Management Information System
A Case Study from Business Week
“The eBay Economy”
The company is not just a wildly successful startup. It has invented a whole new business world
Maybe the folks at eBay Inc.'s annual analyst
conference in late 2001 were simply too dazzled
by the Web marketplace's blockbuster financial
results. Or maybe they had heard one too many
dot-com platitudes to heed yet another one.
Whatever the reason, when Chief Executive
Margaret C. Whitman had the audacity to
describe eBay as a "dynamic self-regulating
economy," no one in the room even blinked. This
overgrown flea market -- an economy?
From its humble origins as a trading post for
Beanie Babies, eBay is indeed morphing into
something entirely new -- and a lot bigger than
most people realize. This year, at least 30 million people will buy and sell well over $20
billion in merchandise -- more than the gross domestic product of all but 70 of the
world's countries. More than 150,000 entrepreneurs will earn a full-time living selling
everything from diet pills and Kate Spade handbags to $30,000 BMWs and hulking
industrial lathes. More automobiles, of all things, sell on eBay than even No. 1 U.S.
dealer AutoNation (AN ). So what does this add up to? "This is a whole new way of
doing business," says Whitman. "We're creating something that didn't exist before."
Not inside one company, anyway. More than a corporation, eBay is a nexus of
economic activity, a new and vibrant hub for global commerce. As much as anything,
this commercial force is just what Whitman said: It's the eBay economy.
Dig into the history of the world's great trading centers, and the parallels to eBay's
global marketplace jump out. Consider Manhattan, suggests Morgan Stanley & Co.
analyst and amateur historian Mary Meeker: The Dutch East India Co. began with a
trading community of ragtag merchants. Shut out of the prime markets of the day -slaves and spices -- they dealt in less lucrative goods, such as beaver pelts. Over time,
the traders flourished, and a larger community began to settle around them. As the
community prospered, it needed order. The Dutch turned to a hard-nosed, peg-legged
leader named Peter Stuyvesant, who, as governor of New Amsterdam, arranged the
construction of streets and other services, such as a police force. Later, Alexander
Hamilton greased the burgeoning economy's wheels of commerce by setting up the
Bank of New York.
Now look at eBay. It began as trading site for nerds, the newly jobless, and bored
homebound parents to sell subprime goods: collectibles and attic trash. But it quickly
grew into a teeming metropolis of 30 million, with its own laws and norms, such as a
feedback system in which buyers and sellers rate each other on each transaction. When
that wasn't quite enough, eBay formed its own police force to patrol the listings for
fraud and kick out offenders.
There's an educational system that offers classes around the country on how to sell on
eBay. The company even has something akin to a bank: Its PayPal payment-processing
unit allows buyers to make electronic payments to eBay sellers who can't afford a
merchant credit-card account. "EBay is creating a second, virtual economy," says W.
Brian Arthur, an economist at think tank Santa Fe Institute. "It's opening up a whole
new medium of exchange."
It's also introducing a whole new mode of management in this Internet era. If
Stuyvesant had a tough job bringing the scruffy denizens of his freewheeling city to
heel in the backwater frontier of the New World, Whitman and her team face even more
challenges leading their economy in the full glare of the wide-open Internet. Through
the Web, eBay's citizens have access, 24 hours a day, to every trend, every sale, every
new regulation in the eBay world. The system is utterly transparent.
As information spreads, power moves to outsiders and makes life miserable for
managers who fail to adapt. But this new people power offers rich rewards for
companies that figure out how to channel it. The key is to embrace this new
transparency and use it to turn customers and vendors into collaborators and colleagues.
"The Internet creates an economic imperative for transparency," says consultant David
Ticoll, co-author with Don Tapscott of the upcoming book, The Naked Corporation:
How the Age of Transparency Will Revolutionize Business.
That's why eBay's success holds potent management lessons for many businesses. In
place of Stuyvesant's tyrannical approach, seemingly a model for conventional business
management, Meg Whitman must take a more laissez-faire approach. It is based on
cooperation and finesse, not coercion and force. To make sure eBay doesn't do
something that incurs the wrath of its citizens and incites a revolt, eBay's executives
work more like civil servants than corporate managers. They poll the populace through
online town hall meetings and provide services to keep them happy -- and business
humming.
As challenging as it is, the collaborative approach offers awesome benefits. Unlike most
traditional companies, eBay presides over an expanding ecosystem -- one whose limits
are still unknown. Its magic is that as buyers and sellers flock to the site, they not only
feed on it, but nourish it. By rating each other on transactions, for instance, both buyers
and sellers build up reputations they then strive to maintain, setting a standard of
behavior that reinforces eBay's appeal. It's a powerful dynamic that only a handful of
other companies can claim. One example is Microsoft Corp. It builds a software
universe that grows bigger and richer as thousands of companies and programmers add
their own applications. This in turn attracts more users, fueling an ever-expanding
ecosystem. The upshot, says Harvard Business School professor David B. Yoffie: "You
get the incredible leverage of other people doing all your work for you."
