EBay-Craigslist Court Clash Could Reprice Classifieds

In a case that may define how the online classified advertising industry evolves for years to come, eBay and Craigslist will square off in Delaware Chancery Court, starting on Dec. 7. The companies are at odds over what eBay calls unlawful efforts by Craigslist to diminish its minority ownership in Craigslist. Victory by eBay may help the e-commerce company boost its stake in the world's largest online classified site and pave the way for eBay (EBAY) to exert greater influence over the no-fee strategy that gives Craigslist a big leg up on the competition. A defeat for eBay would let Craigslist keep setting the direction of the online classified business in key markets. The site's insistence on not charging for most ads makes it hard for rivals, including eBay, to charge for listings in places where Craigslist is entrenched. Founded by Craig Newmark in 1995, Craigslist is run more as a community service than as a business focused on profits. It lets most users post ads for everything from autos to apartments at no charge, although it generates revenue from listings for jobs, real estate, and adult services in certain markets. The company is expected to have about $100 million in sales this year, from $81 million in 2008, according to consultant AIM Group. Craigslist gets more than 90% of the traffic to U.S. online classifieds sites, according to researcher Hitwise. Analysts speculate that eBay, which is fighting in court partly for the right to elect a member to Craigslist's board, would use its influence to push Craigslist to charge for other listings. "At the core of this dispute, there seems to be some disagreement over maintaining Craigslist as a community resource," says Olufunmilayo Arewa, an associate professor of law at Northwestern University. Craigslist decisively cut eBay's stakeExecutives at eBay might even use a legal victory as a precursor to an eventual Craigslist takeover, some analysts say. From the time eBay purchased a 28.4% stake in 2004, the larger company has considered fuller ownership, court documents indicate. The idea was "to take out the free player," says Jeffrey Lindsay, an analyst at Sanford C. Bernstein. According to court documents, Craigslist took steps in 2007 and 2008 to reduce eBay's stake to less than 25%, negating eBay's right to elect a director to Craigslist's board. In April 2008, eBay sued, alleging that Newmark and Craigslist CEO Jim Buckmaster acted unfairly by reducing its stake. Officials of eBay say they don't plan to own the whole of Craigslist. "We are a content minority owner of Craigslist," eBay CEO John Donahoe said in a Nov. 24 interview with Bloomberg News. "All we want to do is restore the status quo." At the same time, Donahoe didn't rule out upping the stake. "If someone came to us and offered us the opportunity to buy more, sure we'd look at it, but we're not planning on it," he said. Craigslist declined to comment for this article, but in the past has bristled at eBay's partial ownership, saying eBay made moves that transformed it into a competitor. "We have an uncomfortably conflicted shareholder in our midst, one that is obsessed with dominating online classifieds," Craigslist said in a statement last year. "blend between classifieds and eBay"After it bought the Craigslist stake, eBay purchased other classified sites, such as Markplaats.nl in the Netherlands. It also launched its own series of sites called Kijiji, which has become the leader in online classifieds in Canada and other countries. According to eBay, Craigslist shouldn't have been surprised by its foray into classified ads. "EBay and Craigslist have agreed that eBay would engage in competitive activity," except in the area of jobs classifieds, says Mary Huser, eBay's deputy general counsel. Whatever the outcome of the court case, eBay wants to expand its classified business, possibly through acquisitions. In his interview with Bloomberg, Donahoe hinted at the possibility of incorporating classifieds into its core site, focused on auctions and other e-commerce. He said he expects to see a "blend between classifieds and eBay." Potential acquisition targets include recruitment sites Yahoo! (YHOO) HotJobs, Monster.com (MWW), or Realtor.com, says Peter Zollman, founder of AIM Group, which provides consulting for eBay. Yet because Craigslist offers most listings at no charge, competitors may have a hard time collecting fees in markets where Craigslist is prevalent. If eBay loses in Delaware, its classified efforts could suffer. "It is quite possible that eBay could exit some [markets]," says Lindsay at Sanford C. Bernstein. In the coming years, Craigslist could reduce eBay's stake even further, reducing the likelihood eBay could press Craigslist to change its business model, Lindsay says. On its own, eBay has had mixed results in online classifieds. It runs 10 sites serving more than 1,000 cities worldwide. The number of unique monthly visitors to Kijiji's various sites declined 16%, to 19.8 million in November, from a year earlier, according to researcher comScore (SCOR). eBay has yet to put out a winning classifieds site design and business model, says Peter Krasilovsky, a program director at consultant Kelsey Group. "It just looks like a me-too product," Krasilovsky says. "Why would anybody go to a place with fewer ads when all of their friends go to Craigslist?"

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