By Yi-Wyn Yen

Santa Claus won’t be coming to eBay this year. The online auction giant reported quarterly sales and profits late Wednesday that met expectations, but gave such a dismal outlook for the holiday season that one analyst suggested Christmas had been cancelled.

eBay reported third-quarter profits of 46 cents a share, or 12% higher than the same period a year ago. Revenues came to $2.12 billion, up $229 million, or 19%, from last year thanks to advertising sales and its PayPal payment service.

But any delight that investors found in eBay’s numbers was quickly doused when eBay (EBAY) delivered some Scrooge-like numbers for the current quarter. Executives noted a sharp spending decline starting in mid-August for both high-priced items like cars and for smaller ones like concert tickets, which are sold through its StubHub subsidiary. The San Jose-based company expects its revenues to decline by 4% in the fourth quarter from the same period a year ago.

eBay also cut revenues for the fourth quarter to $2.02 billion to $2.17 billion. That would make the current quarter, typically the strongest because of holiday spending, eBay’s weakest of the year. Wall Street, which had been warned by eBay last week of slowdown, was expecting revenues of $2.44 billion. eBay now predicts earnings of 39 cents to 41 cents per share for the current quarter, well below Street estimates of 47 cents.

Investors signaled their disappointment, sending eBay shares down 3.5% in after-market trading. Shares are down 53% so far this year.

“Your guidance indicates there is no Christmas,” said Goldman Sachs analyst James Mitchell during the company’s post-earnings conference call with analysts.

eBay CEO John Donahoe tried to convince investors that the impact of a severe economic slowdown was beyond eBay’s control. Donahoe used the phrase “challenging and uncertain times” multiple times during the call. eBay CFO Bob Swan said a stronger U.S. dollar will cut into international revenue and a consumer spending decline will make “growth deceleration that much tougher.”

Swan presented slides to investors that showed spending on the auction site mirroring consumer spending trends offline.

However, some analysts were skeptical that eBay’s problems could be blamed primarily on sagging retail spending. “eBay’s model has been probably hit harder than the average e-commerce company would be,” said Jeffrey Lindsay, Sanford Bernstein’s Internet analyst. “This is a fairly poor performance, but it looks like it’s going to get worse with no improvement any time soon.”

For the first time ever, eBay’s marketplace business, its main revenue driver, fell 1% to $14.3 billion from a year ago. The decline in eBay’s transactions are not a healthy sign of the company’s growth prospects.

A steady decline in eBay’s traffic for the past two years has prompted the company to spend the year trimming costs and restructuring its auction model. eBay recently announced plans to cut 1,000 jobs, or about 10%, of its global workforce. The company is also focusing on items that consumers can buy immediately and offering standardized shipping rates to better compete with Amazon (AMZN), which has been gaining popularity with buyers and sellers.

Donahoe said the company is seeing improvements with its turnaround plan, citing a 3% increase in users for the third quarter. Still, that hasn’t translated into more eBay users buying on the site.

Said Lindsay: “Santa Claus is coming for Christmas, but he’s coming from Seattle - not San Jose.”

By Scott Moritz

Recessions are supposed to be boom times for yard sales and flea markets, so what’s eating eBay (EBAY), the world’s largest bargain bazaar?

Ebay shares hit a new five-year low Thursday as yet another analyst weighed in on the nagging deterioration of the auction giant’s business. Morgan Stanley analyst David Joseph downgraded eBay to neutral, pointing out that there are some troubling trends contributing to the company’s drooping e-commerce market share.

With fears that the credit crisis could throw the economy into a tailspin, Wall Street has been in a bit of a selling mood of late. When analysts point to signs of strain at eBay, investors don’t seem inclined to wait and see.

Foremost among eBay’s challenges, Joseph writes, is buyers’ shifting preference in favor of easy shopping, and away from the auction format. People like features like free delivery, shopping various selections within categories, and conveniences like one-click checkout. As the go-between agent in a transaction, eBay has limited control over these features.

As the analyst notes: Ebay is at a disadvantage in its “ability to compete in buyer experience.”

Given the changing tastes among shoppers, it’s not too surprising that eBay’s market share has dropped to 17% from 19% in the past two years. It’s also not shocking that Amazon’s slice of the business has grown to 5.3% from 3.7% in the same period, according to Morgan Stanley.

