Week 9:
ebay
Case study: Developing new services at the world’s most successful internet
based company, ebay.
This case study explores the remarkable success of ebay and illustrates how its continual
development of new services has enabled it to remain the worlds leading auction site and
deliver extraordinary financial results for investors.
Introduction
Founded in September 1995, ebay is The World's Online Marketplace for the sale of goods and services by a diverse community
of individuals and small businesses. This ebay community includes more than a hundred million registered members from
around the world. According to Media Metrix, people spend more time on ebay than any other online site, making it the most
popular shopping destination on the Internet. On an average day, there are millions of items listed on ebay. People come to ebay
to buy and sell items in thousands of categories from collectibles like trading cards, antiques, dolls, and housewares to practical
items like used cars, clothing, books and CDs, and electronics. Buyers have the option to purchase items in an auction-style
format or items can be purchased at a fixed price through a feature called Buy It Now. Currently, ebay has local sites that serve
Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Korea, the Netherlands, New Zealand, Singapore, Spain,
Sweden, Switzerland, Taiwan, and the United Kingdom. In addition, ebay has a presence in Latin America and China through its
investments in MercadoLibre.com and EachNet, respectively.
ebay, Inc. is possibly the most successful Web-based enterprise in existence. Ebay has a market capitalisation of $35bn; and by
way of illustration ebay’s quarterly profits are similar to Amazon’s annual profits (Birchall, 2006; Nuttall, 2006). The San Jose,
California based company is universally known and is synonymous with the auction model of Internet on-line selling. ebay was
pivotal in helping to facilitate buying and selling between individuals and businesses. The industry leader also created one of the
first trusted online commercial communities, whereby the exchange between sellers and buyers is regulated by the evaluations
and recommendations of each. Although ebay has spawned many imitators as well as a spate of other Web destinations with
auction capabilities, it continues to dominate the auction industry and remains on the leading edge in innovation with models
such as fixed-price and half-price sales.
How ebay works
The internet auction site's rise from local flea-market to global trading powerhouse has been accompanied by one of the most
consistent track records of any US company. As revenues soared from $86m in 1996 to $3.3bn in 2004, eBay was consistently
posting better than expected financial performances. The result was a share price that stood out even by the heady standards of
internet stock prices. Its ability to generate cash was always superior to Yahoo and Google.
Figure 1 illustrates how ebay works. It is essentially the same as that of a physical auction. Prior to bidding or listing an item for
sale buyer and seller must register with ebay. All items listed by ebay can be viewed by all including non registered users, but to
trade (i.e. buy or sell) you must register. Figure 1 shows the process for a typical trade:
1.
2.
3.
4.
5.
Item is listed
A seller’s track record of selling is made available to all
Potential buyers can bid
Sellers view buying track record of buyers
ebay notifies winning bidder and seller of winning bid
6.
7.
Payment made and goods shipped
Buyers and sellers leave feedback on each other
Ebay receives its income from charging sellers a small fee to display items and then also taking a small percentage of the
winning bid. For example, it costs very little to display items of low value such as a novel. A seller may display a novel (including
a digital image of the book) for a few pence (approximately 20p). The move into higher value items such as automobiles has
provided ebay with substantial additional income. Ebay charges a vendor £6 to display a vehicle which may sell for several
thousand pounds. Ebay will then also take a small percentage of this winning bid.
The entire system is based upon trust and there is clearly an opportunity for rogue traders to operate and steal money from
genuine traders. The use by ebay of the feedback system allows vendors and buyers to view the trading record of each other
before agreeing to trade. This helps genuine traders to determine authentic traders from rogue ones. New traders will have to
establish themselves as genuine before others will trade with them. This is possible by agreeing to pay for goods prior to
receiving them or if one is a vendor forwarding goods prior to receiving the money.
