eBay Ends AOL Ad Sales Deal

As eBay’s income from auction sales has grown at near-geometric rates, advertising revenues became less a part of the mix, which helps to explain why the auction giant is letting an ad sales deal with America Online expire. But a little friction may also be involved.

Also, eBay has disclosed that its PayPal operating subsidiary is facing a claim by the U.S. Attorney for the Eastern District of Missouri that the payment service operation allegedly violated part of the USA Patriot Act by transmitting payments related to gambling.

San Jose, Calif.-based eBay said in its annual 10-K filing with the Securities and Exchange Commission that its ad sales representative agreement with AOL “has not been extended or renewed” and in fact terminated on Monday.

eBay cited “a general deterioration in the online advertising market that adversely impacted our advertising sales through AOL.” The company also said its AOL deal will continue for a specified wind-down period but that as of today, its third-party advertising revenues “will be dependent on the efforts of its existing internal sales staff.

“We continue to view our business as primarily transaction driven and we expect third-party advertising net revenues in future periods to continue to decrease as a percentage of total net revenues and in absolute dollars,” eBay said in its 10-K filing.

eBay’s revenue from third-party advertising sales dropped from $80.5 million in 2001 to $54.9 million in 2002.

However, the Wall Street Journal, quoting an unnamed source said to be familiar with eBay’s dealings with AOL, reported that the auction company has found it increasingly difficult to deal with AOL Time Warner, which has been seeking to bolster its lagging America Online unit.

The source was quoted as saying that AOL has been unclear about its plans for a fixed-price marketplace on the service.

eBay, in the process of integrating its Half.com unit, is also in the fixed-price arena and for some time has been pushing the “buy it now” fixed-price feature even in its regular auction listings.

Meanwhile, on the PayPal matter, eBay said in its filing that PayPal might have to forfeit money it has received from gambling site transactions, and it also might be subject to criminal liability.

PayPal exited the business of processing payments for online gambling in November of last year after it was acquired by eBay, and eBay said that only about 6 percent of PayPal’s revenues in 2002 were derived from gambling-related transactions.

The federal prosecutor in Missouri sent eBay a letter offering “a complete settlement of all possible claims and charges if PayPal paid the purported amount of its earnings derived from online gambling merchants during the nine-month period from October 26, 2001 to July 31, 2002, plus interest.

eBay, which said it believes that PayPal did not violate the law, stated in its annual report that “although the outcome of this matter is not yet determinable, the monetary amounts are not expected to have a material impact on our financial position, results of operations or cash flows.”

Also surfacing in the SEC report was the news that trial is scheduled for next month in a complicated patent infringement lawsuit filed against eBay by MercExchange LLC.