The People's Company
eBay is run like a democracy, with customers playing a major role. But will that
relationship become a casualty of the auction site's success?
It seemed like a boffo idea to the brass at the Internet auction site eBay Inc.: By referring losing
bidders to similar auctions by other eBay sellers, they'd keep bidders coming back. Within
minutes of the program's debut in early June, though, all hell broke loose. Hundreds of angry
sellers jammed eBay's online discussion boards, furious that their bidders were being siphoned
away. One veteran seller of stamps and postcards, Bob Miller, auctioned a rare eBay jacket as an
excuse to post a long screed slamming "eBay's new policy of screwing the folks who built them."
Even among the 7 million ongoing auctions, this one quickly caught the attention of Chief
Executive Margaret C. Whitman and founder Pierre Omidyar. Within a week, they met with Miller
in eBay's suburban Salt Lake City office near Miller's home. As they listened for 45 minutes,
Whitman took four pages of notes. Two days later, they promised to switch course.
E-mails would first recommend the same seller's other auctions, or the seller could simply opt out.
"No other large corporation listens nearly as well as they do," says Miller, who's now happily
running several thousand auctions on eBay.
GOOD TIMES AND BAD. Meet the People's Company. Like a democracy, it can be a noisy and
unruly place, where citizens sometimes think the folks in charge are numbskulls. But the people's
passion prevails at eBay because the people are firmly in charge. Its customers--the 38 million
buyers and sellers who trade on its site--wield the kind of influence over the online auction site
that most consumers and businesses could never dream of exerting on conventional companies.
Oh, sure, eBay has a delicious business model that doesn't require carrying any inventory. And,
yes, it's growing like a weed and minting juicy profits because bargain hunters, in good times and
bad, flock to the auction site. But the real secret of eBay's unlikely success is this: It's a master at
harnessing the awesome communications power of the Net--not just to let its customers sound off
directly in the ears of the big brass, but to track their every movement so new products and
services are tailored to just what customers want. Remember that famous tagline, "When E.F.
Hutton speaks, people listen"? At eBay, it's the other way around: When people speak, eBay
listens.
One month in late 1998, for instance, eBay managers noticed an uptick in listings in various
miscellaneous categories, such as die-cast cars--suddenly, people were selling real cars. Now,
eBay's the country's biggest car dealer, with $1 billion in sales of cars and car parts this year. In
January, shortly after an eBay seller suggested speeding up auctions for impatient bidders, eBay
debuted a Buy It Now feature that lets bidders end an auction at a set price. Now, 40% of listings
use it, attracting more mainstream buyers and helping close auctions nearly a day faster on
average than a year ago.
ALL IN ONE. In essence, customers are eBay's de facto product-development team, sales and
marketing force, merchandising department, and security detail--all rolled into one. It's not just
that they have catapulted eBay, in just three short years, from a funky little online garage sale full
of Beanie Babies and attic trash into a global marketplace for almost anything, from a $1 baseball
card to a $4.9 million Gulfstream jet. eBay's customers also take it upon themselves to tell the
world about eBay through word of mouth. They crowd eBay's online discussion boards, posting
100,000 messages a week to share tips, point out glitches, and lobby for changes. eBay's
customers even police the site by rating each other, keeping fraud minimal.
By using the Net to tap into the talent and imagination of its customers, eBay has multiplied the
brainpower of its executives by millions. Imagine a retailer trying to do this: It would have to
interview every single person leaving every store, post a list of what each thought of the shopping
experience, then ask them to write up a merchandising plan and call suppliers to arrange
deliveries--and oh, by the way, could they keep an eye out for shoplifters? That's what eBay's
customers voluntarily do each day. Says Whitman: "It is far better to have an army of a million
than a command-and-control system."
The success of this let-'em-loose-and-listen strategy holds some potent lessons for Corporate
America. By staying in close touch with customers, eBay can reinvent itself every day, since it
knows precisely what its clientele wants. The trick is to keep up with what buyers and sellers
want. "We've had to constantly change how we run," says Chief Operating Officer Brian Swette.
"We start from the principle that if there's noise, you better listen."
