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eBay Inc.

eBay Inc.

2005 Hamilton Ave., Suite 204
San Jose, California 95125
U.S.A.

Telephone: (408) 558-7400
Fax: (408) 558-7401
Web site: http://www.ebay.com

Public Company
Incorporated:
1996
Employees: 6,200
Sales: $2.17 billion (2003)

Stock Exchanges: NASDAQ
Ticker Symbol: EBAY
NAIC: 453998 Other Miscellaneous Store Retailers

Millions of buyers and sellers have made eBay Inc. the world's largest and most popular Internet site for individuals and businesses to exchange goods. By 1999 eBay had 5.6 million registered users and listed over 3.1 million items for sale; by 2004 there were an estimated 65 million registered users from 150 countries, 971 million items for sale, and gross merchandise sales hit $15 billion. eBay owns local sites in 19 countries, has stakes in another eight foreign nations, and provides users with its own online pay service, PayPal Inc. As eBay's revenues continue to grow, the sky seems the limit despite competition from Yahoo!, Amazon.com, and an ever increasing number of imitators.


Looking for Pez Dispensers: 199596

Paris-born Pierre Omidyar, who immigrated with his family to the United States when he was six, graduated from Tufts University in 1988 with a degree in computer science. While at Tufts, Omidyar met his future wife, Pam, who had an unusual hobby: she collected and traded Pez candy dispensers. When Pam complained it was hard to find people with similar interests, Omidyar decided to create a small online auction service. AuctionWeb was launched Labor Day weekend in 1995. Set up as a sole proprietorship in San Jose, California, the online bazaar was considered a "grand experiment" by its creator. Little did he know the impact his brainchild would have on the Internet, auctions, and corporate history.

At the time he launched AuctionWeb, Omidyar was working at the General Magic Corporation as a software developer. His background included cofounding Ink Development Corp., which became eShop, a pioneer of online shopping before it was bought by Microsoft. Omidyar also developed consumer applications for Claris, a subsidiary of Apple Computer, and had even written a software program for his high school library at the age of 14.

For the first five months of AuctionWeb's existence, Omidyar offered the new service for free, building a base of buyers and sellers through word of mouth. In May 1996 he incorporated eBay (which stood for "electronic Bay Area"), becoming its chief executive and quit his day job. By the end of 1996 the company had six employees, including Jerry Skoll, eBay's original president.


The Concept

Prior to AuctionWeb, online auctions were either business-to-business or business-to-consumer. There was nothing comparable to Omidyar's concept either online or offline; flea markets and yard sales were the most similar kind of person-to-person interaction offered by the precursor of eBay. Unlike traditional auctions, there was no auctioneer. At AuctionWeb sellers posted information about their items, and buyers were able to browse the site and submit bids by electronic mail (e-mail). The actual auction for an item was held over three to four days, with bidders receiving e-mail notices when someone made a higher bid. They could then counter the bid or drop out. The winning bidder made arrangements with the seller for payment and shipping.

eBay served the role of a broker; the firm did not own any of the items being sold and was not responsible for distribution. Bidding was free, but it did cost between 25 cents and $2 to list an item for sale, plus a commission of between 2.5 and 5 percent of the sale price. The site was profitable almost from the beginning, unlike the vast majority of e-commerce sites. Much of the site's success appeared due to Omidyar's sense of what people wanted: a simple, central location to buy and sell items, and the ability to talk with (and perhaps eventually meet) people with similar interests. From the beginning, eBay's auction service sought to create the sense of an old-fashioned marketplace and encouraged communication between hobbyists and collectors.

During 1996 the site hosted more than 250,000 auctions in some 60 categories including Beanie Babies, stamps, coins, and computers. By the end of the year it was overseeing about 15,000 simultaneous auctions daily, with 2,000 of them new each day. The site received over two million hits a week, and the amount of money exchanged for goods sold exceeded $6 million for the year.


Fighting Fraud: 1997

The site's popularity continued to increase and in the first quarter of 1997 AuctionWeb saw over 330,000 completed auctions, with the total transaction value of goods sold worth more than $10.25 million. Among these items was an original 1959 "Suburban Shopper" Barbie doll, which sold for $7,999. In a May 1997 press release, eBay President Jerry Skoll stated that the growth "clearly demonstrates the receptivity and the eagerness of the general public to participate in online commerce. Our goal is to provide a fun, efficient, and reliable forum for both buyers and sellers."

