EBay sees growing risks to business in coming year

By Eric Auchard

SAN FRANCISCO (Reuters) - Online auction leader eBay Inc <EBAY.O> warned in an annual report on Friday that it faces difficulty getting former customers to return, adding to the normal challenge of attracting new users to its sites.

In its annual shareholder filing with the U.S. Securities and Exchange Commission, eBay cited a variety of new threats to its business that reflect "changing customers demands."

EBay acknowledged that its main auction business faces slowing growth in each of its top three markets.

"We face challenges in the U.S., U.K. and Germany, which are our three largest markets, as growth of listings, active users and GMV on the eBay.com platform in those countries has slowed," the company said in the regulatory filing.

GMV is gross merchandise volume, the total value of goods and services sold on eBay sites -- on which eBay takes a cut in the form of transaction fees.

Adding to the risks in the coming year is expected weaker consumer spending in each of these three major markets, it said. At the same time, overall growth in the e-commerce market is expected to continue to decelerate, the company cautioned.

Wall Street analysts, on average, expect eBay this year to earn revenue of $8.7 billion, a rise of 14 percent on 2007.

EBay revenue has suffered a dramatic slowing of growth in recent years -- down from rates of 30 percent to 40 percent.

In a discussion of potential risks to growth and profitability, eBay added the need to "reactivate former users," adding to the typical Web business concerns about attracting new users and keeping existing users active.

The San Jose, California-based company also acknowledged that significant changes made in January in fees and policies on its marketplaces have been controversial with many sellers.

"If these changes cause sellers to move their business away from our sites or otherwise fail to improve gross merchandise volume or the number of successful listings, our operating results and profitability will be harmed," eBay said.

The language of eBay's annual report underscores previous warnings the company has made about slowing growth. In January it reported solid fourth-quarter results but said it expected 2008 revenue to grow only 12 percent -- well below the 18 percent that analysts, on average, had predicted at the time.

Jeffries & Co analyst Youssef Squali said the pessimistic language eBay uses to describe its business prospects reflect a growing awareness that eBay is no longer the only game in town for merchants. Rivals such as Amazon.com <AMZN.O> are enjoying surging growth in its merchant business as eBay slows.

EBay has also been suffering one of its periodic seller revolts in response to the recent round of price changes.

But Squali said the impact of the latest "sellers' strike" has yet to be reflected in any dramatic fall-off in auction listings. "The buyers don't go on strike," he said, but added: "Now sellers are looking for new options off of eBay."

(Editing by Braden Reddall)