And, because it set a firm corporate goal from the start--to create "global economic democracy"-it has managed to maintain focus even while growing at a crazy clip. First-time eBay buyers are
often shocked at the intensely personal service they get from eBay merchants, from handwritten
thank-you notes to free shipping. It's an example of how building a strong brand depends more
on understanding that each and every transaction can create a personal, one-on-one relationship
that will endure. Says eBay board member Howard Schultz, CEO of Starbucks Corp.: "The
imprinting of the eBay brand was not based on 30-second ads, but the relationship with the
users."
That's why neither the September 11 tragedy nor the recession has put a pall on eBay's
prospects. Despite losing about $5 million in revenues from a drop in activity following the terror
attacks, eBay beat third-quarter estimates. Sales rose 71%, to $194.4 million, surpassing
expectations by 3%. It earned an $18 million profit, 15% above analysts' forecasts. eBay even
raised its fourth-quarter sales forecast by 5%, to $200 million or more. Analysts now expect 2001
sales to jump at least 70%, to $736 million. Next year looks just as promising. Analysts figure
sales will rise 40%, to $1 billion, and profit will be up 56%, to $150 million. Rivals are in awe:
"These guys have done a killer job," admits Amazon.com Inc. Chief Financial Officer Warren C.
Jenson.
SMARTS, MOXIE. Now, eBay appears poised to buck what looks to be a gloomy holiday season
for almost every retailer, online and off. That's largely thanks to the smarts and the moxie of its
customers, who--unlike big retailers--can switch gears instantly on what they sell or buy and at
what price. This year, for instance, sales of discount products, from overstocked PCs to excess
toasters and bedsheets, have rocketed. As the economy worsens, more and more corporations,
from IBM to Walt Disney to Sears Roebuck, are turning to eBay as a place to unload mounting
inventory. "The mix of products on the site changes by the minute as our highly entrepreneurial
community of users adapts their own buying and selling strategies to trends in the economy,"
says Whitman.
eBay aims to press that advantage hard this season. It has just kicked off its first-ever holiday TVad campaign, which aims to show how shoppers can find almost anything on eBay. Produced by
AOL Time Warner Inc., for which eBay is the exclusive auction partner, the ads also promote how
easy it is for AOL members to find the perfect gift on eBay. eBay also is sending out catalogs in
newspapers nationwide on Dec. 2 and opening a "Great Gifts" shop on its site, highlighting
auctions of everything from gold necklaces to digital cameras.
For all its nonstop success, though, eBay faces a lot of challenges. Its $60 stock price represents
a nosebleed 2002 price-to-earnings ratio of 82, more than double Microsoft's premium ratio of 31.
The tiniest slip--or even, say, a few more anthrax-laden packages--could whack billions off its
value overnight and limit the expansion opportunities that have in turn buoyed the stock.
Indeed, eBay is increasingly a victim of its own success. As Whitman moves to make eBay more
of a clean, well-lighted place that attracts greater numbers of mainstream merchants and
shoppers, she has riled existing customers who don't want more rules--or more rivals. These
moves also pit eBay much more directly against bigger and more consumer-savvy behemoths.
AOL Time Warner, Microsoft, Amazon, and Yahoo! are all trying to create online malls where
people can buy just about anything from anyone.
MOMENTUM. Still, eBay has the Big Mo' right now, thanks to the groundwork laid way back on
Labor Day weekend in 1995, when Omidyar unveiled a bare-bones site called Auction Web. Even
then, the programmer and entrepreneur had much more in mind than simply helping his girlfriend
trade Pez dispensers. He aimed to create a Nasdaq-like market for a wide range of goods, but
with a twist. "I wanted to give the power of the market back to individuals, not just large
corporations," says Omidyar. "It was letting the users take responsibility for building the
community--even the building of the Web site."
For instance, he would answer e-mails from buyers and sellers during the day, then rewrite the
site's software that night to incorporate their suggestions, from fixing software bugs to creating
new product categories. Says e-commerce expert John Hagel III, chief strategy officer with ebusiness incubator 12 Entrepreneuring Inc.: "It really helped give people a sense of ownership
and participation." Likewise, Omidyar set up an online bulletin board for customers, whose
volunteered help kept early support costs almost nil--and cemented their loyalty.