EBay's powerful vortex is pulling ever larger players into its economy. The company's
sellers are stretching far beyond eBay's specialty of used and remaindered goods -they're pushing into the heart of traditional retailing, a $2 trillion market. Among eBay's
12 million daily listings are new Crest toothbrushes and the latest DVD players, and
giants such as Sears Roebuck & Co. and Walt Disney (DIS ) Co. are selling brand-new
items there as well. More than a quarter of offerings are listed at fixed prices familiar to
mass-market consumers. The result, says Bernard H. Tenenbaum, president of the
Princeton (N.J.) retail buyout firm Children's Leisure Products Group: "They're coming
right for the mainstream of the retail business."
As the eBay economy expands, managing it could get a lot tougher. The move into the
mainstream, in particular, poses thorny challenges. It not only means balancing the
needs of big corporate vendors with those of small fry -- no easy task -- but also
remodeling eBay to attract millions of newcomers. For the many who haven't yet tried
eBay, the process of listing items on the site, packing them up, and mailing them can be
cumbersome and confusing. And, for many, the brand still emits the stale odor of thrift
stores -- or worse. Reports of fraud on auction sites -- mostly on eBay, which still
accounts for 80% of the market -- are rising sharply even as eBay keeps hiring more
virtual cops.
EBay managers are reminded of this day after day. Whitman says it often takes six
months for new managers to adjust to the democratic regime. "Some of the terms you
learn in business school -- drive, force, commit -- don't apply," says former PepsiCo
(PEP ) Inc. exec William C. Cobb, now senior vice-president in charge of eBay's
international operations. "We're over here listening, adapting, enabling."
This process is clear in one of eBay's most cherished institutions: the Voice of the
Customer program. Every couple of months, eBay brings in as many as a dozen sellers
and buyers to ask them questions about how they work and what else eBay needs to do.
And at least twice a week, it holds hour-long teleconferences to poll users on almost
every new feature or policy, no matter how small.
The result is that users feel like owners, and they take the initiative to expand the eBay
Economy -- often beyond the execs' wildest dreams. Stung by an aerospace downturn,
for instance, machine-tool shop Reliable Tools Inc. tried listing a few items on eBay in
late 1998. Some were huge, hulking chunks of metal, such as a $7,000, 2,300-pound
milling machine. Yet they sold like ice cream in August. Since then, says Reliable's
auction manager, Richard Smith, the company's eBay business has "turned into a
monster." Now, the Irwindale (Calif.) shop's $1 million in monthly eBay sales
constitutes 75% of its overall business. Pioneers such as Reliable prompted eBay to set
up an industrial products marketplace in January that's on track to top $500 million in
gross sales this year.
EBay is also beefing up its services -- most of all, its police force. While the company
claims that fraud happens in less than 0.01% of all transactions, its own surveys reveal
that fear of fraud is a major turnoff for prospective customers. So early last year, eBay
formed a Trust & Safety Dept., now staffed by several hundred eBay employees
worldwide. They do everything from trolling the site for suspicious listings to working
with law enforcement agencies to catch crooks. EBay also has developed software that
recognizes patterns of behavior common to previous fraud cases, such as sellers from
Romania who recently started selling large numbers of big-ticket items. Says Trust &
Safety Vice-President Robert Chesnut: "As time goes on, we're exercising more
control."
How much? Figuring that out is eBay's overriding challenge in years to come. As it tries
to accommodate mainstream merchants, for instance, eBay is facing the same challenge
city councils face when Wal-Mart comes to town. "EBay's walking a fine line trying to
satisfy both merchandising powers and mom-and-pops," says Pacific Growth Equities
Inc. analyst Derek L. Brown.
For now, the big brands, which still account for under 5% of eBay's gross sales, seem to
be bringing in more customers than they steal. Motorola Inc., for example, helped kick
off a new wholesale business for eBay last year, selling excess and returned cell phones
in large lots. "We bring a community of buyers to eBay," says Chip Yager, a director of
channel development at Motorola PCS. Thanks to the initiative of established
companies such as Motorola, eBay's wholesale business jumped ninefold, to $23 million,
in the first quarter.
That organic growth makes it exceedingly tough to predict how far the eBay economy
can go. Ask an analyst, a seller, a partner, and they all have different forecasts for
eBay's future: the world's biggest mall, the Windows of e-commerce, even the next
Wal-Mart. Whitman professes not to know. "We don't actually control this," she admits.
"We are not building this company by ourselves. We have a unique partner -- millions
of people." For the foreseeable future, eBay's fate will be up to them
Summarize this article including answers for below 5 questions in about one page.
1. What are the success factors in eBay case?
2. What is the meaning of eBay’s success today?
3. Who can be eBay’s major rival in the future?
4. What do you think about the future of eBay?
5. What is the best strategy for eBay for its future?