EBay Chief Says Change Isn’t Over

More changes are coming to eBay, and John Donahoe, the new boss, is girding for the repercussions.

Mr. Donahoe, who has been running the company since his appointment to the top spot was announced in January, wants the company, the Internet’s largest e-commerce site, to operate less like an unruly flea market and more like a strip mall — where buyers are guaranteed to have a comfortable and predictable shopping experience.

The changes are intended to help eBay restart growth in its main marketplaces business, which has stagnated as Amazon.com has attracted eBay’s best buyers and sellers.

The effect of some of those changes was beginning to be seen in financial results. The company announced stronger overall earnings on Wednesday, including a 22 percent increase in net income from the year-ago quarter, beating analyst’s estimates. The results were aided by robust international sales, a weak dollar and eBay’s rapidly growing ancillary businesses, like the payment service PayPal and the Internet calling service Skype.

EBay’s stock, which was flat in late trading after the earnings report Wednesday, is up 20 percent, to $32.12, since mid-March on these positive signs. But its marketplaces business still continues to stagnate. The number of active eBay users increased only 1 percent in the last year, to 83.9 million.

To fix that, Mr. Donahoe has pushed through a series of significant changes to the auction site, many of them favoring big, reliable sellers. And that has meant inevitable rancor in eBay’s boisterous community of smaller sellers who have made a living out of selling knickknacks from home.

For example, in February sellers who viewed a recent change to eBay’s payment structure as a fee increase organized an attention-grabbing boycott of the site. In an interview after the quarterly earnings report on Wednesday, Mr. Donahoe, who officially succeeded Meg Whitman in March, said he was not fazed by the attention. “The good news is Meg prepared me well for this,” he said. “I will say at one point in the first quarter I got an e-mail from my mother that said, ‘John, eBay sellers may not love you, but your mother does.’ ”

Mr. Donahoe has signaled that everything eBay does is up for review. Among the speculation on the sweep of that statement is the possibility that eBay will sell Skype, which eBay bought in 2005, to the Internet search giant Google.

Mr. Donahoe did not dismiss the possibility, but said he wanted to give Skype’s new chief executive, Josh Silverman, more time to look at synergies between the calling service and eBay. “Let’s see if they exist,” he said. “In the meantime, we’re building a great business.”

Mr. Donahoe says he is focused on bringing consistency to the core marketplace business and improving the experience for buyers. Among his recent changes, eBay has revised the way that auction listings appear in search results on the site. Instead of listing auctions in the order which they end, the company is now favoring sellers with better ratings, lower shipping fees and cheaper prices.

Beginning in May, eBay will not allow sellers to leave negative feedback for buyers, a move that has many sellers complaining. “One of eBay’s mantras for the last 10 years was that they provide a level playing field for everyone,” says Jonathan Garriss, executive director of the Professional eBay Sellers Alliance, a group of eBay’s largest sellers. “But they now realize that just doesn’t work in today’s competitive environment. So they are doing a lot of things they never did before, like treating their biggest sellers like their customers and giving more things to their better customers. Any business does that.”

The fee and search changes, which took effect only six weeks ago in the United States, Britain and Germany, appear to be having a positive effect. In its earnings call Wednesday with analysts and investors, eBay said that it was seeing increases in the number of listings on the site and in gross merchandising volume or G.M.V., the total sum of all transactions on the eBay marketplace. G.M.V. in the latest quarter increased 12 percent from a year earlier.

The company said net income in the first quarter rose to $563 million, or 42 cents a share, on revenue of $2.19 billion, a 24 percent increase from the period a year ago. But its operating margin fell to 32 percent from 33.6 percent last year, as lower-margin businesses, including PayPal and Skype, grew quickly.

The changes in fees and search listings have drawn anger from some of the smaller mom-and-pop sellers on the site, who now say they have a harder time making a profit and getting their items to show up in search results.

“You can’t sell anything. Buyers say they can’t buy anything. It’s a disaster,” said Valerie Lennert, a longtime seller of custom doll clothes who helped organize the boycott in February. She says the new changes to eBay’s search engine effectively make her listings invisible.

Mr. Donahoe says it is not the company’s intent to discriminate against small sellers. But, he said, “where large and small sellers are trying to cut corners and not provide a good buying experience, we are making less room for them in the marketplace.”

Mr. Donahoe outlined some more coming changes to the site. In Australia, the company is testing a program that requires sellers to accept only PayPal payments. Mr. Donahoe said that if the test was successful, the company would introduce it in other countries “in months, not years.” Mr. Donahoe said the intent was to cut down on fraud on the site, but critics say the change will entitle eBay to a double helping of fees on each transaction.

Ms. Whitman was absent from eBay’s earnings call for the first time in more than a decade. Although she remains a director and advises Mr. Donahoe, she is spending part of her time as a national co-chairwoman for John McCain’s presidential campaign.

