Ebay

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EBAY

eBay was founded in 1995 by Pierre Omidyar, who wanted to set up an auction site for sellers of obscure and collectible items. After the site proved popular, eBay was incorporated in May 1996. All of the inventory, ordering, shipping, and payments were handled by sellers and buyers who registered on the eBay site. The company's revenue came from commissions on items that were sold and from listing fees.

In 1998 Margaret C. "Meg" Whitman became eBay's CEO, joining the company after working at FTD Inc., Walt Disney Co., and Hasbro Inc. eBay was both popular and profitable, having transformed auctions into highly charged classified ads. Last minute bidding frenzies were common on the timed auctions. By providing feedback from buyers and sellers, eBay had succeeded in establishing an online community. Customer loyalty was a key factor that allowed the site to maintain a dominant position in the auction market. Tips and gossip were shared on chat boards, and many people came to earn their living by selling items on eBay.

After Whitman joined eBay, she revamped the site to make it easier for users to participate. She sought ways to make it safer for customers to purchase items. Whitman revamped the payment process by allowing customers to use credit cards instead of personal checks or money orders. She also began expanding eBay beyond its core model of collectibles. eBay acquired art auctioneer Butterfield & Butterfield in 1999 and used the Los Angeles area as a test market for local auctions of items that were difficult to ship, such as cars and furniture. As Whitman told Newsweek in 1999, "We are enabling a kind of commerce that didn't exist to any extent before, and that's person-to-person commerce."

BECAME PUBLIC COMPANY IN 1998

In September 1998 eBay went public with an initial public offering (IPO) that raised more than $60 million. Potential investors were attracted by the fact that eBay would not have any money invested in inventory. Items that were auctioned over eBay remained the property of the seller, who received payment directly from the buyer. At no point would eBay take possession of an item to be sold or payment for an item. Sellers paid eBay a small commission for listing items, from $.25 to $2 per item. They could pay an additional $50 for additional promotion on the eBay site. When an item was sold, eBay received a percentage ranging from slightly more than one percent to five percent of the selling price.

According to the company's 1998 IPO prospectus, revenue for 1997 totaled $5.7 million. Net sales for the first half of 1998 were $14.9 million, with gross profits of $13.2 million. Earnings from operations for the first six months of 1998 were $2.8 million, and the company managed to earn net income of $348,000. During that period the number of registered users increased from 340,000 to more than 850,000. At the time of the IPO, founder and chairman Pierre Omidyar owned 42 percent of the company, and venture capital firm Benchmark Capital had a 21.5-percent interest after investing $5 million.

When eBay held its IPO in September 1998, investors quickly bid up the initial offering price of $18 to more than $54. After the stock settled down to around $47 a share, analysts noted that the valuation reflected consumer excitement over online auctions and investor awareness of the potential for profit. At the time, most Internet ventures were losing money.

Just before its IPO, eBay entered into a three-year agreement with America Online (AOL). In exchange for $12 million in payments to AOL, eBay became the exclusive online trading community for AOL. By October 1998 eBay's community had grown to more than 1 million registered users, and some 700,000 items were listed on eBay in more than 1,000 categories.

ENJOYED GROWTH AND EXPANSION, 1999-2000

Throughout 1999 and 2000 eBay grew by adding new categories, forming strategic partnerships, and making acquisitions. Following the acquisition of Kruse International in May 1999, eBay launched a new automotive category later in the year. Kruse was an Indiana-based automotive auction house that sold some 130,000 collectible cars each year through more than 40 events. In March 2000 eBay launched a co-branded automotive site with AutoTrader.com, called eBayMotors.com, that sold only used and collectible cars.

In May 1999 eBay also acquired Billpoint, a company that facilitated person-to-person credit card payments over the Internet. In March 2000 eBay formed a strategic partnership with Wells Fargo & Co. to develop an online person-to-person payment platform. The partnership involved Wells Fargo taking a 35-percent equity interest in Billpoint. Later in 2000 eBay and Wells Fargo launched Electronic Check, a new payment option for eBay buyers and sellers.

In 1999 eBay formed strategic partnerships with Warner Bros. and Juno Online Services, among others, and expanded its partnership with AOL. The agreement with Warner Brothers gave that company's online users a way to bid on entertainment merchandise featured on different areas of eBay. Links to Warner Brothers' online properties were added to eBay's site. eBay's agreement with Juno Online Services made eBay the exclusive provider of online trading services on JunoLand, Juno's online community site, and on Shop@Juno, the company's online shopping channel. eBay expanded its arrangement with AOL by launching four new co-branded sites on several AOL brands.

eBay's high-flying stock price enabled it to acquire the prestigious art and antiques auction house Butterfield & Butterfield in May 1999 for $260 million. The acquisition was designed to accelerate eBay's entry into higher-priced items and to enhance its position in middle-tier items priced from $500 to $5,000. During 1999, eBay also rolled out more than 30 regional Web sites in U.S. cities nationwide. While items on the regional Web sites were available internationally, the sites made it easier to buy and sell items that required a physical pick-up, or which were expensive to ship.

eBay introduced a new service in 1999 called Personal Shopper. Designed to retain shoppers in niche markets where items were not always for sale, Personal Shopper provided potential buyers with e-mail alerts when an item in a category they were interested in came up for auction. In November 1999 eBay, together with collectible and hobby publisher Krause Publications, launched eBay Magazine. Two books, The Official eBay Guide and eBay for Dummies, also were published in 1999.

