Under increasing pressure from rivals like Amazon.com, eBay has seen its dominance in e-commerce diminished in recent years, as both buyers and merchants seek new alternatives in online shopping.
"The [eBay] marketplace hasn't kept up with competition, nor customer needs," he said at eBay's meeting with financial analysts at its San Jose, California, headquarters.
EBay has been a victim of its success, which has made it hard to implement changes needed to take advantage of future opportunities. "We were trying to protect our past," he said.
In 2008's fourth quarter, the Marketplaces unit saw its revenue decline 16 percent, compared with the same quarter in 2007, while gross merchandise volume declined 12 percent. Unique monthly users also dropped year-on-year.
EBay began strictly as an online auction site but has since become more diversified, allowing the sale of fixed-price items and letting merchants open "stores."
It also got into the online payments business with its acquisition of PayPal, which generates about one-third of the company's revenue, and into Internet telephony with Skype.
Along the way, Amazon.com has expanded its focus into eBay territory by allowing merchants to sell their products from its Web site and providing e-commerce services, like fulfillment.
Now eBay will take a more hands-on approach toward its marketplace rather than simply letting merchants and shoppers work out their differences, trusting in the collective wisdom of its community.
"We're moving to a more managed marketplace," said Donahoe, who took over as CEO from Meg Whitman in March 2008.
Those words should please those merchants who have complained in the past that eBay has been lax and timid in enforcing rules, which in turn has caused trust in the marketplace to erode, scaring away shoppers.
A more managed marketplace doesn't mean eBay will become an online retailer like Amazon.com, Donahoe said. "We'll focus where we can win. We're not a retailer. We'll focus on the secondary market," he said. That means its historical sweet spot of used, hard-to-find items, as well as less-unique products that are a notch below the season's new releases, he said. The latter category includes liquidation, out-of-season, excess and off-price inventory.
eBay will also focus on providing a wider variety of shopping "formats," beyond auction items, fixed-priced products and classifieds, for a variety of devices, he said.
Donahoe also said that the eBay marketplace is far from a mature business, since only a small percentage of retail sales happen online.
The changes will take some time to be implemented and to have an effect, so eBay's growth will likely lag the overall e-commerce market this year, he said. By 2011, however, the eBay marketplace will outpace the market's growth, he predicted.
"I'm as impatient as any of you," he said. However, improving trust in the marketplace, fine-tuning its technology platform and increasing seller standards will take time.
Donahoe also addressed goals for eBay's PayPal and Skype businesses.
EBay's expectation for PayPal is that it, in three years, it will be the undisputed online-payment network for all types of e-commerce, he said.
Donahoe also wants to see across the board a strengthening of eBay's technology, and has been taking steps toward that end already. "Technology is now at the table. We'll fundamentally change how we approach innovation," he said.
Regarding Skype, eBay's strategy will be to run it as a "standalone business," distancing itself from its original intention to integrate the Internet telephony service into the marketplace as a tool to improve communications between buyers and sellers.
"We were wrong," he said about eBay's original plans for Skype.
In an allusion to a major write-down eBay took on its Skype investment, he added: "We're done apologizing for Skype."
Skype is a "great" online communications business that is growing very fast and has great opportunities to grow, he said.
During the meeting, officials provided a series of financial projections for the next three years, including the prediction that eBay will increase its annual revenue to between $10 billion and $12 billion in 2011, up from $8.5 billion in 2008.
PayPal will play a big part in this growth by increasing its revenue from $2.4 billion in 2008 to between $4 billion and $5 billion in 2011, as it expands its market share on and off the eBay marketplace and makes inroads into mobile and non-retail markets.
By 2011, the eBay marketplace will have revenue between $5 billion and $7 billion, as fixed-price sales increase their share of that revenue pie and auctions shrink, while classifieds and advertising rise. Meanwhile, Skype will more than double its revenue to more than $1 billion by 2011.