Other competitors have edged in as well. Local online swap shop specialist Craiglists has its fans. And while far from a runaway success, net giant Google’s (GOOG) Google Checkout purchasing system is an alternative to eBay’s PayPal service.

The weakening economy is having an impact on eBay also. Analysts point out that people are buying fewer items and at lower prices. So with less big ticket sales to add to the total tally, the overall average selling price is falling. And with the slowing sales volume in September, particularly in the U.S., eBay’s growth rate is “under pressure,” according to a Merrill Lynch report Tuesday.

To be sure, eBay has a solid position globally as the marketplace where sellers of cheap goods meet hunters of good bargains. And as a company, eBay is an upstanding financial citizen, with zero debt, $3.7 billion cash in hand, and a cash flow generation rate of $3 billion annually.

But as we saw this week with Monday’s 9% drop in the Nasdaq, even solid favorites in tech like Google, Apple (AAPL) and Research in Motion (RIMM) get trampled when people stampede for the exits.

Worries about eBay’s slowing growth and shifting consumer preferences certainly don’t encourage the highest bids in a market prone to panic.

By Scott Moritz, writer

Ebay (EBAY) rolled out Skype’s unlimited calling plan in a bid to keep up with rivals and – let’s face it – to finally land some paying customers.

For $2.95 a month. U.S. Skype customers can make unlimited calls anywhere in the United States. Calling plans from the United States to Europe cost $9.95 a month.

The move comes amid speculation that eBay might be considering a carve-out option for the voice-over-Internet-protocol, or VOIP, service that counts 309 million registered users.

eBay’s $4 billion Skype bet hasn’t paid off as the company hoped when the deal was signed in 2005. Last year, the online auction shop took a $1.4 billion charge to write down some of the unrealized value of that deal. This year, some eBay investors are hoping for a different sort of transaction – a sale.

“This is something that belongs with another entity,” says Darren Chervitz with the Jacob Internet Fund, an eBay investor. “Skype makes more sense at a place like Google (GOOG).”

Skype software allows PC users with microphones and cameras to make free calls to other Skype users or cheap calls to conventional phones. The service was expected to enhance communication between buyers and sellers in eBay’s auction market.

Big tech companies that generate a lot of cash are justifiably wise to make bold bets on innovative acquisitions, says Chervitz. Sometimes it works, like eBay’s purchase of PayPal, and other times it doesn’t, like with Skype, he says.

Chervitz would like to see eBay get some value back from Skype while it still can. “They should sell it now, says Chervitz, “before the technology changes.”

By Yi-Wyn Yen

After 10 years heading up the world’s largest e-commerce site, eBay CEO Meg Whitman will leave at the end of March and John Donahoe will take over. That much is certain.

But Wall Street remains cautious if Donahoe, a longtime management consultant, can really rev up eBay’s sales engine.

During his first earnings call with analysts Wednesday, Donahoe promised big changes in the next several weeks to help revive eBay’s core business. He discussed his plan to offer fixed-priced goods and an improved customer rating and support system to lure buyers. Next week eBay (EBAY) will lower fees for sellers to list items while taking a bigger cut on sales. “EBay’s best days are ahead,” Donahoe said.

Some analysts aren’t so sure. Despite reporting fourth-quarter revenue that exceeded Wall Street’s expectation, eBay offered disappointing guidance for the first quarter and for 2008. EBay’s fourth quarter revenues rose 27% from the previous year’s record to $2.18 billion. The San Jose-based company said its outlook for 2008 was between $8.5 to $8.7 billion and just $2.0-$2.05 billion for the first quarter. Shares of eBay fell 5 percent in after-hours trading Wednesday.

Some suspect that eBay is low-balling estimates to give the new CEO the best odds to look good. “That was a huge step down, and quite a bit lower than we were expecting,” says Jeffrey Lindsay, a senior analyst with Bernstein. “Maybe eBay didn’t want to set the bar too high for Donahoe, but that could backfire. After what happened with Apple, investors are extremely sensitive with guidance.”

Whitman grew eBay from a small auction site to an online giant with revenues of $7.7 billion in revenue last year. After a decade she decided it was time for a change. “It’s important that new perspective and new eyes come into this company,” Whitman said on the earnings conference call. “It’s difficult to stay fresh for this long. I felt it was the right time to turn over the reins.”