Omidyar and Skoll decided the company needed venture capital and a more experienced management team. In mid-1997 Benchmark Capital, a venture capital firm in Menlo Park, California, put $5 million into the company to acquire a 22 percent stake. With their advice, the company began targeted advertising, renamed itself eBay in September, and launched a second-generation service with a redesigned site. By the end of the year the company had about 340,000 registered users and was hosting approximately 200,000 auctions at any given time. eBay had also established a relationship with America Online Inc. (AOL), and eBay became featured in AOL's Hobby and Classifieds prompts. A year later, in 1998, eBay became the exclusive auctioneer in the Classifieds area, paying AOL a guaranteed $12 million over three years.

Internet fraud soon became a growing concern, with buyers paying for goods that were never delivered. In November 1997 the U.S. Senate's Permanent Subcommittee on Investigations conducted hearings into Internet commerce. The National Consumers League found fraud reports had tripled after it created its Internet Fraud Watch project in March 1996. In addition to false promises for discounted services and charges for Internet services that were supposed to be free, people were experiencing problems at auction sites such as eBay as well. Between January and October 1997, Internet Fraud Watch received 141 complaints about auction sites. As Susan Grant of the National Consumers League told Internet World, "The problem basically is that auction sites really don't take responsibility for the sales if they go bad. They merely put the buyer together with the seller."

In the same article, eBay reported it had only 27 disputes from over one million transactions between May and August 1997. To keep such disputes to a minimum, eBay instituted a feedback system for buyers to post reviews of their transactions. Sellers were then given a rating based on the number of their successful auctions: positive comments received one point, neutral responses a zero, and negative comments a minus one. Potential buyers were able to read the comments as well as view the rating. A rating of minus four (4) resulted in a seller being denied use of the service.


Major Growth and Change: 1998

eBay grew phenomenally, recording gross merchandise sales of $100 million and revenues of $6 million in the first quarter of 1998. The first quarter had become the company's best, as eBay promoted the auctioning off of unwanted Christmas gifts.


Some competition, however, was beginning to develop. Late 1997 saw the business-to-business auction service OnSale Inc. add person-to-person auctions and the launch of Auction Universe Inc., a web auction firm owned by Los Angeles Times parent Times Mirror Company. During 1998 Auction Universe began providing city-oriented auction sites through a group of affiliated newspapers, each offering its own local auction site (but run by Auction Universe). Such web sites, aimed primarily at the newspapers' local areas, made it easier to auction large items, since it was expensive to ship a used car or a large piece of furniture across the country. It also offered newspapers a way to regain revenues lost when classified ads became too expensive for low cost items.

eBay bought Jump, Inc., the developer and operator of Up4Sale, an advertising-supported trading/auction site, launched in 1997. Planning to use Up4Sale to introduce complementary future services, eBay operated the site as a separate service. In May, Meg Whitman was appointed president and CEO of eBay, with Pierre Omidyar becoming chairman. Whitman came from Hasbro Inc.'s preschool division, where she had been general manager. She had previously headed FTD Inc., where she launched its web site and oversaw the transition of the organization from a network of individual florists to a private company. Known for her experience in managing and marketing consumer brands, including Teletubbies and Playskool, Whitman concentrated on raising eBay's profile through increased advertising aimed at hobbyists and groups of collectors.

Company Perspectives:

eBay is The World's Online Marketplace. Founded in 1995, eBay created a powerful platform for the sale of goods and services by a passionate community of individuals and businesses. On any given day, there are millions of items across thousands of categories for sale on eBay. eBay enables trade on a local, national and international basis with customized sites in markets around the world. Through an array of services, such as its payment solution provider PayPal, eBay is enabling global e-commerce for an ever-growing online community.

At the time Whitman came on board, eBay claimed more than 950,000 registered users, hosted more than two million auctions a month in 846 categories, and had a success rate of more than 70 percent (offered items actually being sold). Whitman and Omidyar reincorporated eBay in Delaware in September 1998 and took the company public, watching the price of their stock triple within a few days. Among those selling shares in the $63 million initial public offering was the eBay Foundation, established by eBay several months before the initial public offering (IPO) with a grant of 100,000 shares.

