EBay China decides ‘free’ is a business model

EBay has decided to stop charging sellers a transaction fee on its Chinese Web site, just a few months after lambasting a rival auction site’s no-fee strategy.

“‘Free’ is not a business model,” eBay said in an Oct. 19, 2005, statement. Alibaba.com’s strategy of not charging a fee from users of its Taobao auction site for three years “speaks volumes about the strength of eBay’s business in China,” it said.

Now, eBay appears to have changed its tune. Effective from Friday, the company will no longer charge a transaction fee from sellers on its Chinese Web site, according to a notice posted online. EBay executives were not immediately available to comment

EBay faces tough competition from Taobao in China. Analysys International, a Beijing-based research company, last month reported Taobao accounted for 57.1 percent of the 8.8 billion renminbi ($1.1 billion) transaction volume of online auctions in China during the first eight months of 2005. By comparison, eBay represented 34.2 percent of the total transaction volume during that period, Analysys said.

Porter Erisman, a spokesman for Alibaba, said Taobao’s operations will not be affected by eBay’s decision to cancel its transaction fee. By continuing to charge its users while Taobao remained free, eBay created an opening that allowed Taobao to build a loyal base of users. “Now it’s too late for them,” he said.

Chen Haiying, an analyst at Analysys, is not so sure. While the no-fee strategy used by Taobao has given it an edge over eBay in the past, that may be less of a factor in the months ahead now that eBay has also decided to stop charging a transaction fee, he said.

Nevertheless, Taobao clearly has momentum in the market and most Chinese users appear to prefer its Web site over eBay, Chen said. “You see that reflected in how the market has developed,” he said.

While eBay will no longer charge a transaction fee for sellers, the company will continue to charge for some services, such as more prominent placement among the site’s product listings. Taobao is also not entirely free for users. Alibaba earns revenue from some transactions on the site through its AliPay online payment platform, Erisman said.