eBay – The Frustrated CFO

Today, our minds automatically go to facebook, Twitter, Instagram, etc. when someone uses the words "social network." The Rudin/Sorkin/Fincher team made a movie about Mark "I-violate-your-constitutional-rights" Zuckerberg and used those words as a title!

And it's absolutely ridiculous, because establishing and maintaining connections with friends and "the right people" have been vital for the human species since, like, forever. Folks have always built their settlements, villages, towns, and cities with designated places for meetings. Back in the day (and I don't mean the 1980s), households accepted visitors on certain days of the week; and even on a random day one could come by and leave a calling card with the family's help. And who can deny that, ever since the first Industrial Revolution, the patterns of commercial and financial developments were determined by the who-knows-who principle. It's just that the outreach was far more limited.

Of course, the magnitude of Internet networking is breathtaking. In the early 1990s, when the Internet has connected all seven continents, the miracle of instant world-wide access to knowledge, culture, entertainment, or people was the most important and alluring aspect of this new technology for me. I still experience a thrill every time I look at this blog's dashboard and see that during the last 24 hours my posts have been read not just at home, but also in Denmark, Canada, Germany, South Africa, UK, Vietnam, Australia, Portugal, Spain, India, France, and Taiwan. I love it.

Yet, I hate facebook and Twitter. Okay, push your eyebrows back down and let me explain. I don't hate social networking per se: It's convenient to receive updates on your favorite artists and it's important for business: I've been on LinkedIn since the times it operated exclusively on the basis of professional invitations. But I abhor the contemporary "social network" phenomenon and what it represents: the unrestrained hunger for attention, the vile combination of pathological exhibitionism and a sickly kind of voyeurism; the violation of privacy and the desire to be violated. I cannot stand the stalking by exes, the spying by employers, the snooping by the government agencies – all that shit.

That said, there are some companies with one or another form of social networking at their cores, which I consider not only healthy, but also greatly important due to their positive impact on the commercial environment, especially the consumer sector. I'm not naive and I don't think that any of the entrepreneurs behind these businesses consciously elected to influence the quality of goods and services. Most likely they simply shaped their business models utilizing the exploding patterns of collective participation in the Internet experience, but in the process they unwittingly created an influential force that has a power of strengthening and weakening businesses.

In 1979, Tim and Nina Zagat started imploring their friends into scoring restaurants they visited, eventually turning their social pastime into a ranking business, which was bought by Google in 2011 for a reported $151 million. Being an old-fashioned medium from the start, however, it remained the same under the new high-tech ownership: It's still unclear how the rankings are formulated.

It was Pierre Omidyar's hobby-project turned international conglomerate with an annual revenue of $14 billion, aka eBay that pioneered the concept of building market-place reputations based on the fully-disclosed opinions of the "community members," i.e. users of the eBay services. While everyone was screaming (understandably so) that people will cheat, lie and steal, eBay founders stuck to the most fundamental of the commercial principles: in order to succeed you need to keep your ratings high, because one unresolved accusation of unsavory practices may kill your future transactions for good. It's like what G.W. Bush said, "Fool me once, shame on you. Fool me – you can't get fooled again."

Today, thanks to rating algorithms utilized by various online businesses, we came to rely on communal ratings and individual opinions whenever we buy electronics, computers, household appliances, books, or select entertainment on Netflix, or order food delivery on Seamless, or pick a hotel on TripAdvisor, or make decisions about telecommunications providers. Many of us not only peruse the viewpoints of others, but also actively participate in the polling process by sharing our own thoughts about this or that product, service, establishment, thus affecting a new system of commercial quality control.

It is safe to say, in my opinion, that Yelp has become a flagship of the communal marketing model. Again, not because the ideas of commercial quality control and merit-based rewards are so important to them, but for the sake of the advertising income ($138 million in 2012). Nevertheless, assessing performance and assigning rewards (aka ratings) is exactly what "yelpers" (members expressing their opinions) do.

A few unique traits place Yelp, Inc. in the avant-garde of this movement. They encompass a wide spectrum of consumer services. Right now you can find referrals on businesses in 20 main categories – from restaurants to religious organizations, further subdivided into specialties. In less than 10 years they have achieved an international magnitude. The listings are essentially combined efforts: detailed information about the business is provided by the commercial participants themselves (for a fee) and consumers supply their reviews, photos, and ratings. The search engine is geographically oriented allowing users to find what's around them on the map.

Also, Yelp, Inc. claims that they use an "aggressive" reviews filter, which rejects posts that are suspected to be biased or false. As a result, according to their public releases, about 25% of entries are being dismissed. And I can appreciate that. Like I said, rendering communal judgments on commercial establishments is a serious matter: ultimately it has a power of affecting the livelihood of individual businessmen. So, the filtering is great as long as Yelp conducts their selections, rejections, and other manipulations fairly and without prejudice.

Unfortunately, as with everything touched by greed, the communal quality control as executed by Yelp, Inc. may be seriously misused. While I was writing this piece, TypePad's "related-posts" function has presented me with a few reports (including the one attached below) accusing Yelp of manipulating reviews in exchange for business clients' participation in the site's advertising programs (you can also read about it on Wikipedia). And that's criminal. Not only because it's nothing short of blackmail, but also because, by using individual consumers' personal and freely expressed opinions in this unsavory process, Yelp corrupts the participants' intellectual property and constitutional rights. I sure as hell hope that these accusations are not true. If they are, yelpers should file a class-action suit to bar Yelp, Inc. from using their reviews as the means of racketeering.

