[Infowarrior] - How eBay Makes Regulations Disappear

[Richard Forno]

June 4, 2006
How eBay Makes Regulations Disappear
By KATIE HAFNER
http://www.nytimes.com/2006/06/04/business/yourmoney/04ebay.html?_r=1&oref=s
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IN quick succession one morning last month, Louisiana state legislators
plowed through a long list of bills, including one to relocate the motor
vehicle commission, another to regulate potentially abusive lending
practices, and yet another that was the handiwork of eBay, the digital
shopping mall that bills itself as "the world's online marketplace."

EBay had worked overtime to ensure the passage of Senate Bill 642, which
sought to exempt some Internet transactions ‹ like those that occur on its
Web site ‹ from Louisiana licensing requirements for businesses conducting
auctions. As the State Senate's Commerce Committee convened to consider the
bill, Duane Cowart, an eBay lobbyist, testified that forcing eBay "trading
assistants" to fork over $300 for a license was unduly burdensome.

"What they do on the Internet is not an auction, and they are not
auctioneers," Mr. Cowart told the committee. Trading assistants take items
on consignment from other owners and put them up for bid on eBay, but Mr.
Cowart said their activities were more akin to placing classified ads.
Louisiana's senators seemed to agree with him wholeheartedly. "I think eBay
is great," said one, while another regaled the room about his adventures
shopping for a Plymouth Prowler on eBay. State Senator Noble E. Ellington, a
Democrat who sponsored the bill at Mr. Cowart's behest, beamed as his
colleagues gave the legislation their unanimous support.

EBay's lobbying activities are not confined to Louisiana. As the company has
spread its innovative and influential wings across the Internet, it has also
woven together a muscular and wily lobbying apparatus that spans 25 states.
"It is a fast-moving train, and if you get in front of it you'll get
flattened," said Sherrie Wilks, an official with Louisiana's licensing
agency, who is concerned that eBay flouts regulatory oversight by persuading
state legislators to take the company's side.

Regulators in other states also say that when they try to erect guidelines
around eBay's activities, they quickly encounter the realities of the
company's political power, raising anew the perennial questions about the
proper balance among public policy, consumer protection and business
interests. EBay's lobbying tactics, meanwhile, illustrate the spoils to be
won when a savvy, resourceful company combines local political persuasion
and grass-roots rallying to get lucrative regulatory exemptions that allow
it to safeguard its profits.

EBay's efforts have been remarkably successful, and the company, which has
worked tirelessly to cultivate its image as a friendly neighborhood bazaar
even as it engages in hard-nosed lobbying, is not shy about boasting of its
victories. Last year, Ohio passed a law that would have regulated eBay
sellers, but the company moved quickly ‹ with the help of seasoned lobbyists
‹ to have a pre-emptive and more favorable bill passed.

"We realized what was there, and we worked with local lobbyists and were
able to get the law reversed," said Tod Cohen, eBay's vice president for
government relations. He oversees the company's efforts to convince state
lawmakers of a core eBay belief: that state regulation can impede the flow
of e-commerce.

The Federal Trade Commission, which has loosened regulations across a broad
range of industries, appears to agree. Late last week, responding to a
request from Mr. Ellington for an analysis of the Louisiana bill, the agency
advised that the bill promoted competition and increased consumer choice.

Unlike many other Internet companies, eBay has to be especially fleet-footed
when it comes to stopping what it perceives as hostile regulation, whether
it involves the growing number of eBay drop-off stores ‹ places like UPS
stores and small shops where people take their goods to be sold on eBay ‹ or
the more general category of trading assistants. Anyone engaged in selling
on the site depends on a relatively friction-free environment in order to
make a profit. So does eBay, because its overall corporate goal is to keep
sales volumes high.

At any given moment, 89 million items are for sale on eBay, and the mother
ship ‹ eBay itself ‹ gets a fee for each successful transaction. It also
charges its 193 million registered users listing fees for any products they
display on the site. EBay's gross transaction fees for the first quarter of
2006 alone were more than $500 million, a 30 percent increase over the same
quarter in 2005. Keeping regulators at bay, particularly those whose efforts
might slow down sales traffic, is a particularly high priority for the
company.

