Thursday, February 1, 2001

eBay's Bid To Conquer All

BY ADAM COHEN

Let's say you need to get your hands on a 53-passenger school bus with hydraulic brakes and a six-cylinder diesel engine. Or a 1998 Ford monster truck called Wizard that will let you "give rides all day, crush cars all night." Or four pawnshops--plus a half interest in three check-advance businesses--spread across western Kentucky. Where would you start to look?

There's only one place on earth: eBay.

If the name eBay conjures up Bongo the Monkey, Huggy the Bear and the rest of the Beanie Baby clan, you're about three years behind the times. Computer giant Sun Microsystems is listing up to 150 items a day on eBay, including e4500 servers that sell for as much as $15,000. eBay Motors, which launched last April, is the third biggest auto-sales site on the Internet. And eBay's new Business Exchange, which has listings for $6,000 backhoes and $25,000 lathes, has doubled its offerings in the past quarter.

The Internet collapse continues, and even substantial firms like Amazon and Yahoo are struggling to stay ahead of it. But eBay has never had it better. Revenues topped $430 million last year, up 92% over 1999. The auction king now has 22.5 million registered users, a number that grew at a 125% annualized rate last quarter. And it's on track to do more than $6 billion in gross merchandise sales this year.

With stats like that and the stock up 51% since Jan. 1, the New Economy pundits are scratching their heads. How is it that a flea-market auction site has become the most successful company in cyberspace? And when so many other dotcoms are crashing and burning, will this high-tech highflyer come down to earth anytime soon?

At the heart of eBay's good fortune is perhaps the most compelling business model on the Net. As an online middleman between buyers and sellers, eBay is building an empire that bricks and mortar could not have touched. "If Buy.com goes down, you can still go to Circuit City," says

Meg Whitman, the Harvard Business School-trained CEO of eBay. But if eBay crashes, there's nowhere else to go. And because eBay's job is connecting people--not selling them things--it isn't lumbered with a traditional retailing cost structure. No buying, warehousing or shipping. No taking returns or unloading overstock. "eBay is the only e-tailer that really fulfills the promise of the Web," says Faye Landes, an e-commerce analyst at Sanford C. Bernstein & Co. "And the key is its virtuality."

That virtuality translates into remarkable profit margins. eBay's gross margins last quarter were a stunning 82%. Amazon, which actually has to acquire goods and ship them out, has gross margins averaging 20%. And because so much of eBay's customer recruitment is viral--sellers attracting buyers to the site, and buyers attracting sellers--its customer-acquisition costs are just half of Amazon's.

eBay is also the Internet's clearest example of a company that has exploited its "first mover" advantage. The lore among Internet strategists was that whoever nabbed Web space early would have a commanding commercial lead. The failure of a long list of early-bird dotcoms, from CompuServe to eToys, has proved that wrong.

But eBay did benefit tremendously from being first. The key: by locking up the most buyers and sellers in one place, it created a market no one could afford to leave. If you don't like Amazon, you can do roughly as well at Borders.com. If you leave eBay, you'll be going to a site with many fewer products for sale and many fewer buyers.

CEO Whitman and her cadre have leveraged themselves into all but total dominance of the online-auction market. Attempts by other companies to replicate eBay have bombed. eBay controls more than 80% of the online-auction market, with Yahoo and Amazon lagging far behind. eBay lands all the lucrative cross-promotional tie-ins with companies like Visa and Mailboxes Etc. And the auctioneers keep forging new partnerships with name-brand powerhouses like General Motors (which is allied with eBay Motors) and Disney (which uses the site to auction off authentic studio props, like Cruella De Vil's costumes from the movie 102 Dalmatians).

The goal now is to create entirely new markets. Says Whitman: "The best thing to do to grow your company is to extend a proven concept." The company's marketing division had long known that it was missing out on potential customers. Surveys showed that some buyers are psychologically averse to shopping by auction. They don't like the bidding game, and they are too time pressed. "A lot of people use the Web to simplify their lives," says Landes. "Being involved in an online auction is not necessarily simple."