According to the Community Foundation Silicon Valley, which administered the foundation, this was the first time a company had launched a charitable fund with pre-IPO stock. "It is fairly unusual, [and] it's a fairly effective way to do it because it doesn't cost them much," a Community Foundation official told the Business Journal-San Jose. The eBay Foundation sold just over 10,000 shares at the IPO, generating cash to make grants.

At the end of 1998 eBay was hosting nearly 1.8 million auctions and reported a profit of $2.4 million on revenues of $47.4 million, making it one of the few Internet retailers to return solid profits. At the same time, its growth and popularity were putting the spotlight on the company and user expectations became more sophisticated.


Ups and Downs: 1999

The first quarter of 1999 was again record-setting, with gross merchandise sales of $541 million and net revenues of $34 million. During the quarter eBay stopped selling guns and ammunition on its site, announced a second public offering, a four-year $75 million marketing alliance with AOL, and a 3-for-1 stock split. The day before the secondary offering, Amazon.com, the Web's leading "e-tailer," began hosting its own daily auctions.

In May the company made three acquisitions. Both Butterfield, a 135-year-old San Francisco auction house, and Kruse International, an automobile auctioneer in Indiana known for collector cars, helped eBay move into a higher-priced market. The third purchase, Billpoint Inc., was a California company specializing in credit card payments over the Internet. Sellers on eBay could now use Billpoint to instantly accept credit cards and buyers would be able to receive reference reports listing all their transactions. The company issued $275 million in common stock to finance the purchases.

Moving overseas, eBay next entered a joint venture with Australia-based PBL Online. In addition, to provide its members with more news and information about their collectibles, eBay signed an agreement with the Collecting Channel to provide "content" on the site. The first offering was information about Star Wars memorabilia.

In June 1999, however, eBay was shaken as its web site experienced numerous crashes. The company was a few days away from completing installation of a backup system when outages began, including one lasting 22 hours. eBay refunded from $3 to $5 million in waived listing fees, conducted free auctions, and moved to hire more computer network experts and senior technology managers. As other big Internet companies such as AOL and E*Trade had learned, site reliability was a critical factor in retaining customer loyalty. Competitors such as Amazon.com and Auction Universe reported increased traffic at their sites as a result of eBay's problems.

Within days of the outages, however, eBay gave journalists something else to write about: global expansion. It moved into Europe with the acquisition of Alando de AG, Germany's largest online trading site, and considered adding a Japanese-language corner to provide support for its 6,500 members in Japan. Yahoo, however, beat eBay to the punch and launched its own site in September 1999, a full five months before eBay officially added its Japanese site. This delay would prove a pivotal mistake in eBay's plans for global expansion.

Competition also moved to the high end of the auction market as 1999 drew to a close. Amazon.com, which had acquired a minority stake in Sotheby's Holding Inc., paired up with its new partner to launch a joint auction site. Christie's International indicated it would soon be adding an interactive section to its web site, and smaller companies handling decorative and fine art or antiques were also going online. Behind all the action was the tremendous potential for sales. Experts predicted the online auction field would grow to 17.5 million registered buyers and sales of $15.5 billion by 2001, up from 1.5 millions users and $1.5 billion in sales in 1998.

eBay had already recognized the opportunity to use online auctions for high-priced items, but noted such offerings needed to be presented in a different manner. After acquiring Butterfield and Butterfield, the world's third largest auction house for over $250 million, the company began structuring such a site. Great Collections (later renamed eBay Premier) was launched in October 1999, with partnering auction houses, galleries, and dealers having their own branded areas and offering the same authentication services they did in their brick-and-mortar locations.

Key Dates:

1995:

Pierre Omidyar launches AuctionWeb.

1996:

Omidyar incorporates the company as eBay Inc. in San Jose, California.

1998:

eBay gets a new chief executive, reincorporates in Delaware, and goes public.

1999:

The "Great Collections" auction site is launched for high ticket items.

2000:

Firm buys into AutoTrader.com and brings Japan, Canada, and Austria into the fold.

2001:

Registered users reach nearly 43 million.

2002:

eBay revenues top the $1 billion mark.

2003:

Revenues climb to a remarkable $2.17 billion.