Regulations are threatening to eBay for another reason as well. They set
precedents. Once a law regulating eBay sellers takes hold in one state,
other states are more likely to follow suit. And not only do licenses and
other regulatory requisites increase the cost of selling items on eBay, but
regulations may deter entrepreneurs who are thinking of introducing
eBay-based businesses. Although regulations can help rein in con artists and
other fraudsters masquerading as legitimate vendors on eBay ‹ which is why
most regulators say they favor strict licensing requirements ‹ eBay sees its
online community as self-regulating.

Analysts say the company has little room to maneuver when it comes to
opposing outside oversight.

"EBay doesn't have a choice," said Ina Steiner, editor of Auctionbytes.com,
an online newsletter. "This is such a tight-margin, price-sensitive business
that if there are excessive regulations on sellers, it will affect eBay
dramatically."

Accordingly, eBay fights regulators who try to categorize it as an auction
house ‹ despite the fact that for years eBay has used the word "auction"
when describing what takes place on its site. In securities filings from
1998, the year eBay went public, it said that it "pioneered online
person-to-person trading by developing a Web-based community in which buyers
and sellers are brought together in an efficient and entertaining auction
format." In the annual report last year, eBay said it provided the
"infrastructure to enable online commerce in a variety of formats, including
the traditional auction platform."

Yet eBay contends that such references are informal and says that auction
laws ‹ many of them written long before the Internet and eBay even existed ‹
should not apply to its sellers.

Chris Donlay, an eBay spokesman, said the timed auctions on eBay were
fundamentally different from "someone who holds a live auction in front of
an audience until he has achieved the highest price possible for the
client." Instead, as the company says on its Web site, eBay merely "offers
an online platform where millions of items are traded each day."

THE headquarters of the Louisiana Auctioneers Licensing Board is a modest,
three-room office in Baton Rouge with two employees and a dial-up Internet
connection. The agency says its mission is to protect the public from
"unqualified, irresponsible or unscrupulous individuals."

Late last year, the agency's seven-member board, concerned about possible
abuses, decided that eBay trading assistants doing business in Louisiana
needed licenses. Last summer, Jim Steele, a retired police officer who is
the agency's investigator, started paying visits to eBay sellers around
Louisiana who were registered as trading assistants.

Among those visited by Mr. Steele was Cheryl Brown, who runs a small eBay
business out of her modest one-story home in Hammond, about an hour's drive
east of Baton Rouge. Ms. Brown keeps an eclectic mix of wares ‹ including
shoes, belts and Black & Decker laser levels ‹ piled around a bed in a spare
back bedroom. Mr. Steele arrived at Ms. Brown's door last February and told
her that she needed to get an auction-business license or face a
cease-and-desist order.

Ms. Brown said she was "blown away" to find herself singled out. After all,
she said, her sales averaged little more than $2,000 a month. Even so, she
paid $300 for the license and an additional $250 for a surety bond the
licensing board required.

Ms. Brown has yet to make a single sale as a trading assistant ("I don't
want to sell people's old clothing," she said) and says she would rather not
have to have a license. But, she said, she also enjoys the extra credential
that a license gives her. Further, she said, she believes that her
transactions on eBay are, in fact, auctions. "My opinion is that eBay is the
one doing the auctioning," she said. "They're in control."

Ms. Brown's opinion is shared by Brian Leleux, an eBay seller at the
opposite side of the state and the opposite end of the eBay sales revenue
stream. Mr. Leleux employs nearly a dozen people and sells some $120,000
each month in recliners, inflatable air beds and other goods on eBay, making
him an eBay "Platinum PowerSeller." He pays eBay about $12,000 every month
in listing and transaction fees and an additional $2,100 to PayPal, eBay's
automated payment subsidiary.