Figure 1: How ebay works
The birth of ebay
Ebay was born in September 1995. Its original name was Auction Web. The idea fell out of a discussion between Pierre Omidyar
a thirtysomething French-born computer programmer and his fiancée, who was an avid Pez collector (sweet dispensers). With
the help of his friend Jeff Skol, Mr Omidyar launched Auction Web; it was incorporated in 1996 and changed its name to ebay in
1997.
After a year of trading, however, the start-up company was struggling to develop quickly. Worringly for the founders there were
many competitors (including Yahoos own on-line auction site) and the technology and internet was developing and changing
rapidly. Omidyar and Skoll needed significant amounts of money if they were to make ebay successful. In 1997, Pierre Omidyar,
drove to Silicon Valley's Sand Hill Road to seek venture capital funding for his fledgling online flea market, ebay. Though it was
growing at 40 per cent a month - without any marketing - and enjoyed 30 per cent margins, ebay also needed professional
management. Competition was intense: there were 150 other auction sites, many of them free, unlike ebay's fee-based service.
Mr Omidyar had no PowerPoint presentation and no business plan and his company's computer server was down - meaning
there was no active website for him to showcase. This was not a good start for Mr Omidyar, but within four weeks, Benchmark a
Venture Capital firm had agreed to invest $6.7m, valuing Ebay at about $20m. According to Benchmark it seems Mr Odimyar
recognised that eneeded help. In particular, it required better qualified people to run the business. In addition to their investment
Benchmark offered its services and its industry contacts. Benchmark's investment generated a return of $4.5bn, probably the
greatest profit ever generated in the venture capital industry. But, the investment paid off for ebay too. Indeed, it was Benchmark
that helped recruit Ms Whitman as CEO and Mr Swette as chief operating officer, now head of corporate development. While no
one doubted that the business model developed (connecting individual buyers and sellers online and taking a cut of the
transaction) was excellent, it was the development of this to a public offering which has enabled ebay to become the giant it is
today.
The appointment of Ms Whitman as CEO is regarded universally as an outstanding move by ebay. She was able to develop
ebay from one of the many auction web sites into the leading site. In those early days of 1997 the ebay site was in black and
white and the type face was basic courier. The company was called ebay and the website was called AuctionWeb, but both
brands appeared on the site. The ebay web pages appeared amateurish and compared to what Ms Whitman was use to at P&G,
Disney and Hambro; many thought she would not join, but she did. After Mr Omidyar explained ebay's impressive growth rate,
margins and profitability. Ms Whitman realised the potential. Furthermore, when Mr Omidyar explained that people had met their
best friends on ebay there was an emotional connection to the site and the ebay community. Ms Whitman joined the company on
January 2, 1998. One of her first major decisions was to reject an offer to merge with rival auction site ‘Onsale’, and instead
began to prepare for an Initial Public Offering (IPO). The company had just 35 employees, and she began filling senior
management positions. She hired auditors and set up the selection process for investment banks to lead the offer. By September
1998 she, Mr Omidayr and Gary Bengier, ebay's then chief financial officer, began three weeks of road-shows to investors. That
autumn ebay enjoyed a sensational IPO - the fifth most successful IPO ever. The shares began trading on Nasdaq on 24
September at $18. By the close of trading they had nearly trebled to $47 (Abrahams and Barker, 2002). The cash raised was
immediately put to work. While ebay’s peers burned their start-up cash, ebay became a phenomenon -a Silicon Valley company
that has always made a profit and is the world's most successful internet group. Moreover, the profit potential was huge. ebay
had almost no cost of goods, no inventories, few marketing costs and no large capital expenditure.
Everything seemed to be set fair and then in 1999 ebay suffered one of its worst disasters- in June the site went down for 22
hours, and did not work well for four days. During that summer, the senior management team questioned whether it could scale
up the business to provide a site that would be available to the world. Significantly the team began to question and doubt their
own technology. It was clear that ebay would need to invest heavily in its technology platform on which the entire business
rested.
