EBay's Rebound Drags While Craigslist Rakes In Dirty Money

Last Updated Apr 27, 2010 6:41 PM EDT

With good first quarter results and stellar performance of its PayPal unit, the eBay (EBAY) of 2010 is a far cry from the foundering mess it was a year ago, when the company was hemorrhaging buyers and suffering a free-fall in its stock price. But just as eBay turns a corner, new stumbling blocks could temper the company's growth -- and one of them is still Craigslist.

First, the back-story: in the last few weeks eBay capped off a veritable revitalization, beginning with a salient court ruling that absolved eBay of trademark infringement charges brought by Tiffany (TIF). Persuaded by some new eBay initiatives -- a 4,000-person "trust and safety" department among them -- the New York-based Second Circuit Court of Appeals ruled that eBay wasn't liable for the counterfeit jewelery sold on its site, setting a liberating precedent for other e-commerce outlets who don't verify the used goods sold by third parties on their online marketplaces.

EBay's usership is also becoming re-enfranchised, just as the company finds itself courting the $220 billion Chinese e-commerce market. A Neilsen report released on April 27 says that eBay was one of the "largest gainers" in terms of time spent per user in February. The auction site also just inked a deal to integrate PayPal functionality into one-time rival site Alibaba.com, China's largest e-commerce company.

Bang-up apps for the iPhone and iPad also have eBay well-positioned for what might be explosive growth in the mobile payments sector; Juniper Research estimates the number of mobile payments customers will increase by roughly a billion worldwide between 2010 and 2014. PayPal has also managed to insinuate itself into the checkout systems of all three major app stores -- RIM's, (RIMM) Apple's (AAPL) and Google (GOOG) Android's -- as well as into Facebook's disruptive new Credits system.

But just as things are getting good, major obstacles are emerging, too. A promising ground-up mobile payments startup called Zong could pose a major threat. Funded in part by a former PayPal exec, Zong has allied itself with 174 mobile carriers worldwide, giving it theoretical access to 1.5 billion customers. Zong lets users buy things with their mobile phones, pushing the charges to their cell phone bills.

More importantly, Zong is the only other payments system baked into the Facebook Credits system, competition which matters hugely to PayPal since virtual goods on Facebook are PayPal's number two moneymaker (after eBay), having grossed the company $500 million last year.

There could be more bad news. The New York Times reports that financial regulatory legislation in Washington may restrict the way PayPal moves money around online. Though PayPal is not a bank, it is considered a financial institution under Regulation E. Calls to PayPal for comment on the legislation were not immediately returned, but one threat may be the proposed consumer protection board.

Meanwhile, eBay's longtime antagonist Craigslist is growing handily. A new study by the AIM Group estimates that the classified site will gross up to $122 million in 2010, up from $81 million in 2008. But while eBay is worrying over governmental interference, Craigslist is making millions from it; AIM says that 30% of Craigslist's revenue is attributable to its "thinly disguised advertising for prostitutes," a niche that has benefited hugely from a bizarre and lucrative price-floor mandated by the Connecticut Attorney General. Making so much money off prostitution (and recruitment, and New York real estate) allows Craigslist to serve the rest of its ads for free, making it harder for eBay's own eponymous classified site to scrape together much revenue or marketshare.

There's history to this fight. EBay bought a 28% stake in Craigslist in 2004, perhaps intending to scuttle it from inside. But when the Craig Newmark felt threatened, he and his co-founder issued themselves more shares to dilute eBay's stake. Then eBay sued and, just last month, threatened a hostile takeover. The case is still dragging through Delaware Chancery Court, but until then, Craigslist continues uninhibited, despite being a switchboard for recent murders, child-selling, armed robbery, and drug sales. Should Craigslist err in any of its legal proceedings, it might just break its curse and invite eBay's long-awaited resurgence.