Mr. Leleux operates his business, MassageKing.com, in a large warehouse near
Lafayette, and Mr. Steele visited him there earlier this year. Mr. Leleux
had signed up with eBay as a trading assistant but done very few consignment
sales. Still, he paid the state's fee and applied for the license. Like Ms.
Brown, Mr. Leleux said that he did not want a license but that it did give
him "one more bit of legitimacy," a notion that appealed to him. And he,
too, says he believes that eBay is an auction house.

Still, not every eBay trading assistant was so compliant when Mr. Steele
came calling. Barry Simpson has a computer equipment store in Morgan City
and sells items on eBay as a sideline. Earlier this year, Mr. Simpson said,
Mr. Steele visited him and insisted that he be licensed, even after Mr.
Simpson said he would prefer to stop being a trading assistant. Mr. Simpson
refused to get a license and complained to eBay, after which the company
stepped up its legislative push in Louisiana.

"At that point, we decided we needed to act," said Mr. Donlay, the eBay
spokesman.

Mr. Simpson says he believes that complying with certain regulations just
does not add up. "If someone comes in and tells me I need a license and I'm
selling something for someone else, and I don't do enough of that business,
I'll quit," he said.

Unlike most entrepreneurs, Mr. Simpson has a well-heeled and influential
corporation ‹ as vigilant about its own interests as it is about his ‹ ready
to take on regulators. And eBay appears to be prepared to contest regulators
in almost any state where it feels that its prerogatives are threatened.

In California last year, a bill that would have subjected eBay drop-off
stores to restrictions now placed on pawnbrokers died quickly after eBay
executives ‹ including Meg Whitman, the chief executive ‹ met with leaders
of the Republican caucus of the Legislature. "The Republican votes we
thought we had withered away," said Leland Y. Yee, the Democratic California
assemblyman who sponsored the bill.

Last year, after eBay waged a protracted lobbying effort in Illinois, the
state revised its laws to allow Internet auction sites to compete with
licensed ticket brokers and sell tickets for more than their face value. New
York and Florida have passed similar amendments after eBay lobbied for
changes.

Auctioneering laws like those in Louisiana are another focus for eBay. In
Maine and Tennessee, after eBay intervened, laws were changed to exempt
Internet auctions from licensing requirements.

All of this is just a matter of common sense, according to some people
involved in the debate. Ms. Steiner, the newsletter editor, says that many
eBay sellers do their trading part time or in addition to another job. "If
they are overregulated by licensing fees," she said, "they will abandon
their eBay business." For its part, eBay is leaving little to chance.

Over the last eight years, eBay has built a stable of local lobbyists in 25
states. Those lobbyists ‹ who work on retainers that can reach $10,000 a
month, according to state lobbying registration documents ‹ have also made
contributions to individual politicians who sponsor bills favorable to eBay.
For example, Mr. Cowart's political action committee in Louisiana
contributed $2,000 to Mr. Ellington in 2005. And eBay lobbyists in Illinois
have contributed thousands of dollars to politicians who supported the
ticket-scalping bill.

EBay combines its politics-as-usual approach with more creative grass-roots
tactics. It keeps its membership informed about regulatory issues as soon as
they crop up, using mass e-mail messages and a year-old Web-based initiative
called "eBay Main Street," which sends out "legislative alerts" and provides
letters that users can send to government officials. Bowing to the
traditions of ward politicos adept at turning out the vote, eBay routinely
summons its sellers and sends them on personal visits to statehouses around
the country to meet with legislators.

"What better way to get a response than to get to the grass roots, which is
eBay's members," said Kathy Greer, an eBay seller in New Hampshire, where
there has been continuing debate about regulating eBay sellers. "Let them go
out and fight your battle."

WHEN eBay sent e-mail messages in April to its Louisiana members to tell
them their livelihoods could be threatened by the state's intention to
require licenses ‹ and urged them to take action ‹ Ms. Wilks, the licensing
agency's sole administrator, was besieged with phone calls and e-mail
messages from angry eBay sellers. After she explained that the board
intended to require that only about 460 registered eBay trading assistants
be licensed, the hubbub died down.