Gross profit ($)
Figure 1: ebay profits
3.7bn
2.6bn
1.7bn
2005
2003 2004
The Business Model
The business model developed by ebay is unique and has evolved over time as the business has grown. The founders intentions
was that ebay should be made up of a community and this vision has helped shape the business. According to the Chief
Operating Officer, Brian Swette, the business has grown by constantly responding to what the users have wanted. It is the ebay
community which has designed the business model. Ebay supports the desire to respond to the user community by employing
approximately 5000 people. About half of whom are involved in customer support and about 20% of whom are in technology.
Ebay does not need to spend large sums of money trying to understand what their customers want because their customers
constantly request and suggest changes. For example, in 2003 over 100,000 messages from users were posted each week in
which tips were shared and system glitches highlighted. The technology systems that ebay has introduced over time enables the
company to trace every move of every potential customer, this yields rich information which can be acted upon. In addition,
Category Managers for ebay play a crucial role in the company’s development. Unlike other, say product managers in large
firms, these roles involve listening, adapting and enabling. It is the Category Managers’ responsibility to develop tools to help
users buy and sell more effectively.
How to grow the business?
In 1999, one year into the role as CEO, the challenges facing Ms Whitman were daunting. To achieve the ambitious growth
targets ebay had set itself she needed to transform ebay. Opportunities for growth existed in all four quadrants of Ansoff’s growth
share matrix (see Figure 2). As always the key decision was which ones to invest in? in which order? And when?
There was a need to develop ebay’s carboot or garage sale community and expand the number of different audiences the
company serves. In particular ebay needed to consider moving into sectors with higher average selling prices, such as cars,
boats and even houses. Ebay needed to consider increasing the range of formats, shifting from auctions to fixed-price sales without alienating traditional customers. Another area for growth was new sellers, particularly big corporations, while raising the
amount of revenue from each transaction - all without giving her competitors an opportunity to expand market share. Finally,
Ebay's needed to exploit international opportunitites.
Figure 2: Ansoff’s growth matrix identifying opportunities for growth for ebay
current
Products/service
current
markets
new
markets
new
Products/service
1. Market penetration strategy
3. Product development strategy
Try to get existing users to
spend more
Wireless
Develop sectors such as
introduce car sales, boat sales etc.
Fixed price shops
Paypal: payment system
providing commission on sales
2. Market development strategy
4. Diversification strategy
Attract new vendors such as
large corporations;
Skype: VOIP
Enabling communication
amongst community
Develop international sites in
significant markets such as
Germany, Japan.
The development of new services
International
Between 2000 and 2005 eBay expanded internationally, and had country-specific sites in the UK, Germany, Japan, Italy and
Australia and in 2005 purchased a majority stake in Korea's largest online auction site.
On-line payment system: Paypal
In 2002 EBay purchased PayPal, the world's largest online payment system, in an all-stock deal worth about $1.37bn. The deal
was eBay's largest investment to date and it was recognition by eBay that Billpoint, its own payment system, had been
unsuccessful. Furthermore, about 60 per cent of PayPal's revenues were generated on eBay; hence there was a natural
association between the two firms. The acquisition of Paypal will allow ebay to expand beyond its core auction services. EBay
and PayPal, have both prospered because their strategies capitalised on the internet's strengths. EBay has employed the
"network effect", in which new customers are added at almost zero marginal cost to the benefit of other users. Together, eBay
and PayPal can enhance the internet's potential by reducing the number of steps for buyers. This should accelerate the number
of transactions thereby improving revenues.
One of the main risks facing PayPal was its dependence on eBay for 60 per cent of its revenues. EBay has acquired a fastgrowing business - with analysts forecasting a 50 per cent earnings growth rate over three years (2003-2006) - albeit one with
lower margins. It should now be able to increase its overall commission on transactions that include online payment, as well as
brushing up PayPal's act and expanding abroad. This helps ebay address the threat from bilateral transactions between
merchants and customers that cut out the middleman. In this case these made up the other 40 per cent of PayPal's revenues
(Moules Abrahams, 2002).