Inside Yelp's Wasp Nest: When Social Networking Meets Extortion

Believe it or not, but the Battle for (or against, if you will) the Internet Sales Tax has been going on for 20 years now.

First, there were no online sales taxes at all. Back in the early 90s, members of various legislative bodies thought that the World Wide Web was something that Al Gore invented and, therefore, didn't pay much attention to it, especially the Republicans. Meanwhile, the online vendors (the term e-tailer didn't gain wide acceptance until 2000) and their customers justifiably acted like pioneers in the brave new world: as far as they were concerned, they operated in the environment with no physical attributes, and no brick-and-mortar regulations were applicable to them.

It didn't take too long, however, for the states to catch on and get all itchy on account of the missing revenues. The first most obvious targets were those conventional retailers, who quickly added shopping carts to their websites: Godiva, Staples, Best Buy, Bloomingdale's, etc. With them it was easy to enforce the guiding principle of sales taxation - the physical presence rule. They have multiple locations practically in all states – collecting and remitting sales taxes are routine tasks for them. A bit of code-writing and, voila, if your shipping address is in the state where the seller has a store, an office, or a warehouse, the tax will be applied.

I was in the avant garde of the e-commerce consumers. I bought my first book on Amazon in 1995. I recall it was a new addition of Joy of Cooking: 1150 pages – too bulky to drag it with me from B&N. A desire to own a one-of-a-kind Victorian coral bracelet sold by an antique dealer in Amsterdam trampled my inherent mistrust and led me to the conclusion of my first eBay purchase in 1996. I had to fax my credit card info to the seller – we were still two years away from the inception of PayPal. And that same year I booked a room at Montreal's Ritz Carlton through Expedia. I consider myself an Internet veteran. Today, 90% of my consumer experience is managed online. And I am not alone: in 2012 Internet sales amounted $226 billion.

And all these years, I've been kind of on the fence about this whole Internet taxation issue. On one hand, I LOVED not paying sales taxes for the items I bought from my home. Plus, no state or city resources were utilized: I didn't use any public transportation, roads, or street parking; I didn't walk into any buildings; nor did I use any City utilities. The cost of my connectivity is taxed via my cable and power providers, while delivery services collect sales taxes from the shippers. I still remember how disappointed I was when Amazon opened a distribution center in NYC to facilitate same-day deliveries and started taxing my purchases.

On the other hand, the economist in me is fully aware of the importance of sales taxes for the state and municipal budgets. And, while I strongly believe that 70% of government employees are redundant and the rest are lazy, I do want all bridges to be repaired on time. Unlike other people, I understand that it's a capital-intensive process and money has to come from somewhere. I knew only too well that Bluefly, with offices and employees in NYC, should've been taxing my purchases (they didn't) way before the CEO decided to launch a brick-and-mortar outlet.

I am a stickler for the rules that create common platforms for everyone involved: generally accepted accounting principles (GAAP), international financial reporting standards (IFRS), international commercial terms (Incoterms), etc. Speaking the same language prevents misunderstanding. If we cannot avoid paying, collecting, and remitting sales taxes, let's at least stick to the simple rules of physical presence already in place. Even though, the interpretation of what constitutes "physical presence" in the Internet environment could be debatable. I kept pondering, for example, whether, besides the conventional criteria like leased or owned commercial property, payroll, and inventory, the location of web servers and interface workstations should be considered as well.

Yet, one thing has always been clear to me: If you don't have any type of presence in a state and don't use any of the state's resources in order to generate income, you cannot be made responsible for collecting sales taxes in that state. This is not medieval Europe, I thought: just because the governments want additional revenues, they should not just impose new tax-collecting laws like some Sheriff of Nottingham. This would destroy a lot of small businesses that were able to break out of their local boundaries and find their way into the national and even international markets through the web.

What a fool I was! Who cares about small businesses? Members of the government act according to their allegiances to a few Big Players with their big gains and losses at stake. On one side, there are Wal-Mart, Target, COSTCO, and Amazon (boy, this alliance alone was unimaginable only a few years ago), who are literally everywhere on the ground and on the web. These "poor" leviathans complain that they are at the "price disadvantage," losing customers to those e-tailers (read: smaller businesses), who don't charge sales taxes. "All" they want is to level the playing field, i.e. for everyone to collect taxes everywhere.

On the other side of the barricade is eBay providing thousands of online shops and craftsmen with the means of offering their products to the world. It stands to lose tons of fees if the members' business volumes contract. Nobody represents the unaffiliated e-tailers.

Guess who tips the scales? In the beginning of this month, the Senate approved an Internet tax proposal (perversely named Marketplace Fairness Act), which is not based on e-tailers' physical presence at all and will force shoppers to pay sales taxes on the majority of online purchases. In basic terms: all online sellers will have to collect sales taxes and file returns for all states to which they ship their merchandise.

The plight of small businesses, including the additional workload related to the new responsibilities, is almost an afterthought in the proposed legislature: the ones with less than $1 million in out-of-state sales will be exempt from sales-tax obligations. What is this stupidly irrelevant number? Are they low-balling like some cheap hagglers? Again, common ground, people! According to the Small Business Administration's definition, a retailer is considered "small" if the sales do not exceed $5 million to $21 million, depending on the product!

Why our various government bodies always have to be such opportunists and never think about the future impact of their decisions, I have no fucking clue. The e-customers have only this much disposable income: if they have to spend a portion of it on the Internet sales taxes, they will buy less goods. Consumer market contraction anyone? And in the long-run every time a small business is hurt, it affects the entire economy. But who cares about the long run? The governments are more interested in grabbing whatever they can right now, whether they entitled to it or not.

Share this:

Share this: