Online retailers are not immune to the current credit crunch and are feeling the heat in a big way. The New York Times says that online spending dropped 4% for the first 23 days of November 2008 when compared to the same period last year. According to comScore, the online spending was about $8.19 billion versus $8.51 billion in 2007. They are forecasting flat holiday season at $29.2 billion.

Their estimates are more conservative than $30.3 billion in projected online spending this holiday season by eMarketer which estimated a total of $136.8 billion. In comparison, comScore is projecting $131.3 billion. Despite this lower number, I think comScore is being too optimistic.

If you take their estimates at face value, it means that we will see additional spending of $21.01 billion during the remainder of 2008 holiday season. in 2007, for the same remainder of the season consumers spent $20.69 billion, a gain of 1.54%. If you believe comScore’s survey that says that 46% people are buying less expensive gifts, and 47% are buying fewer gifts — it is hard to see how they are going to get to the $21.01 number.

Hitwise, another research firm today reported that “for the retail category overall traffic is flat when the market share of visits for last week is compared to the week before Thanksgiving in 2007.” They are seeing an increase in traffic interest to websites preceding the Black Friday, the day after thanksgiving, and at the same time “daily market share of visits to the Retail 500 (adjusted to reflect the number of days leading up to Thanksgiving) has also remained relatively flat.”

The upside of this bad news is that if you are actually looking to buy anything, it is a pretty good season for bargain hunting. The longer you wait, more you might be able to save. For past few days I have been getting all sorts of offers from online retailers … I smell the desperation. Now wait for prices to fall low enough.

Santa Claus Photo by Alex Buhrmann via Flickr.

Today eBay said it would spend $945 million to buy online payment company Bill Me Later, but the folks over at Amazon.com aren’t likely to welcome eBay as Bill Me Later’s new corporate overlords. Amazon holds an equity stake in the payment processing company and is its top customer — with competitor eBay moving to buy it, Amazon has some thinking to do.

Amazon doesn’t have a board seat at Bill Me Later, and as such was probably not involved in the acquisition talks. The question now is whether it will continue to offer Bill Me Later as a payment option. As far as merchants go, Bill Me Later is cheaper than credit cards. But so far Amazon.com, which previously scorned PayPal because of its ties to eBay, has been non-committal about its plans. It said in a statement, “Currently, Bill Me Later is still available as a payment option on our site, but I can’t speculate as to whether we’ll continue to offer them going forward.”

From  a payments perspective, eBay has chosen wisely with this buy. PayPal is a debit-oriented program, while Bill Me Later caters to those who are shy about using their credit cards online but don’t want to deal with the hassle of PayPal by offering them credit after they enter their information. While that may seem downright foolish in this economic environment, Bill Me Later investor Mike Kwatinetz of Azure Capital Partners says the company is able to quickly adjust the amount of credit it offers customers.

PayPal has the largest number of the top online retailers using its service, but Bill Me Later has an opportunity to process more transactions, according to data issued last month by research firm Cowen & Co. PayPal’s penetration rate of the top 300 U.S. e-commerce companies rose to 35 percent as of September from 28 percent at the end of last year, but Bill Me Later has $31.6 billion in addressable sales, compared to $26.1 billion for PayPal. Bill Me Later’s top customers (other than Amazon) include OfficeMax, Apple, Newegg, and QVC. Underscoring Amazon’s eBay aversion? All of those merchants also accept PayPal.

I am pretty sure at some point we have all done this — gone on a shopping spree to mask the feelings that come after a cataclysmic event. It doesn’t make our problems go away but somehow it helps us feel better for a few hours. It is good to see that large, lumbering tech giants have a similar approach to business life.

eBay, a San Jose, Calif,-based company today announced that it was cutting 10 percent of its workforce, about 1,000 jobs, in addition to getting rid of several hundred temps. These cuts will cost them between $70 million and $80 million and will be predominantly recorded in the fourth quarter of 2008. I am told the majority of the blood letting has been in the Marketplaces part of the business.

The company also spent $1.21 billion buying up two companies.

• U.S.-based online payments business Bill Me Later for approximately $820 million in cash and approximately $125 million in outstanding options. Bill Me Later had raised a total of $200 million in funding from Amazon along with several others. It was spun out of Nortel in 2001.
• Denmark’s leading online classifieds site dba.dk and vehicles site bilbasen.dk for approximately $390 million in cash.

These are two major moves by new CEO John Donahoe, who replaced Meg Whitman in January 2008.

Both acquisitions are smart and make strategic sense for eBay, though the company has some serious challenges in its core marketplace business. The CEO of eBay Marketplace Operations, Lorrie Norrington, who was named to the job in July and was recently named to Fortune’s 50 Most Powerful Women list, has been looking to transform the business, which is in serious trouble.

How bad? The sellers — aka the customers of eBay — are so mad that they are putting out statements publicly denouncing the company. Professional eBay Sellers Alliance (PESA) on its web site wrote:

In the first nine months of 2008, we have observed a substantial deterioration in the value of the marketplace for merchants. Broader e-commerce growth is in the high teens while eBay’s GMV has increased at low single digit rates; a clear sign that eBay is losing wallet share among online shoppers.

Today eBay merchants have an increased level of business uncertainty due to eBay’s poor execution of changes in many areas including seller performance measurement, fees, site search, buyer activity, and seller communication. The result is that merchants are changing their behavior in ways that we believe is not beneficial to the eBay marketplace.

Merchants are pursuing alternate channels for their businesses which are more economical, including launching their own website, participating in other third party channels such as Amazon and Overstock, and even opening brick and mortar stores.

Whichever way you look at it, that is a big fat F for the company. I think buying new companies might give eBay a near-term lift, but the business is a bureaucratic mess and as a company eBay has had trouble coming to terms with the future. It has failed the innovation test — a metric almost every Silicon Valley company should be judged by — and all it has done is use its monopolistic position to paper over its shortcomings.

Given the poor performance of that stock — down almost 50 percent over the past 12 months — the investors seen to be in agreement with my F-rating on the company. I hope new deals are a new start for the company, and to them I say good luck! They are going to need it.

Photo courtesy of eBay Inc.

Despite the acceptance of credit cards and services like PayPal, the issue of getting money from one person to another online still offers opportunities for innovation. Venture firms are continuing to fund startups that hope to offer better ways to pay online, while the growth of Software as a Service in the enterprise has led to a need for new tools in corporate billing management. Further out, buying items over a mobile phone presents a multibillion-dollar opportunity — if someone can make it easy.

Despite the early-mover advantage PayPal has, and the presence of rival offerings from Internet giant Google, there are plenty of retailers who only accept credit cards for online purchases. That eliminates their ability to sell to those without credit and those concerned with security online. There are a few ways rival online payment services can find success against PayPal, wrote Jim Friedland, an analyst at Cowan & Co. earlier this week, citing a few examples: providing a neutral independent platform (PayPal is owned by web retailer eBay), extending credit to shoppers, and offering lower transaction fees.

And startups are still searching for other opportunities online. Just last week online bill pay startup eBillMe raised $12 million from Canaan Partners and New Celtic Ventures. The company offers vendors an alternative to credit cards by allowing shoppers to receive a bill at their online banking portal. This allows shoppers to avoid putting their personal information on the merchant’s site and allows for a cash, rather than credit, transaction.

But online sales are no longer limited to the PC. U.S. consumers are starting to use their mobile phones to make purchases, and this could be a growing market in the years to come. But there are challenges ahead. Bigger players such as PayPal and credit card companies already offer mobile-payment products, and the current U.S. market for mobile-pay services is still small.

Only 1.5 percent of U.S. consumers have ever used their mobile phones to make a payment, but almost 50 percent are aware that they can do so, according to a survey released this week. The research, commissioned by financial firm Mercatus, predicts that with better services and customer education the percentage of people who will make payments from their mobile phones is likely to grow in five years to 15 percent among those ages 18-30.

The growing use of smartphones and shopping sites optimized for mobiles require payment options that are easier than keying in a 16-digit credit card number. Startups such as angel-backed Billing Revolution and Zong, which launched earlier this month after raising more than $12 million in venture capital, are tackling the problem of buying on your mobile phone. Zong sends purchase information to carriers, who then bill the subscriber for their purchases, and Billing Revolution offers a mobile credit card processing platform. In April, Obopay scored $20 million for its money-transfer-via-mobile efforts.

While the opportunity in mobile is still just cresting the horizon, enterprise customers provide an immediate opportunity for startups seeking to streamline transactions. In March, two startups offering an online billing platform for companies delivering Software-as-a-Service (SaaS) products raised money. Zuora brought in $6.5 million in first round funding led by Benchmark Capital for its platform. Rival Vindicia announced a $5.6 million round led by DCM and Leader Ventures.

These companies aim to make it easier for SaaS vendors to track and bill all of their customers. They also help customers track and manage multiple software services they might be buying — a task akin to managing household bills from tens or even hundreds of service providers. Tim McAdam, a general partner with Trinity Ventures, says these sorts of billing platforms and ways to track payments still represent a big category and no one has mastered it yet.

With everyone searching for ways to make money online that don’t revolve around advertising, offering seamless but secure online payments will go a long way in enabling alternative business models.

This article also appeared on BusinessWeek.com

Like an aging matron sporting Juicy tracksuits, eBay’s announcement today that it’s partially opening up its developer’s platform by allowing programmers to build their applications directly inside the site is unlikely to change the fact that the auction site is no longer the hot new thing.

The move is reminiscent of ones made earlier this year by social network MySpace as it tries to keep rival Facebook at bay. However, eBay’s efforts are a bit more limited and even less likely to change things for its developers, or its perception with buyers and sellers.

For starters, eBay is only opening up its Selling Manager program, which has 700,000 members. Across its 39 markets, eBay has about 84 million active users. Max Mancini, senior director of platform and disruptive innovation at eBay, said the move to open up the site to developers is in the early stage, but he wouldn’t say how far it would go, nor how revenue might be shared between the company and third-party developers selling their software on the site.

However, he was clear about the fact that eBay is taking these steps to increase the utility of the site for sellers. In addition to having their applications hosted directly on the eBay site, developers who participate in the program will also get access to proprietary APIs that can help them build apps to make life easier for eBay’s power sellers. An example Mancini gave included a way for a seller to determine how much a person usually buys so a seller knows how to prioritize requests for information from that person.

EBay has allowed third-party developers to use its web services platform since 2000. In 2005 it stopped charging developers for access to certain APIs in an attempt to broaden its reach. And last year it released a slew of APIs into the world in the hopes of bringing in ever more traffic from widget and mobile users. In the first quarter of this year, 20 percent of eBay’s listings came from third-party tools.

Power sellers tell me that bringing more tools inside the eBay ecosystem isn’t as important to them as making it easier for buyers to find items or other buyer-oriented programs that lead to more people browsing the site. Developers are already making money offering software for power sellers outside of eBay, so bringing those programs onto the site is of questionable value unless eBay is handing over some really good APIs. As a first step in a platform strategy, this isn’t earthshaking, but at least eBay’s not spending billions on a P2P voice startup.