So when intelligence came back from eBay's Consumer Insights Group that an obscure website launched a year ago called Half.com was a prospective threat, Whitman's gang went to work. Half.com started as a cleverly designed site that allowed people to sell used books, CDs and videos for a fixed price (see following story). The eBay investigators recognized immediately that Half's fixed-price system could become a devastating threat to their floating-price auction model. So they asked for a meeting. And then they bought the company.

eBay also experimented late last year with adding a fixed-price option to its auction listings. Items with a BUY IT now logo--as many as 25% of all listings--can be bought immediately for a set price. Buy It Now increased eBay's "velocity of trade," the critical measure of how quickly goods listed on the site are sold. Declared a success (last Christmas it stretched the holiday buying season by 10 days), the program has been extended through this year.

The easiest explanation for eBay's prevalence is that its managers haven't stopped to congratulate themselves. In many New Economy companies, the founders don't step aside easily. But it has now been proved, by billions of dollars in squandered fortunes, that while brilliance may ignite a start-up, it won't necessarily sustain it.

Pierre Omidyar, who founded eBay as a clunky website in his San Jose, Calif., living room, always knew he didn't have the company-building savvy to vault eBay into the corporate big leagues. So in 1998, he and co-founder Jeff Skoll brought in Whitman, who had learned the crucial importance of branding in the trenches of Old Economy powerhouses like Hasbro. Whitman, who combines an upbeat personality with a hard-driving focus on the bottom line, took the company public, grew it and proved adept at exceeding earnings predictions. She culled her senior staff from places like Pepsico and Disney. The kids aren't running this dotcom. The management team's average age is 44, with an average of 20 years of business experience and a strong vision for the company. They've had a knack for making the right calls--and have slain a stream of well-funded companies that tried to move into the online-auction space. And these top managers are relentless about something few dotcoms ever bothered with: pinching pennies.

Whitman and her crew are shedding their sentimental attachment to the stuffed animals and stamps that helped build eBay. Wall Street has long made clear that it is anything but misty-eyed about collectibles. After all, there are only so many coin or toy-soldier aficionados, and eBay was running the risk it might tap out the market. Moreover, the collectibles' average sale price (ASP), a key metric that helps determine eBay's fees on a transaction, is lower than for "practicals," like lawn mowers. The asp in eBay's computer category, which includes peripherals and software, is $80. The asp in "Toys, Bean Bag Plush" is $20.

To boost the ASP, eBay is pushing into an array of upscale markets--from autos to real estate to high-end business computers. Buyers were at first a little skeptical when Sun Microsystems started listing its servers on eBay. (Sun received e-mails warning that someone was using the company name to sell its servers.) But in the past year, Sun has sold $10 million worth of equipment, and it now lists between 20 and 150 items a day, making it one of eBay's biggest sellers. The ultimate sign it's working: Sun's competitors have started putting up items too.

Still, for all the good news, eBay has had a few stumbles lately. Great Collections, the high-end antiques-and-art category unveiled with great fanfare a year ago, has been a disappointment in traffic and sales. This month eBay scrapped it and unveiled eBay Premiere, a retooled attempt to capture this lucrative but elusive market. eBay's international strategy, which spans Europe, has yet to take hold in Japan, the world's second largest Internet market.

The company has benefited, though, from some key courtroom victories. It has established a critical legal principle: it is not liable for the sale of improper items on the site by third parties. eBay scored last July, when it extracted a $1.2 million settlement from ReverseAuction, a rival that copied e-mail addresses of eBay users and sent them messages urging them to switch sites. And earlier this month, the company won dismissal of a class action against it for allowing fake sports memorabilia to be sold. If eBay had lost, its entire hands-off business model might have been imperiled.

But preserving its hands-off status has come at a cost: the occasional p.r. black eye it sustains when cases of fraud or sales of offensive items hit the news. Last month a California man was charged with selling $110,000 in computers and consumer electronics on eBay but not delivering. And there was a minor dustup last fall when convicted serial killer Angel Resendez-Ramirez boasted in a television interview that his hair and shavings from calluses on his feet had been sold on eBay.

Given how well it is doing right now, eBay's greatest challenge may be meeting the wildly ambitious goals it has set for itself. Whitman maintains that the company is on track to grow 50% a year for each of the next five years. This means that a lot of things--from an expansive push into international markets to eBay Autos--will need to go right. If eBay does keep growing at its torrid pace, it will amount to more than just the world's leading marketplace. It will stand as convincing evidence that despite the recent spate of bad news, the Internet revolution has changed business once and for all.

Adam Cohen is at work on an independent book about the life and times of eBay