Wireless
Offering the ability for customers to use ebay on the move and via wireless technology is a natural development of the firm’s
technology. In most ways the ebay product has the necessary components to be a success in wireless markets: it delivers highly
personalised content that is time sensitive in nature. A wireless service from ebay should appeal to the well-heeled big-ticket item
bidders least likely to have free time during their hectic professional life to track auctions on their PCs. However, one important
consideration with any wireless software program - still a novelty for most consumers - is that it has to have a simple interface.
Such a service would enable ebay to charge a premium and many believe eBay customers would be willing to pay a small
monthly sum if it increases their chances of landing that item of pop culture ephemera on which they had set their heart (Phillips,
2002).
Ebay shops
In 2004 ebay began offering commercial sellers the concept of a shop on the site where they could direct consumers to view
more of their merchandise. This has proved extremely popular for the large sellers.
Voice over internet protocol (VOIP) and Skype
In October 2005 ebay purchased Skype, the internet telephone service for $2.6bn and was by any measure a risky venture.
Skype is an internet voice company offering voice over internet protocol (VOIP). This enables users to talk for free over the
internet. SKYPE produced $50m of revenues in the third quarter of 2006 (Nuttall, 2006). Ebay wanted to move beyond its core ecommerce business, potentially putting it on a collision course with Google and Yahoo. This would provide ebay with the
opportunity to add a voice calling feature to its existing online network and would allow it to charge fees to merchants for
generating sales leads with merchants paying every time a potential customer clicks on a link in an online listing to initiate a
voice call.
There is little doubt that eBay has at least 500,000 sellers, many of whom are entrepreneurial, quick to copy best practices, and
used to working with new forms of software. Indeed, they are motivated by money. The acquisition of Skype and the use of VOIP
should enable ebay to offer its call transfer functionality, which can bypass traditional private branch exchange networks, thereby
enabling small companies to acquire enterprise-style communications systems for a meagre amount. Further opportunities
should exist such as sellers could direct details and similarly automate information content, such as allowing potential buyers to
watch a video of the product free of charge via Skype. Similarly, calls coming into an auction will have caller ID of potential
buyers, feedback of buyers, and could concurrently provide additional information back, such as details of other auctions.
This isn't even a full list of benefits of the link up between ebay and Skype. There is also the potential to link Skype and eBay
user profiles to databases on other services and create new communities and communication tools. Initially, however, Skype
enables a much broader platform. Furthermore, the link up of Skype/eBay/PayPal develops a platforming strategy for
conversational markets. Thus connected to different application platform interfaces developers might design their own
"softphones", enterprise solutions, or even "pay to call you" channels - a Skype equivalent of premium telephone services.
Figure 2: New opportunities for ebay
ebay
Paypal
opportunities
Skype
Dangers, threats and challenges
Competition
While ebay is the internet’s most successful business, the internet is nonetheless currently dominated by the two biggest search
engine companies: Yahoo and Google. Also, there is disenchantment within certain parts of Ebay's user community. This is
largely because ebay is moving away from its “user community” model to a more mainstream market. The question is whether
rivals - principally Amazon.com and Yahoo - can take advantage. Amazon is trying to convert its big customer base - 23m active
customer accounts in 2006 - to the lucrative area of person-to-person trading. In Amazon's case, this is focused on outsiders
selling second-hand books at a fixed price for a fee - an area that now accounts for about 17 per cent of its US transactions.
There is a danger that Amazon could start eroding Ebay's liquidity through aggressive pricing. That would hit Ebay's margins,
though the company hopes to raise operating margins from the current 25-28 per cent to 30-35 per cent by 2005, says Rajiv
Dutta, chief financial officer. That would partly be achieved by raising the amount charged for each transaction or through
additional services. At present, however, the competitive threat seems low as neither Yahoo nor Amazon can rival the number of
buyers on Ebay.