Donahoe’s methodical style is a drastic turn from Whitman, who was known as a big risk taker. Whitman often led by instinct, resulting in the acquisition of PayPal, which raked in $563 million for the fourth quarter, making up a quarter of eBay’s profits. But that risk-taking also led her to buy Skype in 2005. The company conceded it overpaid for the Internet calling service when it took a $1.4 billion charge in the third quarter of 2007.

Donahoe, who spent 18 years at consulting firm Bain, has a much more systematic approach. Several times during the call, he stressed that he would test new models by collecting data points first and would tweak models if they did not immediately succeed. Whitman hired Donahoe three years ago to run eBay Marketplaces, which makes up 70 percent of the company’s revenues. The division’s revenue for the fourth quarter rose to $1.5 billion, a 21% growth from the previous year’s period.

“He seems to be addressing many of the key issues, which is a nice change,” says Derek Brown, an analyst at Cantor Fitzgerald.  “He seems to be talking about making more aggressive changes. Whether he will be pulling the right levers at the right time at the right degrees, I don’t know. That’s the $40 billion question.”

EBay CEO Meg Whitman. Image: eBay

By Yi-Wyn Yen

After 10 years as one of the most high-profile CEOs in Silicon Valley, Meg Whitman will leave eBay on March 31. John Donahoe, who worked with Whitman at Bain in the 1980s, will take over as president and CEO.

After two years of a declining stock price and a slowdown in the growth of the auction business, it comes to no one’s suprise that Whitman, 51, is retiring. Wall Street analysts and industry insiders say Whitman’s departure has been expected for awhile. This March will mark Whitman’s 10-year anniversary at eBay (EBAY), and she has previously stated that a CEO should not stay longer than a decade.

“She’s done a phenomenal job leading the company up until now, but the business has matured. Buyers and sellers are looking for a change,” says Scott Devitt, an Internet consumer analyst with Stifel Nicolaus.

The auction powerhouse is under pressure to move quickly to make a major overhaul with growing competition from Amazon (AMZN). eBay will report its fourth-quarter earnings Wednesday, and Wall Street is expecting to hear how Donahoe’s new position and an anticipated drop in listings fees will jump start eBay’s auction business.

Donahoe, 47, joined eBay in April 2005 as president of eBay Marketplaces, one of the company’s most important businesses. At a UBS conference with investors last December, the former management consultant at Bain outlined key strategies to revive eBay’s marketplace – which has 248 million registered users – in 2008. Donahoe has said the company must focus on balancing both the needs of buyers and sellers. Historically, eBay has paid more attention to sellers, who pay fees to list their products on the site.

As eBay has become more corporate, Whitman’s philosophy has been to bring in executives from outside. In 2006, she recruited Bob Swan, a 15-year General Electric (GE) veteran as CFO. The year prior, she hired Donahoe, who did an 18-year stint at consulting firm Bain, to run eBay’s auction business. Last January, Donahoe led the successful acquisition of StubHub, the online ticket resale service that handled more than 5 million ticket sales in 2007.

The ultimate test, though, is whether Whitman’s successor can reverse eBay’s slowing marketplace, which accounts for 70 percent of the company’s revenues. Whitman, one of the most high-profile female CEOs, has been repeatedly criticized for not capitalizing on change quickly enough and for overpaying for the telephony service Skype. “Could eBay have been proactive before Amazon and Google came along? They could have,” Devitt says.

One problem that rankles eBay users is the fee charged to sell items online. Historically, eBay has increased listings fees at the start of every year. But with more eBay members turning to sites like Amazon or Google (GOOG) to sell their products, eBay is looking to lure its core users back. The company is expected to announce a lowering of the fees soon. “If there’s a negative here, it was in the speed of which they’ve improved on the site. A fee structure could have been executed two years ago rather than today,” Devitt says.

A prominent eBay members network – that the San Jose-based company closely monitors – says that its members listings dropped 14% in the fourth quarter from the previous year. “eBay’s marketplace isn’t set up to scale well for sellers. Whether you list one item or one million, it’s a flat price structure,” says Jonathan Garriss, the executive director of the Professional eBay Sellers Alliance. “As sellers build bigger businesses, it makes sense to have their own platform and participate in shopping engines like Google or sell on the Amazon platform.”

