(FORTUNE Small Business) – Lisa Lowery isn't a minute into her story when you realize you've heard it all before. eBay success story No. 86,005: Two Tennessee moms sell designer clothes on the uber-auction site, then digital cameras, and ship $100,000 worth of goods in their first ten months. Ho-hum. It is the same site, after all, where sellers have built businesses around glass eyes and Joyce DeWitt T-shirt iron-ons. Except Lowery isn't quite done with her story, and she has a Sixth Sense twist to spring on you: Those first ten months on eBay will be her last. Lowery and her business partner, Toni Applegate, are throwing in the towel. At first glance that seems a little screwy. eBay is a bona fide Internet success story, profitable since its inception on Labor Day 1995. Last year it posted $219 million in profits on sales of $749 million. According to Thomson Financial/First Call, eBay is projected to grow revenues at about 50% annually over the next five years. The company claims a whopping 49 million users and estimates that it will broker $12 billion in transactions in 2002. It dominates consumer-to-consumer Internet auctions, with a 75% market share, according to Deutsche Bank Securities, dwarfing its not-so-close rival Yahoo.

On the road to being the little new-economy business model that could, eBay helped thousands of small businesses make it too. By listing their wares on eBay, antiques stores, collectibles shops, and many other businesses got access to a burgeoning worldwide audience--more eyeballs than a store in any mall could offer, even if it was next to Cinnabon. For many of the merchants, business on eBay was so good that they could close their brick-and-mortar shop and sell exclusively online, where the market was bigger and the overhead lower. Newer businesses--like Lowery's--skipped the retail store entirely. Indeed, abandoning eBay now seems like jumping off the deck of the Carpathia while the Titanic sinks across the way.

But for many, the eBay story no longer reads like a fairy tale. In five months of reporting, we found mounting disillusionment among scores of small business owners, who posted their gripes on eBay's own message boards and expressed their displeasure in rowdy sessions at the company's first user conference last June. In the course of dozens of interviews with sellers and other members of the larger eBay community, we heard complaints that recent trends and changes--most notably in eBay's own policies and focus--have made it harder than ever to do business. The tools the online auction house has introduced, the fees it charges, the big businesses it woos, the services it does and doesn't provide, and even the way it markets its site and lets users market theirs--all have had important and often unwelcome consequences for small businesses selling on eBay. Indeed, some of the site's biggest success stories are now among its harshest critics. "eBay doesn't have a clue how to sell on eBay, and that scares me a lot," says Jay Senese, who with his wife, Marie, began selling CDs on eBay in 1998 and is now its biggest seller by unit volume. While some sellers have learned how to adapt and thrive, finding product niches and business strategies that work, others struggle, and some have called it a day. This is a "new" eBay, and it's not the one you think you know.

Of all the problems out there for small businesses on eBay, the most troublesome is the fee issue. Each time fees have gone up (they've risen twice since January 2001), the eBay community--never known for demure, Eliza Doolittle-like ways--has exploded, clogging online message boards with angry, sometimes downright hostile comments. The 2002 bump was just 0.25% of an item's sale price (on goods selling at $1,000 or less, this gave eBay a total commission of 5.25% of the initial $25, plus 2.75% of the remaining value), but it has decimated the margins of high-volume, small-ticket sellers. CD seller Senese, who closes some 5,000 auctions a week, says that he'll pay eBay roughly $160,000 this year, up from $143,000 under the old system. That's more than the profit he and his wife make and more than all the other costs of running his business combined. "There was no incremental improvement in service that I saw," he says, "and there was no basis for expecting our bids to go up because the fees went up."

Meanwhile, listing items on eBay remains a grueling, labor-intensive process for Senese, since each title is different and needs a unique posting describing its content and condition. He took his first vacation in four years this summer and has decided not to expand his listings beyond his current volume. "Between the grind and eBay's refusal to discount fees, there's just no incentive to do more," he says.

But eBay has no incentive to lower rates. In July, Safa Rashtchy, senior Internet analyst at U.S. Bancorp Piper Jaffray, cautioned that eBay's 2002 growth was due primarily to the higher fees. Sellers are flooding the market and buyer demand for collectibles has leveled off, with a higher percentage of goods getting no bids at all. "There will be no escaping that we have reached the top of growth for eBay by Q3 of 2002," Rashtchy wrote. Yet CEO Meg Whitman has set ambitious targets for the company, promising Wall Street that revenues will hit $3 billion a year by 2005. And to achieve that number, the company is courting big companies like Dell Computer, Disney, and Home Depot. The idea: Big inventories of mass- produced goods mean more listings, and more revenue, for eBay.

Big businesses, though, are staking out the same territory as many savvy longtime sellers, threatening to ruin their business. Bill Shaw's Tampa-based ToppSoft Computer Solutions has used eBay to sell overstock computer-networking gear, among other products, for more than two years. But big merchants like Dell have started selling similar items on eBay at fixed prices far lower than what small business sellers traditionally get at their auctions, and Shaw has seen profits shrink dramatically. "Some items now fetch about a third of what they did when I started," he says.

