Few e-business firms can claim to have been profitable from day
one. But eBay has always played differently to the rest, says
Stephen Phillips in San Francisco
Californian Internet auctioneer eBay is testament to the power and
scope of the Web. The auctioneer has created a truly global
marketplace, bringing together buyers and sellers that would
otherwise be too geographically isolated to do business with one
another. Since pioneering the online auction in 1995, the San
Jose-based company has stoked a market that saw $8.4bn (£5.9bn)
worth of transactions last year, corralling the lion's share
through its own trading platform.
Now that Web portal Yahoo has been humbled by shrinking banner ad
bookings, eBay is the only unassailably profitable e-business left
standing, with a business model that has so far proved
recession-proof.
But the firm's continued success rests on ongoing attempts to
broaden itself from the relatively narrow appeal of consumer
collectibles into becoming a mass merchandise marketplace for major
companies. As it enters this critical new stage in its development,
eBay is counting on harnessing the formidable market momentum it
has built up to date. The firm has tenaciously clung on to its
first-mover advantage in online consumer collectibles and small
business equipment auctioneering.
In a market where building a critical mass of customers is vital to
attract yet more buyers, sellers and sales, eBay has built a loyal
customer base by offering buyers and sellers a place to chat and
trade goods using a fully automated, easy-to-use platform. The firm
takes a cut of each trade as a proportion of the selling price, as
well as charging a listing fee.
EBay captures more than 80% of consumer and small business auction
transactions, according to a recent report from investment bank
Salomon Smith Barney, leaving rivals Yahoo and Amazon to pick over
the crumbs.
Such dominance of what Salomon dubs a winner takes all market has
also squeezed out rival pure-play Internet auctioneers. Upstart
FairMarkets threw in the towel in February, in essence signing up
as a subcontractor for its former foe. Woburn, Massachusetts-based
FairMarkets will maintain the network of sites it set up in 1999 to
compete with eBay, but agreed to license its rival's technology and
offer its clients a service linking their inventory management
systems with eBay.
Meanwhile, startup auction site DutchBid.com fell by the wayside as
a serious competitor earlier in February when its proposed merger
with Gold's Auction collapsed.
EBay counted more than 29.7 million online accounts at the end of
March, playing host to 89 million sales listings. And more than
$2bn (£1.4bn) worth of goods went under the hammer during the first
three months of this year alone, helping the firm rake in a $30.6m
(£21.8m) first-quarter profit as sales soared almost 80% to $154.1m
(£109.8m).
All of this may be small change, though, compared with the killing
eBay could make if it can tap corporations. The success of this
effort rests on the firm's ability to convince large businesses
that it offers a viable alternative sales channel. Initial results
suggest this may not be too much of a hard sell. As a bridgehead
into the corporate retail market, the firm already counts 60% of
its revenue from small businesses. Meanwhile, it is capturing
piecemeal business from companies attracted to the well-trafficked
site as a cheap and effective sales outlet and testbed for product
pricing.
IBM has listed at least 26 computer hardware items on the site,
while workstation vendor Silicon Graphics has sold more than 200
monitors on eBay, using it to gauge what prices the market will
bear.
Beyond technology, General Motors has expressed interest in selling
vintage car parts on eBay Motors, while The Walt Disney Company
uses it to peddle promotional items and memorabilia.
EBay has also come to be seen as a useful repository for the
inventory glut that much of the technology industry has been
saddled with as companies have cut IT spending amid the deepening
economic downturn. Investment bank Merrill Lynch noted in a recent
report that 2,306 items from network equipment vendor Cisco Systems
were listed on the site.
The firm is seeking to harness its growing corporate cachet to put
business sales on a more formal footing. Last November, it released
the coding specifications, known as the application programming
interface (API), for its auction platform to software developers.
The move is intended to encourage firms to develop e-commerce
platforms using eBay, establishing it as the technology standard
for Internet marketplaces. EBay spokesperson Kevin Pursglove says
the API initiative has already led to deals with camera retailer
Ritz Camera and used car listings service Autotrader, both of which
are using eBay as their e-commerce engine.
Extending the standard-setting initiative, the firm struck a deal
with Microsoft in March to offer its auction platform as a Web
service based on the software leader's XML-based simple object
access protocol (SOAP) for e-commerce transactions. XML is the
emerging lingua franca for firms to exchange information with each
other over the Web. Under the pact, eBay's technology will be
offered as a component of Microsoft's .NET Web services plan,
making it available over a range of applications and websites.