By Michael V. Copeland

Here’s the math problem facing early-stage venture capitalists today. The vast majority of “exits” for venture-backed software companies, those happy events where everyone gets paid, are acquisitions valued at less than $50 million. All those large companies that go shopping for startups — Google (GOOG), Microsoft (MSFT), Cisco (CSCO), eBay (EBAY), Yahoo (YHOO) and AT&T (T) — may be buying up dozens of companies every year, but mostly they arent paying out-sized prices and venture firms consequently aren’t getting out-sized returns.

As an entrepreneur, you might be very happy with someone buying your company for $10 million or $20 million. But if you are the VC who invested $2 million in the first round of financing, a return of 2x or even 3x the venture firm’s money doesnt move the needle much on a fund that might be anywhere from $250 million to $600 million. To compound the problem for venture capitalists, many startups these days simply don’t need much money to get off the ground, thanks to cheap hardware and software tools.

So if there is a tension between the needs of a typical software startup and the needs of a venture capitalist, what do you do? If you are Sequoia Capital, you don’t do anything. Of any early-stage firm on the planet, Sequoia gets first crack at the best ideas and the best entrepreneurs –- everyone wants to work with Sequoia — so the odds of them finding the next YouTube or PayPal along with the big returns they bring are as good as they get. If you are Kleiner Perkins Caufield & Byers you start focusing a good deal of your energy on areas like alternative energy which, unlike software, do need boatloads of cash to get products developed and to market.

The other option is to tweak the traditional VC model. Firms like Union Square Ventures, and First Round Capital size their funds and investments so that a relatively small exit is still a meaningful return. In the past few years, “super angels” like Ron Conway have used a shotgun approach putting small amounts of money into dozens of companies a year. The startup boot camp Y Combinator, and the knockoffs it has spawned also fall into this category — put a little money into a lot of companies. These might be seen more as institutional seed funds.

The latest twist on the VC model is Tandem Entrepreneurs. Started by three former big company guys who cut their teeth at places like Oracle and Xerox Parc and then went on to found their own companies, Tandem is putting small amounts of money, $850,000 per company over two years, into just six companies.

By Yi-Wyn Yen

Making small business loans to the world’s poor is now as easy as buying an iPod on eBay. The auction giant has launched MicroPlace, a for-profit online service that allows mom-and-pop investors to provide low-interest “microfinance” in developing countries while earning interest off the loans.

Small, individual loans provide the cash for budding entrepreneurs to do things like buy a cow to sell milk or a fruit squeezer to open a juice stand. MicroPlace investors can loan as little as $100 with interest rates ranging from 1% to 4%. “All it takes is a small amount of capital to lift people out of poverty,” says MicroPlace founder Tracey Pettengil Turner.

MicroPlace is the first microfinance site that permits ordinary investors to profit from their loans. By acting as a broker between investors and microfinance institutions, it potentially lets all parties make money – from the working poor to the individual lenders. MicroPlace is similar to non-profit site Kiva.org. But while Kiva allows people to loan money online to specific individuals, it does not pay interest on the microloans.

The idea of profiting from the poor makes some critics uneasy, and they say it may be better to donate a check to established microfinance groups like Accion International or Finca International. “It’s an exciting model in that you’re connecting people and making a direct difference,” says Jonathan Morduch, a professor of public policy at NYU who co-authored a book on microfinance economy. “But over the long haul it hasn’t yet proved itself as an established model where you write a check to an institution or network. I’m willing to trust an expert to pick a field and figure out how to best use the money. I’m less confident that I can make the best choice sitting in my home office.”

MicroPlace says the interest payments are an incentive for people to make a little money while also helping to cure global poverty. “This isn’t the same as getting your money back from the stock market,” notes Morduch. “Maybe it’s better if the extra $15 you make on a return stays with the institution if it means it can actually do more for poor people.”