Maturing markets and slow growth
After a run of more than six years as a public company, during
which it consistently turned in financial results that made every
other dot com firm green with envy, in 2005 eBay's earnings
came up short. The slowdown was particularly acute in the US
and Germany, its biggest markets. In the US, revenue growth
slowed to 24 per cent, from 29 per cent prompting fears it would
be hard to keep the long-term growth rate above the promised
20 per cent. Ebay's non-US business slowed even faster, from
82 to 64 per cent. Worse, the company's rock-solid profit
margins showed uncharacteristic signs of erosion. Ebay's muchadmired business model has enabled it to keep its gross profit
margins above 80 per cent. But heavier spending on marketing,
including the first TV campaigns in countries like the UK and
China, ate into operating profit margins cutting them by one point
to 30.4 per cent. Ebay spent more than $300m in 2005 to improve growth opportunities; with most of this spending taking the
form of higher marketing costs. It spent $100m (£53m, €77m) in expanding its presence in China in a race to dominate what is
likely to become the world's biggest internet market (Waters, 2005b)
Fixed price sales
The move in 2004 to sell an increasing number of goods at fixed prices, rather than through auction, was seen as controversial
among some suppliers. So too has the strategy of attracting large corporate sellers - such as IBM, now the biggest supplier –
which has raised fears among smaller, traditional clients. Such moves risk antagonising the "power sellers", the army of
entrepreneurs that have formed the bedrock of Ebay's sellers and make their living trading on the site. They provide the liquidity
that makes Ebay the dominant online auctioneer. Many sellers welcome the changes because of the new buyers they attract to
the site. Others, however, believe corporations will get special treatment from Ebay - and destroy its culture.
Cash rich
With $1bn already on the balance sheet and projected free cash flow of $1bn a year by 2005, she will one day have to decide
how to spend it. One opportunity is the personal communication market because Ebay has no related presence in the instant
messaging, chat or e-mail services.
Fraud
The continual coverage in the popular media of fraud on the internet in general and criminals using ebay to amass ill-gotten
gains clearly does not help ebay. But, there are so many millions of users who have very positive experiences of using the site
that it seems unlikely that existing users will be put off using the on-line auction site. Should one of its competitors develop a
more full proof trading model, however, this would be a serious threat to the business.
The press is full of stories of people with bad experiences of using ebay. Vendors have placed articles for sale and have been
shocked at the number of people who make a successful bid but, when the time comes to pay up, disown their bid. And
significantly there is no recourse. Meanwhile, eBay has collected its fee and leaves Vendors high and dry. Indeed, sellers and
buyers have never seen an invoice from eBay for its fees. The bidder may get a black mark against their name, but that is
irrelevant as they can easily get a new pseudonym and continue playing games with other vendors.
In 2005 Visa, Microsoft and eBay announced a global service to combat identity theft on the internet especially "phishing"
incidents. Phishing refers to the practice of e-mails being sent to users purporting to be from institutions such as their bank and
urging them to click on a web link to update their online account information. The link leads to a fake website where inputting
details risks giving fraudsters access to actual bank accounts. This new network is a response to concerns from within the
industry that consumers were reducing their online shopping and one-fifth refused to work with their financial institutions via the
internet. The new network allows companies targeted by phishing attacks to report them to a central database. Then others
devising software to alert users or block them from phishing sites, such as Microsoft, would be immediately notified by the
network, enabling them to update their programs (Nuttall, 2005).
Shill bidding
In 2007 a Sunday Times investigation claimed the practice of shill bidding was widespread on ebay. A shill is an associate of a
person selling goods or services who pretends no association to the seller and assumes the air of an enthusiastic customer. The
intention of the shill is, to encourage other potential customers unaware of the set-up to purchase said goods or services. The
word "shill" is probably related to "shillaber", a word of obscure early-20th century origin with the same meaning. Ebay tried to
reassure customers and stated that any such fraudulent bidding is strictly prohibited on their auction site (Sunday Times, 2007).
