9.19 eBay Inc.

eBay Inc., an online auction and shopping website in which individuals and businesses buy and sell a broad variety of goods and services, is the world's largest online marketplace. The company went public in 1998 at $18/share, and was trading at $282/share by March 1999. {2}

Initially intended as marketplace for individuals, eBay was started by Pierre Omidyar and Jeff Skoll in September 1995, but three years later brought in Meg Whitman, who had studied at the Harvard Business School and knew the value of branding. Whitman in turn brought in staff from companies such as PepsiCo and Disney, and turned eBay more into the business of connecting people than simply selling things. Her team forged partnerships with GM, Disney, Sun, IBM, Dell, Sony, Sotheby's and other large companies, increasing the average sale price (ASP) and therefore eBay's commissions. An important acquisition was PayPal, in 2002, which today serves millions of small merchants in 190 markets and 24 currencies.

eBay Business Model

eBay has been successful by:

1. Meeting an existing need, an online auction, particularly for secondhand goods, {9} in which: {1} {16}

    a. Sellers are charged a non-refundable insertion fee: US$ 0.10 to $2.00, depending on the opening bid.
    b. Browsing, bidding and buying are free of charge.
    c. Sellers are charged a final fee: 9 % of closing price (up to $100).
    d. eBay acts only as a third party, does not take possession of sales items, or guarantee them.
    e. eBay does offer forums, however, a dispute settlement system {9} and a star rating of sellers based on purchaser feedback.

2. Creating a large customer base by: {2}

    a. Forging relationships with over 60 websites, including AOL.
    b. Preventing those companies from competing by contractual arrangements.
    c. Setting up 'business exchanges' where new and existing businesses, merchandise and equipment could be bought and sold.

3. Expanding operations on national and international levels: the company trades in 190 markets today, and 24 currencies {2}

4. Depending on viral marketing to create a strong brand. {2}

5. Seeing off the early competition by: {2}

    a. Acquisitions: the auction house Butterfield and Butterfield, half.com
    b. Expansion into market niches.

6. Fostering a sense of community among buyers and sellers. {2}

7. Making the process easy: sellers need only write a compelling description and add a photo. {2}

Performance

eBay weathered the dotcom crash and expanded rapidly: {15} {16} {19}

Year

Sales

(US$ million)

Net Income

(US$ million)

Operating margin

1997

44.4

7.1

26.3%

1998

86.1

7.3

12.9%

1999

125

9.5

9.9%

2000

431

48.3

18.9%

2002

1214

250

32.9%

2004

3271

778

34.8%

2006

5970

1,126

26.0%

2008

8,541

1,779

23.5%

2010

9,156

2,299

23.7%

2011

11,651

3,229

21.3%

2012

14,072

2,609

21.2%

Also important is the so-called Motley Fools' Flow Ratio, defined as (Current assets - Cash) / (Current liabilities - Short term debt), which measures the performance of working capital on a day-to-day basis. A Flow Ratio below 1.25 is considered attractive, but eBay did better with a Flow Ratio around 0.90 for the first three quarters of 2000 and 0.76 in the fourth. {1}

Acquisitions

eBay has acquired companies to: {13}

1. Protect its position: half.com, Butterfield and Butterfield (later sold to Bonhams), Rent, Markplaats, etc.
2. Extend its market segments: Skype (also bought to enable potential customers to call sellers, but didn't mesh sufficiently and was sold).
3. Improve customer relations: cheap and easy ways to pay for purchases: Billpoint (shut down) and PayPal (still part of eBay) and GSI Commerce.

Threats

1. In the higher ticket bracket, eBay faces competition from specialist auction houses that appraise items and guarantee quality. {11}
2. Fraud remains a serious concern, for eBay and PayPal. {9} {10}

Points to Note

1. First mover advantage applies, since competitors have difficulties in building up a rival customer base and/or offering appreciably lower selling fees.
2. eBay has extended its market segments and improved its customer relations by organic growth and acquisition.
3. eBay has become a more sophisticated marketplace, with fixed-price merchandise now accounting for 68% of sales. {20}

Questions

1. Briefly describe the seven strategies that have made eBay successful.
2. Which eBay acquisitions were beneficial, and which not?
3. What threats to its business does eBay currently face, and what countermeasures is it taking?

Sources and Further Reading

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