > I didn't bother mentioning Skype because of its initial reason for
    > being purchased, to integrate with eBay and provide sellers a communications
    > infrastructure.
    >
    > My point has to do more with the how eBay started out and the mantra
    > behind the company to make it an equal market place for both the
    > big and little guys, and this is no longer the case because the auctions
    > are still what define eBay (as a stock), i.e. if there is data showing
    > eBay listings are down and sales are down, the stock is significantly
    > affected.
    Reply | Link to Comment
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