The MicroPlace works a lot like investing in a mutual fund. The site, which had been in development when eBay (EBAY) acquired MicroPlace in June 2006, lets individual investors pick a fund from a specific region or country. The funds are managed by the non-profit investor Calvert Foundation and Dutch microfinancier Oikocredit, which reinvests the money with hundreds of local lenders that make loans to the impoverished. MicroPlace investors can make a loan through a bank or PayPal, which processes payments for free. While there’s no guarantee that investors will make back their principal, let alone interest, Turner says microfinance receipients have a 97% repayment rate.

Much like eBay’s marketplace, MicroPlace earns revenue from listing fees that it charges the fund issuer. An eBay spokesperson says if MicroPlace becomes profitable, it’ll use future revenues to fund other socially-minded initiatives within the company.

EBay’s interest in microfinance was established by company founder Pierre Omidyar. A proponent of helping the poor create sustainable economies, he created his foundation, Omidyar Network in 2004, and helped advise MicroPlace in its early stages. Former eBay executive Matt Bannick, who spearheaded the purchase of MicroPlace, left the company in March to run Omidyar Network. Says Turner, “Matt felt it was a good fit for eBay to leverage its expertise in building marketplaces with small business owners, payment processing, and connecting people with one another to change world ideas.”

Turner hopes MicroPlace’s approach will help grow the industry from 100 million investors to 1 billion worldwide and subsequently, reach billions of the poor. The idea for the site struck her when she worked for microfinance pioneer Grameen Foundation in 1998.

Turner went to visit a woman in an extremely poor Bangladesh village. The woman had received a modest loan that allowed her to buy a handloom to weave fabric. She sold enough fabric to repay the loan, send her kids to school and earn a profit. A photo of her now hangs in Turner’s living room.

Says Turner, “I keep that photo there to remind me how everyday people like you and me can reach out and help people like Mina Choudhary in a sustainable way.”

By Lindsay Blakely 

StumbleUpon, the San Francisco startup acquired by eBay (EBAY) in May for $75 million, wants to personalize search – even if you prefer to use sites like Google and Yahoo.

As its name suggests, StumbleUpon helps you “stumble” around the Web and find new content. A downloadable toolbar suggests Web sites and videos and learns your preferences as you give a thumbs up or down to what you see.

On Tuesday the company unveiled SearchReviews, which brings personalized recommendations directly into search results on Google (GOOG), Yahoo (YHOO), MSN, AOL, Ask, Flickr, Wikipedia and YouTube. A registered user simply searches on one of the above sites. If any of the resulting websites have been reviewed by the StumbleUpon community, they will be denoted by a logo, star rating and link to user reviews.

So far StumbleUpon users have reviewed 13 million Web sites. Sixty-five percent of all search queries will include some recommended links and that number should grow as more people use the service.

The stumbling technology could eventually be a welcome innovation for the startup’s parent company. As eBay faces a dropoff in sales growth in its domestic online auction business, SearchReviews could potentially help people window shop on eBay and discover products they wouldn’t have found otherwise.

StumbleUpon CEO Garrett Camp says he can see SearchReviews enabling eBay users to “stumble across the marketplace” to find merchandise or sellers recommended by others. That kind of integration, he says, likely won’t take place for another six months to a year. “We want to let it grow on StumbleUpon first,” says Camp. He notes the the technology will need some tweaking so that it doesn’t, for instance, recommend merchandise in auctions that have expired.

For now the startup is launching SearchReviews without the collaboration of the search giants. Camp says that StumbleUpon can do this because it’s not reordering search results, which would interfere with the search engines’ revenue models.

StumbleUpon currently boasts more than 3.7 million registered “stumblers” that use the company’s website and downloadable toolbar. The company earns advertising revenue by targeting users and sending them directly to sponsored results that have been inserted into the mix of content.

Camp says the new SearchReviews feature was born of the realization that the company can’t compete with the major players like Google and Yahoo. “But StumbleUpon can improve what’s already there,” he says.

It could have been so much worse for eBay (EBAY). Two weeks after the giant online auction site acknowledged that it had paid far too much for Skype, the Internet phone service, and would be writing off $1.4 billion in charges, the company surprised Wall Street with relatively strong results in the rest of its operations.

After the market closed on Wednesday, eBay reported record revenue of $1.89 billion in the third quarter, up 30% from last year — handily beating analysts’ expectations of $1.83 billion.

Because of the Skype write-off, however, eBay quarterly results showed a net loss of $935.6 million, or 69 cents per share.