What's up at eBay? (Expenses!)

Rob Hof

If there's one thing investors love about eBay, it's how little the online marketplace has had to spend to get that runaway growth when compared with retailers online or off. So when eBay's fourth-quarter earnings came up short, the most crimson of the red flags was how much more it's now spending on marketing and capital improvements. The disturbing question, says American Technology Research analyst Mark Mahaney: "Has the cost of selling online become materially higher?"

At least in eBay's case, it sure looks like it. For one, its fourth-quarter marketing expenses shot up 56% as the company tried to jumpstart a retail season that started slowly, not just for eBay but for the whole retail sector. eBay CEO Meg Whitman says the spending largely worked, as the company set sales records for the Thanksgiving holiday and afterwards. But analysts rightly wonder why it took so much money to produce only 44% sales growth--actually, only 39% if you take out foreign-currency exchange benefits. Whitman's response: Advertising rates for all media are rising. "We're going to have to find other ways to market," she told analysts. (Listen up, Yahoo! .)

That's not all. eBay also said it plans some $500 million in capital spending this year. Granted, as eBay Chief Financial Officer Rajiv Dutta pointed out to me, that includes a onetime $126 million payment for eBay to buy its leased office complex in San Jose. But even at that, Legg Mason analyst Scott Devitt wonders why on Earth eBay, which doesn't stock or sell anything itself, suddenly has to spend so much on capital improvements. After all, even Amazon.com, which operates 12 huge distribution centers worldwide, plans to spend less than $100 million this year. Maybe, says Devitt, "this business is more capital-intensive than we realize." No wonder investors freaked.

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