However, Shaw's biggest problem today isn't dwindling profits but simply finding any product he can unload at a profit. Instead of selling surplus inventory to liquidators, larger companies are reaping far greater returns liquidating it themselves on eBay. "This gives us something after retail but before liquidation," says Chip Yager, director of channel development at Motorola, which has been selling cellphones, two-way radios, and other electronics on eBay since April. "It's been very successful." With Motorola getting 40% to 50% more than it could through traditional liquidation, other large businesses will likely follow suit.

eBay senior director of communications Kevin Pursglove (eBay refused repeated interview requests with FSB, but the spokesman responded to questions via e-mail) asserts that big business accounts for only 5% of gross merchandise sales and isn't expected to exceed 10% for some time. But with liquidated inventory drying up, small businesses that relied on it, like Bill Shaw's, have to change--or die.

Big business's impact on small business sellers doesn't stop there. Some entrepreneurs charge that major corporations are providing subpar customer service (they point to eBay's own buyer-feedback system as evidence) and that this hinders their own ability to do business online. Michael O'Harro, founder of the Champions sports bars, who now sells photographs in Arlington, Va., doesn't mind the big businesses on eBay per se, because they don't compete with his collectibles business and they bring more traffic overall. "What I do mind," he says, "are people selling on eBay who don't take care of customers. Because those customers will give up." O'Harro recently lost one of his best customers when, burned by another eBay seller, the buyer quit the site in disgust. O'Harro was out the $2,000 to $3,000 per month this customer routinely spent on his auctions, a significant fraction of the "six figures" his one-man operation pulls in from eBay.

eBay doesn't seem overly concerned by stories like O'Harro's. "It is possible that the scenario you described has happened," says Pursglove. "It is true that a nationally recognized brand may fall short of the 98% positive feedback rating required of PowerSellers [a benefits program for sellers doing more than $2,000 in sales a month]. But not every seller on eBay may meet the 98% level. That is not unique to the national brands." As of late September, both IBM and Ritz Camera had positive-feedback levels of only 93%. And Disney's feedback was labeled "private," meaning that bidders cannot view comments left by previous buyers. "Run, do not walk, do not pass go, do not send money," warns Bob Miller, a stamp and postcard dealer in Roy, Utah. "The huge shipping and handling fees and slow mailing times that big companies can get away with in direct marketing don't work on eBay, and it shows."

Sellers complain, too, that some of eBay's newest features--like its option to sell goods for a fixed price rather than at auction--are being misused and are driving down their own prices. (At press time, AOL, a division of FSB's parent company, had announced plans to launch a fixed-price marketplace.) Nancy Daeley, an antiques dealer in Laguna Beach, Calif., who shut down her mall-based antiques booths after discovering eBay in 1997, is doing only half the business she did three years ago. One of the causes she cites is the casual sellers looking to make quick money emptying out Grandma's attic. "They use the fixed-price option, but they price the items too low," says Daeley. That decreases the bids Daeley gets for similar items. She estimates that half of her colleagues from eBay's early days have thrown in the towel, reopening their stores and kiosks. She plans to stick it out as long as she can and then find another line of work.

The small businesses with the best chance of success on eBay today are either those with access to a steady supply of goods or niche players with some awfully creative markets. In the first category is O/E Systems, a computer-leasing company in Troy, Mich., that moves 5,000 off-lease PCs it gets back from customers each month. "It's a great secondary channel for us," says Bob Amori, the executive vice president. O/E's name-brand, secondhand PCs go for between $180 and $200 apiece, double what they did through liquidation, according to Amori. In two years O/E has hauled in $9 million in used-equipment sales on eBay.

The bulk of eBay sellers, however, are smaller entrepreneurs who rely on eBay exclusively, and these days they must find an exclusive niche to survive. Cars are big business on eBay; its motors division is now projected to be its largest sales generator. That's a point not lost on Ed Koon of Freshfloridacars.com in Clearwater, Fla. Koon sells used cars on eBay. He closed his first sale in 1999 and, with more than a twinge of nostalgia, can recall every last detail about the car, a 1982 Mercedes he had picked up for $1,800 and listed in the local AutoTrader for $3,950. When he got no takers, a friend suggested eBay, where the car promptly sold for $6,200. Today, to maintain his margins as large dealerships have saturated the market, Koon sells what others don't: cars ten years old or more, with less than 100,000 miles. "Those do pretty well for us," he says. "Later models don't work unless you want to give them away. You'll see 30 Saabs with comparable miles and conditions."

eBay denies that in its haste to boost its bottom line it has forsaken the users who made it a success. At June's eBay Live in Anaheim, the company's first-ever user conference, Whitman and her managers took to a stage at the convention center to reassure the 5,400 assembled eBayers that the interests of the company and its community are one and the same; that new initiatives, like the push to sell more brand-name products, the increased emphasis on fixed-price sales, and new listing software, will benefit sellers large and small. "We have got to maintain our commitment to our community of users," she told the assembled crowd. "We'll continue to listen and make only those changes that help."