2004:

eBay buys three international dot.coms and a stake in classified ads provider craigslist.

2005:

eBay auctions are available in 46,000 merchandise categories worldwide.




A New Century, a New Frontier: 200001

By the new millennium eBay had become the Internet's top auction site with ten million registered users, selling around $10 million of merchandise a day. In the week of January 9, eBay set a new record for attracting just under 1.8 million users that week, prompting CEO Whitman to tell DSN Retailing Today (May 8, 2000): "Our unique community of passionate buyers and sellers continue to take eBay to new heights."

Some of the firm's more creative users, however, had learned how to rig bids and outcomes; buyers teamed up with bidding partners, while sellers had buddies submitting fake high bids. eBay, however, was not terribly concerned since by 2000 fraud occurred only once in every 25,000 transactions according to company spokesperson Kevin Pursglove. This was due in part to measures taken two years before when the subject of fraud was addressed by CEO Whitman and eBay's board. Though founder and Chairman Omidyar feared tighter controls might alienate some of eBay's diehard users, several measures had been implemented including the ban on weapons, placing adult-themed items in a secure area, offering buyers insurance from the esteemed Lloyds of London, and allowing sellers a discounted rate at Equifax to run credit checks.


The biggest news of early 2000 was not security but the possible merger between eBay and mega-portal Yahoo. Both firms owned pay-online businesses (Yahoo bought Arthas.com and eBay had acquired Billpoint.com) and each brought clout to the bargaining table: Yahoo had a customer base of 120 million users, while eBay had already established itself as the premier online auction house. Talks, however, fell apart.


In mid-2000 eBay bought the Philadelphia-based Half.com, an auction site specializing in used goods, for $312 million. Half.com, which sold used goods for half their original retail price, already had four million registered users and earned 15 percent on every sale. While eBay finalized its acquisition of Half.com, its chairman founded the Omidyar Foundation to donate $20 million annually to worthy causes.


While eBay Chairman Omidyar spent time in Paris working on eBay's international expansion, Whitman continued to expand the company's domestic operations. At the end of 2000 a new service called BusinessExchange, a business-to-business marketplace for small companies to buy office products and equipment, was launched by eBay to maintain its lead as the world's top online auctioneer. According to Forrester Research, an Internet market research firm, eBay controlled 85 percent of the online auction action, which Forrester estimated would top $3.3 billion for the year (Fortune, June 26, 2000).


In January 2001 eBay suffered another outage, this time a crash lasting for 11 hours. While the company blamed the crash on a series of "glitches," IT analysts believed eBay's Sun Microsystems hardware and Oracle software were no longer up to the task of handling millions of transactions a day. The company denied such reports, claiming confidence in its systems. With eBay's difficulties, minor as they were, competitors were still unable to topple its reign. Yahoo, which had gained considerable ground and was the Web's third most visited firm, lost the majority of its online auction clients after starting to charge fees in the first quarter of 2001.

Not waiting for Yahoo to regain its footing, eBay inked a deal with Microsoft, the Internet's second most visited firm behind AOL, to be featured on a myriad of its web sites and to serve as its default auction provider. With online auctions growing at an exponential rate, eBay was determined to hang on to the lion's share of what Forrester Research claimed would rise to $6.4 billion in sales by 2003.

As 2001 ended, eBay earned the top slot on the Deloitte & Touche Technology Fast 500 as the fastest-growing technology company in North America, based on an average of its revenue growth over a five-year period. For the years in question, eBay had gone from $372,000 in 1996 to an astounding $431 million in revenues for 2000, with nearly 30 million registered users. Better yet were eBay's figures for the year 2001: revenues topped $748 million and registered users had climbed to more than 40 million.


Staving Off Competition: 2002 and Beyond

In early 2002 eBay signed an agreement with Priceline.com to dabble in the travel and leisure market, for which the company's 42 million registered users had already shown a keen interest. Next came a partnership with Sotheby's to market high-end collectibles. The new Sotheby's site would supersede both eBay's Premier site and Sotheby's own online auction site. Both the Priceline.com and Sotheby's deals spearheaded new frontiers, as eBay struggled with overseas competition. Rival Yahoo had gained control of Japan's lucrative online auctions, the globe's second largest online auction marketplace.


