eBay's secret of success

Profits may be new for Amazon, but eBay has had them from the start

There is something faintly absurd about the milestone status accorded to Amazon.com's first profits. That something so ordinary in business terms can become so extraordinary indicates
how necessary the recent e-commerce shakeout really was.

What makes the situation particularly odd is that another dotcom has been happily churning out profits more or less from day one, and yet it has received disproportionately little attention.

The latest earnings figures for eBay are, as usual, good and getting better, but have occasioned little in the way of comment. Even more impressive is the fact that eBay's share price has resolutely defied the dotcom downturn. Such an across-the-board success cries out for an explanation.

The origins of eBay offer one clue. Unfortunately, the best place to start, a page explaining the improbable beginnings of eBay in the Pez candy dispenser collecting habits of the founder's girlfriend, is no longer to be found on the eBay site. Perhaps the suits now running the company think it a little unbecoming. Fortunately, the Internet Archive lets us savour the details.

It is clear from this that eBay has always fed off the enthusiasms - some would say obsessions - of its users. One immediate advantage of this is the natural way in which communities of users form based around their common interests.

It also brings into play a lucrative process of natural selection, whereby it is the most determined users that tend to turn to eBay most. This, in turn, means that they are likely to bid more fiercely against rivals when they find what they are looking for.

Here is a case where being the first mover really did confer an advantage. As word got out through collector networks that eBay was a good place to look for obscure items, so sellers were also attracted by this growing pool of buyers, which fed the virtuous circle yet further. Later auction sites have only flourished to the extent that they have been able to offer specialised services or benefits not otherwise available on eBay.

With a user base that tends to grow itself, the company has been shrewd in capitalising on that asset in other ways, notably fixed-price sales.

More recently, it has also been successful in selling this audience to major retailers, in what amounts to a new kind of auction-flavoured Web advertising. Here click-throughs lead to sales in a natural fashion through continuity with the surrounding pages, rather than turning into a distracting sideways move away from the main page, as is the case with conventional banner ads.

Two good examples in the field of computers are offered by IBM and Sun, both of which now routinely sell computers to the eBay membership from the eBay site.

The reason that all of these different approaches contribute royally to eBay's bottom line is that its fundamental business model is to act as a mediator between parties - and to take a percentage of the sales. This must be the dream of all online companies, since it frees eBay from worrying about the details, and lets it concentrate on maximising its membership base and the overall use that it makes of the site.

In a way, though, the reason eBay is so successful is because it offers something quite amazing:

a genuine interface between the Internet and everyday life. It allows anyone on the Internet to search not Web pages, as Yahoo or Google do, but through the physical world for objects rather than information. This achievement, the company's great secret, is perhaps the main reason why eBay is a truly special dotcom - and unfailingly profitable.

Next week: Safari

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