Microsoft will integrate eBay into its upcoming Windows XP
operating system, WebTV operations and websites such as
Carpoint.com and the bCentral small business services hub.
Another critical part of eBay's corporate retail thrust will be the
launch, between July and September, of its Internet storefront
initiative, allowing sellers to set up virtual shop on its busy
website. Under the plan, eBay will host e-commerce sites for
businesses, carrying the fight to Amazon and Yahoo, which already
sell such services. The firm is mulling over the idea of charging
merchants listing fees as well as a monthly subscription fee for
their tenancy on the site. "Until recently, eBay allowed sellers to
link to their own storefront, but now they want a piece of the
action," says Jared Blank, an analyst at Internet market watcher
Jupiter Media Metrix.
The initiative will also help the firm stamp out so-called gray
market activity, where buyers and sellers meet on the site, but
conduct their transaction elsewhere to avoid paying commission to
eBay. "Plenty of sellers have been using eBay to lure customers and
the company wants to rein this in," says Blank. Gray market
activity costs the company an estimated 10-25% in lost gross
merchandise sales, according to Salomon.
Additionally, the storefronts will offer goods at fixed prices,
extending eBay's emphasis on fixed-price commerce as a vehicle to
increase sales volume. Auctions using the firm's new 'Buy It Now
feature' turn over in an average three days, versus seven using
competitive bidding. The sales mechanism has proved a hit with
sellers, accounting for 5% of listings since its launch last
November.
Meanwhile, during the next two years eBay plans to integrate
Half.com, the fixed-price, second-hand books and music mart it
bought last August, into its main site.
So far so good. But eBay must continue to rapidly increase
fixed-price transactions to meet aggressive financial goals,
something analysts say could prove harder than building its auction
business, which grew organically based on a virtuous circle of more
buyers and more sellers and more sales. "EBay may have to
reposition its brand message and augment its vendor relationships
beyond the current framework," said Salomon in its report.
And despite eBay's preliminary success with certain companies, it
must still bridge a credibility gap to woo corporations, according
to Blank. "EBay is primarily known as a consumer-facing site. It
has its work cut out to attract businesses."
EBay certainly faces growing pains as it emphasises itself as a
sales channel rather than a consumer community. Its new hard-lined
approach has jarred with some long-time users. The firm caused
consternation in January by hiking its listing fees for the first
time since December 1996. Despite the initial furore, though, sales
have not been dented.
Vigorous international expansion is another key sales driver for
eBay. The firm splashed $121m (£86.2m) on South Korea's Internet
Auction Company in February and recently closed a stock-based
buyout of European auction site iBazaar Group, garnering operations
in Spain, Holland, Belgium, Portugal, Sweden and Brazil.
Acquisitions will probably continue to be a prominent feature of
eBay's international expansion and general growth strategy. The
firm earmarked a warchest of $600m (£428m) worth of its shares for
investments or buyouts, according to a US Securities and Exchange
Commission filing in June, utilising its still pricey stock as
valuable acquisition currency with many other Internet companies
available at a fraction of what they would have cost last
year.
If past form is anything to go by, the firm will weigh all of its
options carefully. Throughout the dotcom boom, eBay retained a
measured and disciplined strategy under its shrewd chief executive,
Meg Whitman, who as a veteran of Proctor & Gamble, Disney, FTD
and Hasbro among others, brings old economy prudence to
e-business.
However, it must now be a bit bolder to grasp the opportunities set
up by its previous success. Whatever happens, the next few years
promise to take eBay even further away from its roots as a site set
up by Silicon Valley engineer Pierre Omidyar in 1995 for his then
girlfriend (now wife) to indulge her penchant for trading candy
dispensers.
EBAY: THE ROAD AHEAD
EBay is in the throes of
diversifying beyond person-to-person and small business trading to
more lucrative, large business-to-consumer and business-to-business
transactions. To this end, it is gearing up to offer online
storefronts to retailers within its auction site and touting its
trading platform as the de facto operating system for businesses
wanting to sell their wares online. The firm is also banking on
rich pickings from fixed-price sales, allowing auctions to be
closed quicker and more items to be listed than with competitive
bidding-based pricing.