Yahoo's dominance was a stinging reminder of entering the Asian market with too little too late. Yahoo controlled 95 percent of the market by 2002 and eBay's dismal performance affected its hopes for worldwide dominion. Despite its problems in Japan, however, eBay remained the leading online auctioneer in Australia, Canada, Germany, and the United Kingdom and its year-end figures reflected its status as revenues topped the billion-dollar mark for the first time, reaching $1.1 billion on total auction sales of some $15 billion for 2002.


eBay's CEO Meg Whitman made news in early 2003 by following in the footsteps of Pierre and Pam Omidyar. Whitman donated $30 million to her alma mater, Princeton University, where she had graduated with a degree in economics in 1977. Whitman's contribution was earmarked for the New Jersey school's campus expansion and to increase student enrollment over the next ten years. On the corporate front, eBay paid a reported $1.5 billion for the Internet's premier online-pay service, PayPal, to replace its own Billpoint service. Both Billpoint and PayPal's online gambling service were phased out after the purchase.

As 2003 wound down, eBay still dominated the world's online auctions with close to 63 million registered users, revenues hitting $2.17 billion, and net income reaching $442 million. In 2004 the firm went on an acquisitions spree, buying Germany's mobile.de, India's Baazee.com, Korea's Internet Auction Company, Ltd., and a stake in online classifieds forum craigslist. Though eBay retained its status as the planet's favorite online auction host, the company had learned from its mistakes: Kruse International and Butterfields were sold; it withdrew from the Japanese market; Half.com was phased out; and Billpoint was shuttered in favor of PayPal. Despite or because of these missteps, eBay refocused on what it did best: providing a comfortable and competitive environment for online buyers and sellers in an ever increasing range of auctions.


Principal Subsidiaries

Baazee.com; Eachnet. Inc.; Internet Auction Company, Ltd.; MercadoLibre.com; mobile.de; PayPal Inc.

Principal Competitors

Amazon.com; Auction Universe; First Auction; OnSale Inc.; uBid.com; Yahoo.com.



Further Reading

Alexander, Steve, "Digital Auction," Star Tribune (Minneapolis), March 1, 1998, p. 1D.

Anders, George, "Customers' Loyalty Tested As eBay Repairs System," South Bend Tribune, June 21, 1999, p. C7.

, "Nation's Latest Cybermogul Got the Bidding Started Online," Orange County Register, September 27, 1998, p. 22.

Avery, Simon, "AOL, eBay in $75M Marketing Alliance," National Post, March 26, 1999, p. C8.

Barmann, Timothy, "eBay Manages to Thrive As Other Internet Startups Drop Like Flies," Knight-Ridder/Tribune Business News, November 11, 2002.

Buel, Stephen, "Amazon.com to Challenge eBay for Online Auction Market," San Jose Mercury News, March 30, 1999.

Bedell, Doug, "eBay Is a Social Phenomenon As Well As a Trail-blazing Auction Site," Knight-Ridder/Tribune Business News, December 5, 2000. ,

"Online Trader eBay Feeling Growing Pains," San Jose Mercury News, December 29, 1998.

Carrell, Paul, "eBay Buys German Online Trader," National Post, June 23, 1999, p. C11.

"The eBay Economy," Business Week, August 25, 2003, p. 124.

"eBay's AuctionWeb Completes Record $10 Million in Auctions," Business Wire, May 1, 1997.

"eBay's AuctionWeb Tops One Million Bids," Business Wire, December 12, 1996.

"eBay Leads Top 500 Tech List," United Press International, November 16, 2001.

"eBay's CEO Meg Whitman," Investor's Business Daily, March 24, 2000, p. A04.

"eBay to Buy Out PayPal," Electronic Payments International, July 2002, p. 1.

Evangelista, Benny, "New eBay Site Auctions High-Ticket Items," San Francisco Chronicle, October 20, 1999, p. C2.

Gaw, Jonathan, "Nearly Daylong Outage Plagues Online Auction House eBay," Los Angeles Times, June 12, 1999, p. C1.

"Going, Going, GoneSucker!," Business Week Online, March 20, 2000, p. 124.

Green, Heather, "Online MerchantsCyberspace Winners: How They Did It," Business Week, June 22, 1998, p. 154.