Conclusions
Ms Whitman has transformed Ebay from a purely domestic group that held
auctions in 300 categories into a global enterprise, operating in 18 countries and
offering 16,000 categories. She has expanded the range of goods sold from
mainly collectibles - Beanie Babies dolls accounted for 8 per cent of items sold at
the time of the IPO - to include used cars, motorcycles, computers, time-share
holiday homes and even golf tee-off times. A Gulfstream corporate jet has been
sold on Ebay for $4.9m. However, ebay risks alienating its customers and the
whole ebay community by introducing fixed price sales. IBM is now its biggest
customer. This move away from auction and onto mainstream sales goes
against the principles on which ebay was established.
Ebay should start to address the fraud issue. The introduction of deposit accounts would help overcome the problem of bogus
bidders. The deposit account would enable a percentage of the successful bid to be automatically deducted or ebay could make
an automatic deduction from users' credit cards. It seems there are people who use the eBay site as a sort of free internet game,
making bids but with no intention of buying. While EBay can produce statistics showing how many auctions are successful, the
numbers give no indication of how many sellers actually get paid.
The purchase of Skype raises many opportunities. Will eBay block potential in the adult market - an area where a great many
developers see potential? Especially when history teaches us that from the VCR industry to the Internet the adult industry has
been at the forefront of developing technologies and markets.
VOIP, the on-line payment system (paypal) and the ebay community should create new experiences and encourage new
developer solutions at the intersection of the three businesses. How open the enlarged business is to the innovation in the
developer community could well determine its success. There is a shared opportunity for the company and independent
developers. Ebay will undoubtedly find ways to achieve a return on the huge investment it has made in Skype, but the rewards
could be all the richer if it opens the platform to outside influences. It is worthy of note that what was a weakness for ebay- its
technology - has now become a strength.
Questions
1.
2.
3.
4.
5.
6.
7.
eBay is one of the only major Internet based firms to consistently make a profit from its inception. What is eBay's
business model? Why has it been so successful?
Other major web sites, like Amazon.com and Yahoo!, have entered the auction marketplace with far less success than
eBay. How has eBay been able to maintain its dominant position?
What method does eBay use to reduce the potential for fraud among traders on its site? What kinds of fraud, if any, are
eBay users most susceptible?
eBay makes every effort to conceptualize its users as a community (as opposed to, say "customers" or "clients"). What
is the purpose of this conceptual difference and does eBay gain something by doing it?
eBay has long been a marketplace for used goods and collectibles. Today, it is increasingly a place where major
businesses come to auction their wares. Why would a brand name vendor set-up shop on eBay?
Many analysts have argued that by moving to Fixed Price sales ebay is risking alienating its traditional community of
garage/car boot traders. How can ebay stop becoming just another site for selling?
Given the growth opportunities available to ebay which ones and in which order should it develop?
References
Abrahams P and Barker T (2002) Companies and Finance inside Ebay, Jan 11.
Moules J and Abrahams P (2002) Companies and Finance the Americas: Ebay set to buy PayPal for $1.37bn FT.com site; Jul
09.
Nuttall C (2005) Visa, Microsoft, ebay combat 'phishing' FT.com site; Feb 14.
Phillips S (2002) Case study: ebay, FT.com site; Nov 20.
Sunday Times (2007) January 28th, p1-2.
Waters R (2005) Ebay beats Wall St expectations, Financial Times, FT.com, October 20.
Waters R (2005b) Ebay chief takes the rough with the smooth Financial Times; FT.com, April 18.
Birchall J (2006) Amazon shares plunge after drop in profits, FT.com site, Jul 25.
Nuttall C (2006) Ebay sales and profits top forecasts, Financial Times, Companies International, Oct 19.