Omidyar's biggest breakthrough was the Feedback Forum, a rating system that allows buyers
and sellers to grade each transaction positive, negative, or neutral. Amazingly, it works. More
than 99% of feedbacks are positive (sample comment: "Great Bidder! AAAAA+++++ Highly
Recommended!"). And eBay's rate of fraud remains below 0.01%. By contrast, credit card fraud
runs at nine times that rate. And positive ratings, which translate to more sales, keep people from
straying to other sites. Says Dwayne Rogers, who sells vintage fruit crate labels on eBay from his
home in Chico, Calif.: "They just don't have any competition."
STRINGENT RULES. But as eBay grew from a small town into a city, urban problems erupted,
such as contraband goods. Since early 1998, eBay has used more stringent rules to crack down
on crime, and banned sales of firearms. Indeed, eBay has increasingly realized that, like
government in a democracy, it can't leave absolutely everything to the people. Says Jeff Jordan,
senior vice-president in charge of eBay's U.S. operations: "You can't govern a metropolis the
same way you governed Mayberry."
eBay's key public-works project: its computer network. Until last year, it was plagued with
outages--including one in June, 1999, when eBay was completely shut down for 22 hours thanks
to software problems and no backup systems. Former Gateway Inc. Chief Information Officer
Maynard Webb, who joined as president of eBay's technology unit, has upgraded systems so
eBay's site is down less than 42 minutes a month despite much higher traffic. Credit that partly to
Whitman, who dived into the technology despite her lack of experience in it. Still, eBay's
customers had a big part, too. Shortly after Webb joined, he recalls, eBay's discussion boards
twice lit up with user complaints about site glitches. His techies claimed nothing was amiss--and
both times were proved wrong. "They catch things we don't," Webb says of eBay's customers.
"The community actually moves faster than we do."
Sometimes, so do rivals. Yahoo and Amazon beat eBay on such features as online bill payment
and uploading of product photos. Shmuel Gniwisch, CEO of online jewelry seller Ice.com, says
Yahoo early on provided services more tailored to helping commercial companies. eBay admits it
sometimes doesn't have the resources to do everything all its customers want--and, on occasion,
just forgets to listen. Says Brian T. Burke, senior manager of community support: "Sometimes
we're kind of slow."
As befits a corporate democracy, eBay's biggest challenges are political. Features good for
buyers, such as those e-mail auction referrals, can hurt sellers. Lately, sellers are especially
peeved at eBay's promotion of large commercial companies such as Disney, which rates a
special area in the Disneyana category. Says David Steiner, an eBay seller who's also president
of the online auction watchdog site AuctionBytes.com: "The general consensus of veteran sellers
is that they've forsaken the people who built them in favor of corporate sellers." eBay argues that
commercial sellers lend credibility to their categories, drawing more buyers to all the sellers--a
point many merchants concede.
TOO BIG? Yet others think eBay isn't listening as well as it once did to its core individual and
small-business merchants. "They've gotten too big for their britches," fumes Ron Saxton, an
Apple Creek (Ohio) seller of die-cast cars. eBay didn't consult its customers when it launched its
Auction for America campaign a week after the September 11 attacks, aiming to raise $100
million in 100 days for victims. And eBay's insistence that sellers use its billing system, rather
than let them accept checks or use a more popular rival system called PayPal, rubbed many the
wrong way. That may partly explain why the charity drive has raised less than $6 million halfway
through--despite donations such as Jay Leno's celebrity-signed Harley-Davidson motorcycle,
which sold for $360,200.
Few complaining sellers, however, stop or even reduce selling on eBay, or go anywhere else.
Partly, that's because eBay commands more than 80% of the online person-to-person auction
market. "The only way I'm leaving eBay is kicking and screaming," says longtime eBay
collectibles seller Tina DeBarge. Sure, eBay's relationship with its customers can be messy, says
eBay board member Scott Cook, chairman of financial software maker Intuit Inc., "but in the same
way that democracy is messy compared with the straightforwardness of a dictatorship."
