Auction Giant eBay

Facing Bankruptcy

San Jose, (AP) They said it would never happen, but Internet giant eBay, the world's biggest auction house, announced Thursday they anticipate filing a Chapter 11 bankruptcy petition in a California Federal Court later this year or early next. While denouncing the company's recent "bullying tactics" to force out what ex-CEO Meg Whitman called "the smarter users", current CEO David Smith said the company's plans to "downsize eBay's user base" from 200 million to 25 million appears to have hit a brick wall and the company is in financial crises.

"We never anticipated the backlash of hostilities this would generate," Smith said. A recent eBay Live Convention, in which the company hosts seminars for their more profitable Power Sellers, was a dismal failure. "We offered room for 20,000 of our best sellers to come to Chicago and only 200 showed up" for the 4-day pep talk, eBay spokesperson Lorrie Norrington revealed. Even offers of a free pizza didn't deter attendees from voicing long-held complaints about eBay's lack of customer service, skyrocketing costs, increasing fraud complaints and restricted or frozen Paypal accounts.

Paypal, a subsidiary of eBay, has come under fire in recent years over the unexplained freezing of accounts. One seller recently sold his motorcycle on eBay to a buyer who paid the winning bid of $7,000 for it using Paypal, and was pleased with the sale and left the seller a positive feedback. The seller has yet to receive his money. Paypal froze his account indefinitely "because the transaction is suspicious", according to a Paypal spokesman who asked not to be identified.

The latest smudge on eBay's once-clean dress is a June 19 announcement of a 4-day sale on listing fees for eBay Motors, a sidebar to their core site. The announcement stated the normal $40 listing fee would be reduced to $1 during the sale. But reading the fine print shows that the total cost, under the sale terms, would escalate from $90 to $110.

"We are no longer targeting sophisticated users at this point," said Smith, in defense of the deceptive bold print in the announcement.

Confident the merry-go-round would last forever, eBay's stock has plummeted from $59 a share in 2004 to $29 a share in 2006 and continues its downward spiral. Their global growth rate has slowed from 42% to 23%. Sales have dropped from 43% to 19% and their income growth has dropped from a healthy 76% to a stagnant 4% in the same period. Despite these losses, eBay still posted a $1.5 billion profit last quarter.

"We're lucky in that we have maintained the financial strength to weather any storm that comes along," Smith said.

"It's built into their User Agreement that when you sign up with eBay, you agree to litigate any claims only in Santa Clara County. This forces 99% of their victims to give up and walk away," said Jason Houston, an eBay watchdog since 1998. Courts throughout the US have upheld this provision.

"If we're to survive economic challenges by such (Internet) newcomers as Craigslist, Amazon, Myspace and You-Tube, we need to make substantive changes to our income structure. If that means losing some of our customers, then that's the cost of staying in business," Smith said of the impending bankruptcy action.

In response to questions that eBay doesn't respond to complaints regarding fraudulent transactions, "One of the biggest overheads today is customer service. Most Internet companies have never offered any type of meaningful customer support and we're just following those trends in order to remain competitive," Smith reiterated.

In March, eBay applied to the Australian government for an exemption from their anti-trust laws, predicated on eBay's proposed mandatory use of Paypal for all online transactions conducted in that country. Buyers and sellers would only be allowed to pay for their purchases with Paypal. Some users believe this to be a subtly-disguised form of racketeering. In June, Australia's governmental trade regulators apparently agreed, denying eBay's application for a permanent exemption. The reasons cited include overwhelming complaints that indicate eBay's promise of a safer and more secure trade environment has no merit. Despite the denial, eBay promptly sent out notices to their Australian users that "any listings that offer payment by check, cash, money order, or cashier's check will be canceled and the seller removed from the eBay Australia site". The notice was also published on eBay's Australia web site.

In France, the government fined eBay $150,000 in April for what French law has deemed "aiding and abetting the commission of fraud". The charges stem from selling product knock-offs, including leather purses, designer-label clothing, bootleg CD's and videotapes and other consumer goods, with forgeries of valued trade names. So far, eBay has refused to pay the fine, claiming they aren't responsible for what their sellers list on eBay.

Last year, New York state regulators levied a similar fine against eBay for the costs of investigating and prosecuting eBay sellers committing similar frauds. eBay's Smith said they have paid the fine; New York regulators insist it hasn't been paid.

"eBay's position is, 'you can't touch us because we have no brick-and-mortar facilities.' '' Houston said.

They may be right. Since eBay is located in California, Houston observed, eBay "is responsive to California state regulators and takes them seriously. However, private complaints against eBay require victims to travel to Santa Clara County to initiate legal action against the company."

"eBay is relying on the anonymous nature of the Internet to maintain immunity from laws, sanctions, fines, civil penalties and other traditional forms of corporate responsibility. This may prove to be the most expensive case of consumer fraud in history. There needs to be a form of international law regulating the Internet," Houston said.