Hardy, Quentin, "The Radical Philanthropist," Forbes, May 1, 2000, p. 114.

Heim, Kristi, and Joelle Tessler, "Rumors Abound Over Possible Merger of Yahoo, eBay," Knight-Ridder/Tribune Business News, March 24, 2000.

Hof, Robert D., "eBay Vs. Amazon.com," Business Week, May 31, 1999, p. 128.

, and Peter Burrows, "Meet eBay's Auctioneer-in-Chief," Business Week Online, May 29, 2003.

"How Yahoo! Japan Beat eBay at Its Own Game," Business Week, June 4, 2001, p. 58.

Lashinsky, Adam, "Meg and The Machine: Unstoppable eBay ...," Fortune, September 1, 2003, p. 68

"Meg Whitman: eBay," Business Week, May 31, 1999, p. 134.

Murphy, Kathleen, "Fraud Follows Buyers onto Web," Internet World, October 20, 1997.

"Net Auctioneer eBay Names Hasbro GM As President and CEO," Network Briefing, May 8, 1998.

O'Brien, Chris, "eBay Buys Half.com," Knight-Ridder/Tribune Business News, June 14, 2000.

"Online Buying Could Top $51 Billion This Year," Investor's Business Daily, January 3, 2003, p. A04.

Razzi, Elizabeth, "Auction Fever," Kiplinger's Personal Finance, May 2000, p. 114.

Roth, Daniel, "Meet eBay's Worst Nightmare," Fortune, June 26, 2000, p. 1299

Scally, Robert, "The Auction Network Making a Bid for Online Dominance," DSN Retailing Today, May 8, 2000, p. 64

Smith, Rebecca, "eBay, Butterfield Make a Bid for the Bourgeoisie," San Francisco Chronicle, June 28, 1999, p. E1.

"U.S. Online Auctioneer Wooing Japanese Trade," Nikkei Weekly, June 28, 1999, p. 11.

Vierira, Paul, "Going, Going, Gone . . . Online," National Post, November 27, 1999, p. C7.

Wagner, Mitch, and Ted Kemp, "What's Wrong with eBay?," InternetWeek, January 1, 2001, p. 1.


Ellen D. Wernick
update: Nelson Rhodes

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EBay Inc.

EBay Inc.

2005 Hamilton Ave., Suite 204
San Jose, California 95125
U.S.A.
Telephone: (408) 558-7400
Fax: (408) 558-7401
Web site: http://www.ebay.com

Public Company
Incorporated: 1996
Employees: 138
Sales: $47.4 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: EBAY
NAIC: 453998 Other Miscellaneous Store Retailers

Millions of buyers and sellers have made eBay Inc. the worlds largest and most popular site on the Internet for individuals to exchange goods in person-to-person trading. Its second auction site, Great Collections, features fine art and antiques from galleries, dealers, and auction houses. As of the end of 1999, the company had more than 5.6 million registered users and listed over three million items for sale in more than 2,000 categories. The company also owns two traditional auction businesses, Butterfield & Butterfield and Kruse International, as well as online auction subsidiaries in Germany and Japan. Virtually all of its revenues come from fees and commissions from its online and traditional auction services.

Looking for Pez Dispensers: 199596

When Pierre Omidyars fiancee complained that she could not find other people interested in collecting and trading Pez dispensers, Omidyar thought he might be able to help, so he opened a small online auction service on the Web. He formed a sole proprietorship in September 1995 and operated the auction service under the name of Auction Web.

At the time, Omidyar was working at General Magic Corp. as a software developer. His background included cofounding Ink Development Corp., which became eShop, one of the pioneers of online shopping before it was bought by Microsoft; developing consumer applications for Claris, a subsidiary of Apple Computer; and writing a software program for his high school library at the age of 14.

For five months, Omidyar offered his new service for free, building a base of buyers and sellers through word of mouth. In May 1996 he incorporated eBay, becoming CEO, and quit his day job. By the end of 1996 the company had six employees, including Jerry Skoll, eBays original president.

