Page 510 -

106 LORI RADULOVICH

ruled that eBay may owe penalties from illegal listings of counterfeit and stolen goods. These
events may also negatively affect eBay’s reputation. In order to halt illegal activity, eBay has
indicated that it may need to invest a substantial amount of resources.
Legislation has also been proposed to prohibit sharing of certain information over the
Internet, such as comments provided by customers in eBay’s Feedback Forum. This limitation
would adversely affect eBay’s ability to provide a reliable and secure community that shares
purchase information and aspects of trades with other members of eBay’s Marketplaces seg-
ment. Furthermore, as of October 2008 certain transactions on eBay.com purchased using
PayPal are protected for the full purchase price in the event that the buyer does not receive the
goods. This may result in greater losses and write-offs incurred by eBay Inc.

Security Breach and Identity Theft
Breaches in data security are on the rise. EBay’s Korean subsidiary experienced a data
breach that affected the majority of its 20 million users. Approximately 141,000 users have
filed litigation. In Korea, courts have granted “consolation money” to plaintiffs. Significant
resources are needed to upgrade security and insurance policies may not be adequate
enough to cover potential losses.

Internal Challenges
Expansion of eBay both in the United States and internationally has placed a significant
strain on management, operations, and financial resources. Particular areas that are
strained include the following:
• Web Site Usability. Growth in the number of products and Web site features has
caused the site to become less user-friendly.
• Web Site Stability. Increased volume and greater complexity requires additional
expensive investments in hardware, software, and personnel.
• Customer Account Billing. Transaction-processing and revenue collection
becomes more difficult as the number of transactions increase and consumers
default on loans.
• Customer Support. Customer support is challenged from greater trade activity and an
increased number of users.
Financial Overview
EBay’s challenges include realizing the anticipated synergistic benefits of recent acquisi-
tions and recouping goodwill costs that have inflated the purchase price of acquired busi-
nesses. For example, the $1.4 billion goodwill associated with the purchase of Skype must
be recouped.
EBay experienced a downward trend in revenues, ending the 2008 year with an
unimpressive performance. Total net revenue for the 2008 year increased 11 percent to
$8.5 billion; however, this is a decrease in prior revenue growth of 29 percent experienced
from 2006 to 2007. On a positive note, eBay’s operating margin of 24 percent showed
a return to the 24 percent to 32 percent range experienced over the years 2004 to 2008
after a dip to 8 percent in 2007. EBay claims that increased costs are due to greater
customer support and Web site operations costs (28 percent increase), payment processing
(24 percent increase) and Skype telecommunication costs (28 percent increase). Exhibit 3
shows eBay’s consolidated income statement.
With regard to segment revenues, the Marketplaces segment reported only a 4 per-
cent increase in revenue growth from 2007 to 2008, as opposed to the 24 percent growth
from 2006 to 2007. Overall profitability was supported by other segments. The Payments
segment earned a 25 percent increase in revenue over 2007, although this is a decrease in
the 34 percent growth rate experienced from 2006 to 2007. The third business segment,
Communications, reported strong growth of 44 percent from 2007 to 2008, albeit lower
than the 96 percent growth reported from 2006 to 2007. Revenue growth details for each
eBay segment are provided in Exhibit 4.
Revenue contributions by segment are provided in Exhibit 5. EBay’s organizational
structure is depicted in Exhibit 6.