But some sellers who joined in the campaign say they felt that eBay had
misled them by making it appear that the proposed regulations were more
sweeping. "They approached it in a very underhanded way," said Stephen
Dille, a Baton Rouge accountant who sells items intermittently on eBay but
received the alert and sent an e-mail message to Ms. Wilks. "I always
thought of them as a good company, but now I'm questioning their culture,
and their ethics."

Anna Dow, a lawyer for the Louisiana licensing board, put it more
forcefully. "They're being deliberately misrepresentational of what's going
on," she said.

For their part, eBay officials say that the licensing board has repeatedly
refused to give the company a clear answer on whom it plans to regulate, so
it has sent e-mail messages to a wide variety of recipients. EBay's
anti-regulatory stance extends to storefront drop-off centers, which have
been proliferating rapidly around the country. Vendors welcome the company's
help.

Debbie Gordon, the owner of Snappy Auctions, a nationwide chain of eBay
drop-off stores that is based in Nashville, says she believes that all eBay
consignment stores should follow certain practices to make sure that
customers are protected. But she was outraged two years ago when Tennessee
regulators told her that she would have to get an auctioneer's license and
attend a week of auctioneering school.

Ms. Gordon paid $700 for a license and other fees and spent what she called
"five days I'll never get back" at a training course for auctioneers.
"Ninety-nine percent of the course had nothing to do with our business," she
recalled. "It was about traditional auctioneering, cattle and land and
firearms."

Soon after a local newspaper publicized Ms. Gordon's experience, eBay
stepped in. It convinced lawmakers that not only did outfits like Ms.
Gordon's have no relationship to hog calling, but also that because of the
timed nature of an eBay auction, the transactions were altogether different
and thus not subject to auctioneering laws.

"We fundamentally believe that auctioneering laws are not applicable, are
detrimental and are being used to harm competition," said Mr. Cohen of eBay
in an interview. "They protect entrenched incumbents rather than enhancing
competition, consumer choice and entrepreneurial spirit."

BUT Ms. Wilks of the Louisiana licensing board says that if trading
assistants on eBay are not required to have licenses, people like Linda
Williams will have nowhere to turn. Earlier this year, Ms. Williams, who
lives near Baton Rouge, gave an antique couch to someone to sell on
consignment on eBay, she said. The couch was sold, Ms. Williams said, but
she did not see a penny of the proceeds.

Ms. Williams called the licensing board, which found that the seller was an
auctioneer who was already facing a separate investigation. A bank seized
his assets ‹ which included a warehouse filled with items he had taken on
consignment from dozens of people, including Ms. Williams ‹ and his license
was revoked, according to Ms. Wilks and Ms. Dow. "They were very helpful,
and told me to call any time," said Ms. Williams of her experience with the
licensing board. "If it wasn't for them, there would be nothing I could do."

EBay executives say that stories like this do not mean that more laws are
required. They point out that law enforcement agencies are set up to
investigate Internet fraud. "Regulators regulate ‹ that is their job," Mr.
Cohen said. "But we have an obligation as a company to protect our
community."

Shortly after the first legislative hearing on Senate Bill 642 in Louisiana,
eBay sent out another e-mail alert, this time to its biggest sellers in the
state. The company asked sellers to attend a meeting late last month to
update them on the bill and to brief them on other potential impediments to
their businesses. Some 50 sellers from around the state attended the meeting
at a Baton Rouge Marriott. Michelle Peacock, eBay's director of state
government relations, flew in from California to join Mr. Cowart, the
lobbyist. Large colorful billboards outlining "barriers to e-commerce"
decorated the room.

Ms. Peacock discussed the proposed revisions to Louisiana's auctioneer
statute and talked about a bill supporting the elimination of restrictions
on the resale of tickets on the Internet. After the meeting, several
attendees piled onto a shuttle bus that eBay provided and drove to the
Capitol to talk with their state representatives about Senate Bill 642.

The next day, the Commerce Committee of the Louisiana House of
Representatives took up the bill, which the State Senate had already passed.
The bill received unanimous support in the committee. Mr. Ellington, the
state senator, said in an interview last week that he expected to see the
bill pass the full House this week ‹ without a hitch.

Iris Smalbrugge contributed reporting for this article.