The business that poses the biggest threat to eBay sellers, though, may be eBay itself. Small business sellers and eBay share the same customers, and despite eBay's public pronouncements, the two sets of interests don't always align. What's irksome to small businesses are eBay's ever-tightening restrictions on marketing. It's a sore point, especially for those who operate websites and brick-and-mortar stores in addition to their auction postings on the site, and want to use eBay to drive traffic to those outlets (where, conveniently, they can sell without paying eBay's fees). eBay, obviously, wants to keep that traffic on eBay.

To that end, eBay no longer allows sellers to link to a website from their item listings. They can link from less trafficked About Me pages, but only to a site that doesn't feature the same merchandise for less money. They can no longer get any buyer's e-mail address by keying in a user ID (a handy way to generate leads). And the IDs themselves may no longer contain a domain name, though sellers who already have such an ID can keep it.

The anger in the seller community makes sense when you realize that eBay has used e-mail and pop-up boxes to steer buyers to CDs and DVDs on sites like Columbia House and its own Half.com subsidiary. "They're guilty of the same thing they won't let sellers do--taking users to other sites," says Brandon Dupsky, president of Sell2All, a four-year-old Lincoln, Neb., company that manages some 3,000 auctions a week for large and small companies selling surplus inventory on eBay. "My business [a multimillion-dollar enterprise with 20 employees] did not even exist before eBay," he says, reflecting the conflicted feelings of most sellers about the site. "But they're taking my customers and saying, 'Don't buy from eBay, buy from Columbia House.' " (eBay had an advertising relationship with Columbia House.) eBay spokesman Pursglove concedes that some of the pop-ups went a bit too far. "Based upon feedback from the community, we are phasing out advertisements that may pose direct competition." But the Half.com ads will remain.

eBay's limitations could be forgiven if the company would give sellers the one marketing tool they covet most: access to the huge amount of data eBay collects about buyer behavior on the site. These metrics--what categories get the most activity, the most popular search terms, the best day to close a particular type of auction, among other data--could help sellers better manage their eBay business and have been a subject of debate for a year. "More and more, we're hearing businesses want metrics to grow on eBay," said Whitman at eBay Live. "We're looking at what data we have and how to get that out to users." The audience erupted in cheers at this pronouncement.

But just two months later, eBay spokesman Pursglove cautioned that those features aren't imminent. "We are working with the community to determine how to best collate the data and present it in a manner that is of the greatest value to the largest number of members," he says. One holdup: determining the fee structure. While eBay sleeps, third parties try to fill the gap as best they can.

Yet for all the flap over tools, marketing restrictions, and competition, eBay's trump card--those millions of users--remains. Even if the 49 million number is overblown (that's user IDs, and many buyers have multiple ones), eBay nevertheless provides access to an enormous worldwide audience.

The key to using eBay, then, is literally to use it. William Paul & Associates, a $20 million, 30-employee company in White Plains, N.Y., uses eBay to sell discontinued cameras and film. But the real benefit comes not from unloading a case of Ektachrome but in contacting the professional dealer who has just bought it, and making him aware of William Paul. "eBay is all about marketing for us," says John LaPerch, president of Econocommerce, the subsidiary William Paul set up to handle online sales. "We'll get five to ten inquiries a day from people who see our eBay auction and want to buy offline. It builds brand awareness."

No doubt William Paul would get more inquiries if it could put its URL right on the auction page instead of in the e-mail it sends winning bidders. But LaPerch says that despite eBay's restrictions, the site has proved a low-cost way to boost business. "It costs us a 30-cent listing fee to get in front of 45 million people," he says.

Even businesses that started, and hoped to stay, exclusively on eBay are finding that the site works best when it's just one part of a sales strategy. Kevin Littleton, a postcard dealer in Hazelton, Pa., used to do all his business on eBay, but with increased competition and fees and decreased sales (just one in five items sells, he says), he has changed tactics. While he still lists 400 to 700 items a week on eBay, he has 15,000 up on Playle's Online Auctions (www.playle.com), a far smaller but cheaper site. When someone buys a postcard on eBay, Littleton puts a link to the Playle site in his confirmation e-mail, then includes a flier with the purchase. He has converted 15% to 20% of his eBay customers to his other site, and many of them, he says, have become repeat customers. "eBay is still a great place to find customers," Littleton says, "but you need to develop your market elsewhere at the same time."

That may be the reality of eBay, but it certainly isn't what has been promised. eBay claims that 150,000 people make a living via its services. But of that group, only 40,000 are in its PowerSellers program, which requires sales of just $2,000 a month. That's 110,000 folks who won't be dining at the Rainbow Room. "The incentive was, I can get wealthy on eBay," says Jay Senese, the site's No. 1 seller. "I look all the time for eBay millionaires. They're not out there." Or maybe they just work there.