Internationally, eBay purchased alando.de AG, Germany's largest online trading company in 1999. In early 2000 eBay Japan was launched, with NEC Corp. taking an equity stake and promoting the site. Unfortunately, eBay launched its Web site five months after Yahoo! opened Yahoo! Japan in September 1999. While eBay charged a commission for each transaction, Yahoo! did not. As a result, by mid-2001 Yahoo! held 95 percent of the online auction market in Japan, while eBay only had a three-percent share.

If eBay had any problems in 1999, the most persistent involved its servers going down. In mid-1999 the company experienced its worst outage to date when software problems and a lack of server redundancy put the company offline for more than a day. As a result, eBay lost more than $5 million and 20 percent of its market value. After expending capital to rebuild its information technology (IT) infrastructure, eBay reported strong financial results for the first quarter of 2000, beating analyst's expectations.

In the second quarter of 2000 eBay announced several wireless agreements as part of its eBay Anywhere strategy. The strategy was designed to make eBay accessible from any Internet-enabled mobile device. eBay partnered with 2Roam to format its content and deliver it to virtually any mobile device on any carrier network. Specific agreements also were announced with OracleMobile, a subsidiary of Oracle Corp., and with Sprint PCS.

A mid-2000 report from Nielsen/NetRatings found that eBay users spent an average of one hour and 42 minutes on the site and viewed 256 pages, making eBay the "stickiest" Web site on the Internet. At the time eBay had more than 12 million registered users. It also was in mid-2000 that eBay acquired Half.com for more than $300 million in stock. Half.com was a fixed-price, person-to-person trading marketplace. The addition of a fixed-price alternative expanded eBay's trading platform and increased its potential to attract a wider customer base. After the acquisition, Half.com and eBay continued to operate independently and to promote each other.

In November 2000 eBay announced that it would begin to license its auction technology to enable other firms to create their own applications. The eBay application program interface (API) initially was made available to selected licensed partners and developers. By February 2001 some 20 to 30 other sites and developers were enrolled in the program or had expressed an interest in joining. FairMarket, which hosted private label auctions for 70 companies including J.C. Penney, Dell Computer, and CompUSA. Using API, FairMarket linked its merchants, manufacturers, and distributors directly to eBay auctions. It took its customers' merchandise out of their inventory systems, prepared it for auction, massaged the bids, and got the information back to the fulfillment systems. FairMarket also would supply the back-office capabilities that eBay did not supply. Another licensee, GoTo Auctions, became the first application to be certified for eBay's API program. GoTo Auctions' ChannelFusion Network allowed users to sell items on six different auction sites, including eBay, Amazon.com, and Yahoo! Auctions. For 2000, eBay reported revenue of $431.4 million and net income of $48.3 million. The company was debt free and had no interest expense.

EBAY COULDN'T BE BEAT IN 2001

In January 2001 eBay launched eBay Premier, a new site for art, antiques, and rare collectibles available at www.ebaypremier.com. The site grew out of the previously existing eBay Great Collections site and was the result of the connections eBay had made in the art world. In March 2001 eBay Premier hosted an online auction of Marilyn Monroe memorabilia, including the famous "Red Velvet" nude photos from 1949, in conjunction with a live auction at Butterfield & Butterfield. Although bidding for the photos failed to reach the necessary minimum and they were not sold, other items were sold in the $15,000 to $20,000 range. eBay reported that close to 60 percent of the bids were placed through eBay Premier, as were about 20 percent of the items that sold.

In January 2001 eBay announced that it would acquire a majority interest in Korea's largest auction Web site, Internet Auction Co. Ltd., for about $120 million. The South Korean company had about 2.8 million registered users. About one-third of South Korea's citizens were online, making the country the sixth-largest Internet market in the world. At the time eBay was reported to be the number one online auctioneer in the United States, the United Kingdom, Germany, Canada, and Australia. It also operated sites in France and Japan.

At the end of January 2001 eBay raised its listing fees. The announcement came after Yahoo! Auctions began charging listing fees after being a free auction service since its inception. The fee increases on eBay were the company's first since December 1996. Analysts indicated that the fees could boost eBay's revenue by as much as five percent in 2001.