United Technologies Profit Jumps 26%

United Technologies Corp., which makes Otis elevators, Sikorsky helicopters and Carrier air conditioners, said Thursday its first-quarter earnings rose 26 percent as the weak dollar boosted profits throughout the business.

But its shares fell almost 3 percent as it reaffirmed a forecast for the year that was below Wall Street expectations.

The Hartford-based industrial conglomerate earned $1 billion, or $1.03 per share, in the quarter, up from $819 million, or 82 cents per share a year earlier. Analysts expected $1.01 per share, according to a Thomson Financial poll.

Revenue rose 12 percent to $13.7 billion from $12.3 billion a year earlier and was ahead of Wall Street's estimate for $13.4 billion.

Chief Executive Louis Chenevert says he is ''confident'' with the company's 2008 financial targets.

Chenevert reiterated United Technologies' 2008 profit forecast of $4.65 to $4.85 per share. Analysts expect earnings of $4.86 per share. Revenue is expected to grow to $59 billion, he said.

Its shares fell $2.13, or 2.9 percent, to $70.50 in morning trading.

The company's Fire and Security division, which makes and installs alarms, video surveillance systems and fire detection and fire fighting products, posted the biggest gains in revenue and profit. Revenue for the quarter was nearly $1.6 billion, up by more than 28 percent, and profit was $115 million, up by more than one-third.

The fire and security business is the most recent among United Technologies' business, which was established in 2003 with the acquisition of Chubb and expanded two years later with the acquisition of Kidde.

The conglomerate is seeking to expand the segment with a takeover bid, announced last month, of North Canton, Ohio-based Diebold Inc., a manufacturer of ATM's and voting machines.

Extra Cost to Buy Yahoo: Retention Pay

Microsoft’s pursuit of Yahoo, if successful, will leave it with more than one bill due.

The shareholders, to be sure, will collect their payment, but Microsoft will most likely need to put together a package of financial incentives to prevent talented engineers and managers from hopping to other jobs in Silicon Valley.

The employee retention program could be expensive, perhaps costing billions of dollars, based on what Microsoft did when it acquired another technology company last year.

A look at that deal suggests the extent to which people are the vital assets at companies that mainly generate ideas that become software and Web services. The hidden cost of “flight insurance” against employee defections may also be a reason Microsoft has resisted raising its bid, which is now worth $42 billion.

Last May, Microsoft bought Tellme Networks, a maker of voice-recognition software used in directory assistance and for searching the Internet through voice commands. Microsoft paid $800 million for Tellme, a private company based in Mountain View, Calif., but it put in another $100 million for employee retention programs, according to two people close to Microsoft. That figure has not been previously disclosed.

Cash payments, stock options and grants to encourage employees to stay after a takeover are fairly standard in Silicon Valley, venture capitalists and industry analysts say. These incentive plans, they add, can extend deep into the engineering ranks, unlike the situation in most other industries where retention packages, or “golden handcuffs,” are typically offered to a handful of top executives.

For Tellme, which has 330 employees, the money set aside amounts to more than $300,000 for each worker.

Yahoo is a much larger company, with more than 14,000 employees worldwide. And if Microsoft acquires Yahoo, any employee retention effort would probably be more tailored and less broad than for Tellme, analysts say. But even a program proportionately much smaller could add another sizable expense, perhaps a couple of billion dollars, to the overall cost of bringing Yahoo into the Microsoft fold, analysts estimate.

“It would be a significant additional expense that would come due over several years,” said David B. Yoffie, a professor at Harvard Business School. “And Microsoft knew that when they made the bid for Yahoo.”

When buying companies in Silicon Valley, Microsoft in particular may have to offer attractive incentives to keep employees. Its reputation is still tainted by memories of its strong-arm tactics against companies like Netscape and Sun Microsystems in the 1990s, which prompted a long-running federal antitrust case that it lost.

That reputation is probably dated, noted Mark R. Anderson, chief executive of the Strategic News Service, a technology newsletter. “But if you’re in the Valley, that first impression of Microsoft still has to be overcome,” Mr. Anderson said. “So I think the company pays more in employee retention packages — a Microsoft premium.”

At Tellme, there was some history to overcome. Michael McCue, a founder and the chief executive, was a vice president for technology at Netscape. He met regularly with Justice Department investigators when they were assembling their antitrust case against Microsoft.

When the chief executive of Microsoft, Steven A. Ballmer, offered to buy Tellme, Mr. McCue asked if his company would be forced to switch the operating system used in its data center, Sun’s Solaris, to Microsoft’s Windows.

“No, no, we’ve learned our lesson,” Mr. Ballmer replied, according to Mr. McCue.

Mr. McCue declined to discuss Microsoft’s employee retention program, other than to say it had been ample and effective. A few people have left, including Robert P. Komin, Tellme’s chief financial officer, who joined a solar energy start-up, Solexel. But 95 percent of the workers who were with Tellme when it became a subsidiary of Microsoft stayed.

“It’s been a great experience,” Mr. McCue said.