Company Case 14
EBAY: FIXING AN E-COMMERCE PIONEER Pop quiz: Name the high-tech company that got its start in someone’s living room, grew from zero revenue to a multibil-lion dollar corporation in less than a decade, and pioneered the model for an entire industry to follow If you’re thinking that the list of companies that fit this description is a mile long, you’re right. But in this case, we’re talking about eBay. eBay is one of the biggest Web success stories in the history of, well, the World Wide Web. But sooner or later, every high-growth company hits a speed bump and experiences growing pains. And after amazing growth for its first 15 years, eBay has hit that speed bump. Current CEO John Donahoe is faced with the difficult challenge of putting eBay back on the superhigh-way to prosperity
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eBay started in 1995 as an auction house. Pierre Omidyar, a French-born Iranian software engineer, was intrigued by the idea of an online auction format and its potential to create a fair and open marketplace where buyers themselves decided on an item’s price. He wrote the code for a simple auction plat-form and called it “Auction Web.” Omidyar himself offered the first item up for bid, a broken laser pointer. He didn’t expect much. But to his surprise, it sold for $14.83. When Omidyar contacted the buyer to make sure he understood that the laser pointer was broken, the buyer responded in an e-mail saying, “I’m a collector of broken laser pointers.” It was then that Omidyar realized the truth behind the phrase, “One man’s trash is another man’s treasure.” He also realized that his auc-tion concept could become something big. As the thrill of participating in an online auction began to catch on, two kinds of people were drawn in droves to eBay: Bargain hunters looking for unusual treasures cheap and purgers enticed by the idea that the old junk in their closets and attics might actually be worth something. When eBay brought these two types of users together in the same online marketplace, sparks began to fly. eBay grew quickly as an ex-citing online flea market where people could buy or sell just about anything. Within little more than a year, there were 41,000 registered eBay users who were buying and selling $7.2 million worth of goods annually. Within three years, the number of registered users hit 10 million and the annual value of goods sold hit $2.8 billion. eBay’s revenue, stock price, number of employees, and other financial performance soared. By the year 2000, eBay was the number one e -commerce site in the world by sales revenue. But eBay had another thing going for it that has alluded most dot-coms. From the beginning, eBay was based on a model that produced profits, not just revenue. Whenever a user posted an item for auction, eBay collected a fee. The more products that went up for auction, the more money eBay made. eBay has tinkered with its fee structure over the years, includ-ing adding fees based on an item’s final selling price. But the basic idea remained the same.
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With explosive growth, change is inevitable. According to many industry analysts and observers, the face of eBay slowly began to change based on two dynamics. The first was expan-sion. eBay’s list of categories and subcategories grew into the hundreds. The e-commerce giant also added international sites for different countries. And it began to launch sub-sites (such as eBay Motors) and to acquire other dot-corns relevant to its business. Such acquisitions ultimately included Half. corn, Paypal, StubHub, Shopping.com, and Skype. The second dynamic driving change in eBay was the addi-tion of fixed-price selling options. During its early years, open auction was the only option buyers and sellers had. Sellers put up an item for sale with a designated starting price for a pe-riod of one to ten days and sold to the highest bidder. In 1999, eBay augmented that core method with a fixed-price, “Buy It Now” option. Two years later, it took that concept much further with the introduction of eBay Stores. With eBay stores, a seller could create an online “storefront” within eBay. The feature al-lowed sellers to post items much more quickly, making it eas-ier for high volume sellers to do business. It also gave fixed-price options with no bidding whatsoever and virtually eliminated the sales period for an item. Both of these dynamics continued to fuel eBay’s steady, strong growth for years. For 2006, $52.5 billion worth of goods were sold on eBay Those sales were generated by 222 million users posting 610 million new listings. eBay’s take was $5.97 billion in revenue and $1.12 billion in net income. These num-bers are tremendous for a company that had only been doing business for a single decade—they also marked a zenith for the company.
In 2007, eBay began to show signs of slowing down. In early 2008, John Donahoe took over as CEO, replacing Meg Whit-man, the mastermind behind the company’s success for 10 of its 12 years. Donahoe acknowledged that eBay faced issues, in-cluding the fact that it had been resting on its laurels. “We were the biggest and the best. eBay has a storied past. But frankly, it’s a past we’ve held onto too much.” Consumer behavior was shifting. When eBay was new, many users were thrilled by the uncertainty of bidding against other buyers for a bargain. But as online shopping went mainstream, more people opted for the tried-and-true method of finding the best price on a new piece of merchandise and buying it from a reputable retailer. The consumer shift to buying new products at fixed prices was evident in the growth experienced by online retailers such as Amazon.com, Buy.com, and Walmart.com, companies that eBay had previously refused to recognize as competitors. Amazon had passed eBay as the largest online retailer a num-ber of years earlier by continuing to expand its selection of fixed-price items, often with free shipping. Shortly after taking over from Whitman, Donahoe said at a public event, “We need to redo our playbook, we need to redo it fast, and we need to take bold actions.” He unveiled the details of a new strategy for eBay’s turnaround. The strategy focused on changing the identity of the eBay marketplace. Donahoe specified that the new strategy would focus on building the