It doesn't hurt that Whitman, despite her traditional top-down marketing background at Disney,
FTD.com (EFTD ), and Stride Rite (SRR ), became a convert to the eBay way shortly after she
joined as CEO in early 1998. Indeed, she's a top seller among the company's 2,500 employees,
with a positive feedback rating in the hundreds. In May, she auctioned some $35,000 worth of
furnishings in her ski condo in Colorado to understand the selling experience--and immediately
required fellow execs to sell on eBay so they, too, can detect problems firsthand.
It's no surprise, then, that as eBay grew beyond its ability to address individual user concerns,
Whitman has pushed it to devise a constant stream of new ways to tap the expertise of its
customers en masse. Naturally, eBay harnesses the special qualities of the Internet to gather
intelligence much deeper than most brick-and-mortar businesses can obtain. For instance, before
eBay revamped its bread-and-butter collectibles categories earlier this year to make products
easier to find, it first e-mailed 1.2 million customers asking them to check out the proposed
structure. Of the 10,000 who responded, 95% of them had suggestions, and many were used.
CHANGES. Some of its most effective ways of getting user input, though, don't depend on the
Net. Since early 1999, eBay has convened Voice of the Customer groups, flying in a new group
of about 10 sellers and buyers from around the country to its San Jose (Calif.) headquarters
every few months. Execs grill them on issues and ask for their views on new features and
policies. "Some of the things we discussed led to changes," such as improving eBay's feedback
policies, says Voices participant George Hawkins, who sells antiques and collectibles on eBay
from Duncan, B.C.
The result: fewer problems with new features and policies, and fewer big blowups. Even when
something does go wrong, eBay uses all that input to shift gears quickly. In the past three
months, in fact, Whitman says eBay has deliberately started budgeting an extra 10% to new
projects so it has the resources in place to make a quick turn. "They can essentially negotiate
with 50,000 users at once and make it work," says Munjal Shah, CEO of the auction services firm
Andale Inc.
Most of all, eBay simply watches--very carefully. Virtually all of its fastest-growing new categories,
such as autos, grew out of its noticing seller activity and giving it a shove at the right moment.
After noticing random car sales, eBay created a separate site called eBay Motors in 1999, with
special features such as vehicle inspections and shipping. This year, eBay expects to gross some
$1 billion worth of autos and parts--many of them sold by dealers. "It's the way of the future," says
Bradley Bonifacius, Internet manager at Dean Stallings Ford Inc. of Oak Ridge, Tenn., which has
sold 50 cars on eBay in the past year.
NEW TERRITORY. Most intriguing, customers have been pushing eBay to move its e-commerce
system outside the borders of its own Web site. Ritz Interactive, the online unit of Ritz Camera,
for instance, is using the technology to run eBay auctions on its own site. Says Ritz CEO Fred H.
Lerner: "eBay has very, very aggressive plans to create an e-commerce platform." Indeed, eBay
is encouraging others to build software applications based on eBay technology--much as
Microsoft does with its Windows operating system. A flourishing ecosystem of companies could
enrich eBay's marketplace by providing support services such as listing tools, escrow, and bill
payment. Essentially, says S.G. Cowen Securities Corp. analyst Scott Reamer, eBay aims to
become the operating system for e-commerce: the preeminent place for people and businesses
to sell online.
It's exciting new territory--and dangerous, too. For starters, a raft of rivals from Yahoo and AOL to
Microsoft and Amazon aim to be the biggest places for e-commerce, too, and some are making
fast progress. But there's a bigger question: Can eBay's values survive such grand ambitions?
After all, trying to be the Microsoft of e-commerce doesn't sound, well, very eBaysian--which may
be why Whitman frowns and demurs when people describe eBay's goal in such stark terms.
For his part, Omidyar frets that the growing participation of large commercial sellers could dilute
eBay's unique culture. "If we lose that, we've pretty much lost everything," he says. eBay's people
power made building a business a breeze compared with everything conventional companies
must do. Keeping in touch with all those millions of customers from here on out won't be so easy.
Source:
Business Week, December 3, 2001
Robert D. Hof