In early 2001 eBay attempted to address the problem of spamming that its registered users were experiencing. Through data mining, e-mail addresses were being harvested from the eBay system and used for unsolicited commercial mailings, or spam, by noneBay sellers. For example, bidders on software subsequently received spam e-mail offering them pirated software. To help protect its users from spam, eBay changed its e-mail policy to gain more control over online contacts between eBay users. The company announced that any users not involved in a particular auction would only be able to contact each other by sending messages through the eBay system. Sellers would still be able to obtain the e-mail addresses of bidders on their auctions, and winning bidders were able to contact sellers directly. All other contact would be channeled through a new "Contact an eBay Member" feature. Critics of the new policy said it was designed to stop offline sales between members. In December 2000, eBay announced that it would begin enforcing its ban on offline sales between members.

eBay also provided its members with some protection against auction fraud. Some analysts believed that fraud and the threat of losing money online were the biggest inhibitors to the growth of e-commerce in the 21st century. eBay users were covered for up to $200 worth of losses through an automatic insurance plan. In addition, an escrow program was in place that enabled users to hold their money in a neutral account until their transaction was completed.

In March eBay's unique audience grew by nearly 4 million to a total of more than 22.1 million unique users for the month. It moved up in the Nielsen/NetRatings ranking from 15th to 11th in terms of unique visitors. While eBay's number of unique visitors was comparable with that of Amazon.com, eBay did better in terms of the number of pages viewed and the time each person spent on its site. eBay ranked second among all Internet sellers, capturing 14.5 percent of all Internet shoppers. Amazon.com led with 15.1 percent. Analysts noted that combining eBay's numbers with those of recently acquired Half.com would make eBay the top Internet e-tailer.

In March eBay announced an alliance with Microsoft that would integrate eBay's auction marketplace into selected Microsoft Web sites. Other new partnerships included an alliance with Artnet.com that made Artnet.com 's fine art pricing database available to eBay Premier customers. An alliance with Eppraisals.com gave eBay users access to professional art and antiques appraisers. During the second quarter eBay expanded offerings on Half.com, adding millions of new items across four main categories: computers, consumer electronics, sporting goods, and trading cards. eBay's fixed-price formats, such as Buy it Now, also performed well. Buy it Now enabled buyers to instantly buy an auction item.

eBay's goal was to increase its annual revenue to $3 billion by 2005. The company had international operations in 18 countries. It completed its acquisition of the Paris-based online trading network iBazar S.A. in May 2001 for $112 million in stock. iBazar hosted online auction sites in eight European countries. In March eBay opened Web sites in Ireland, New Zealand, and Switzerland. The company's best performing international units were Germany and the United Kingdom.

Analysts were skeptical of eBay's $3 billion target, because it would require the company to grow 50 percent each year. For the first half of 2001 eBay again beat analyst expectations in both quarters. Quarterly net revenue was $147.4 million in the first quarter, a 90-percent increase from the same quarter in 2000, with quarterly net income of $21.1 million. In the second quarter revenue reached $180.9 million. As a result of its strong first-half financial performance, eBay raised its expectations for 2001 and projected that second-half revenue could reach $400 million.

In June 2001 eBay launched a two-week pilot test of eBay Stores. Some 18,000 merchants signed up to sell musical instruments, jewelry, electronics, and collectibles. President and CEO Meg Whitman called eBay Stores "the next step in eBay's evolution." The storefronts combined fixed-price retailing with eBay's auction system. eBay's entry into storefronts followed that of Amazon.com and Yahoo!, whose storefronts gave merchants that were too small to establish their own Web sites a way to sell goods online.

Other new initiatives included an agreement with luxury gift e-tailer Ashford.com to sell its leftover and closeout merchandise on eBay in both a fixed price and an auction format. eBay also formed a new alliance with Terra Lycos to integrate eBay auctions into the Lycos auction site and make eBay a featured advertiser on the Lycos network. The agreement gave eBay exposure to the 94 million unique visitors to Lycos sites each month.

In mid-2001 eBay launched a new service involving newspaper classified ads. The eBay Seller Classifieds program gave sellers the opportunity to market their items to a wider range of potential buyers. Sellers who had items listed on eBay for auction were given the option of advertising their items in a branded eBay section in local newspaper classifieds. The program was first offered in the Minneapolis-St. Paul area, with plans for expansion into Florida's St. Petersburg Times.

POSITIONED TO MAINTAIN LEADERSHIP POSITION

eBay was one of the first Internet companies to achieve profitability and figure out how to make online auctions work. It was first company to enter the online auction market, after which it experienced rapid growth. By mid-2001 eBay held a clear leadership position and its name was a household word. Little competition was to be seen on the horizon, although Amazon.com and Yahoo! were creating a niche in the online auction marketplace through new initiatives. With online auction sales increasing 149 percent in May 2001 to $556 million, eBay accounted for more than 65 percent, according to a study by Nielsen/NetRatings and Harris Interactive.

As of mid-2001 eBay's strategy was to expand its business into new markets and improve current services. The company's goal was to expand its platform as quickly as possible in order to have more business transacted. eBay's business model gave it almost unlimited capacity and advantages of scale over traditional auction houses. In auctions, the biggest market has a clear advantage over other competitors because sellers desire the liquidity that comes from having a bigger audience and more potential buyers. In addition to auctions, eBay has successfully expanded its platform to include fixed-price offerings, both through its acquisition of Half.com and through its eBay Stores program, as well as through its Buy it Now service.