The Concept

Prior to Auction Web, online auctions were either business-to-business or business-to-consumer. There was nothing comparable to Omidyars concept either online or offline, with the most similar institutions being local flea markets and yard sales. Unlike traditional auctions, there was no auctioneer. At AuctionWeb, sellers posted information about their items, and buyers were able to browse the site and submit bids by e-mail. The actual auction for an item was held over three to four days, with bidders receiving e-mail notices when someone made a higher bid. They could counter that bid or drop out. The winning bidder made arrangements with the seller for payment and shipping.

eBay served the role of a broker. The company did not own any of the items being sold and was not responsible for distribution. Bidding was free, but it cost between 25 cents and two dollars to list an item for sale, plus a commission of between 2.5 and five percent of the sale price. The site was profitable almost from the beginning, unlike the vast majority of e-commerce sites. Much of the sites success appeared due to Omidyars sense that while people wanted a central location to buy and sell items, they also wanted to be able to meet and talk with people with similar interests. From the beginning, eBays auction service sought to create the sense of an old-fashioned market and encouraged communication between hobbyists and collectors.

During 1996, the site hosted more than 250,000 auctions in some 60 categories including Beanie Babies, stamps, coins, and computers. By the end of the year, it was overseeing about 15,000 simultaneous auctions daily, with 2,000 of them new each day. The site received over two million hits a week, and the amount of money exchanged for goods sold exceeded $6 million for the year.

Fighting Fraud: 1997

The sites popularity continued to increase. The first quarter of 1997 saw over 330,000 completed auctions, with the total transaction value of the goods sold worth more than $10.25 million. Among the items was an original 1959 Suburban Shopper Barbie doll, which sold for $7,999. In a May 1997 press release, eBay president Jerry Skoll stated that the growth clearly demonstrates the receptivity and the eagerness of the general public to participate in online commerce. Our goal is to provide a fun, efficient, and reliable forum for both buyers and sellers.

Omidyar and Skoll decided the company needed venture capital and a more experienced management team. In mid-year, Benchmark Capital, a venture capital firm in Menlo Park, California, put $5 million into the company, acquiring a 22 percent stake. With their advice, the company began targeted advertising and, in September, the company renamed its auction service eBay and launched a second-generation service, with a redesigned site. By the end of 1997, the company had some 340,000 registered users and was hosting approximately 200,000 auctions at any one time. Furthermore, eBay had established a relationship with America Online Inc. (AOL), under which eBay was featured in AOLs Hobby and Classifieds channels. A year later, in 1998, eBay became the exclusive auctioneer in the Classifieds area, paying AOL a guaranteed $12 million over three years.

The problem of fraud on the Internet was a growing concern, as buyers paid for goods that were never delivered. In November 1997, the U.S. Senates Permanent Subcommittee on Investigations conducted hearings. The National Consumers League found that fraud reports tripled after it created its Internet Fraud Watch project in March 1996. In addition to false promises for discounted services and charges for Internet services that were supposed to be free, more people were experiencing problems at auction sites. Between January and October 1997, Internet Fraud Watch received 141 complaints about auction sites. As Susan Grant of the National Consumers League told Internet World, The problem basically is that auction sites really dont take responsibility for the sales if they go bad. They merely put the buyer together with the seller.

In that same article, eBay indicated that between May and August 1997, it had had only 27 disputes from its 1 million transactions. To keep such disputes to a minimum, eBay instituted a feedback system whereby buyers could post reviews of their transactions. eBay rated sellers based on their number of successful auctions: positive comments received one point, neutral responses a zero, and negative comments a minus one. Potential buyers were able to read the comments as well as view the rating. A rating of minus four resulted in a seller being denied use of the service.

Competition Appears: 1998

eBay continued its phenomenal growth, recording gross merchandise sales of $100 million and revenues of $6 million in the first quarter of 1998. The first quarter had become the companys best quarter, as eBay promoted auctioning off unwanted Christmas gifts.

Some competition was beginning to develop for the company. Late 1997 saw the business-to-business auction service OnSale Inc. add person-to-person auctions and the launch of Auction Universe Inc., a Web auction firm owned by Los Angeles Times parent Times Mirror Co. During 1998, that site began providing city-oriented auction sites through a group of affiliated newspapers, with each offering a local auction site run by Auction Universe. Such web sites, which were aimed primarily at the newspapers local area, made it easier to auction large items, since it was expensive to ship a used car or a large piece of furniture across the country. It also offered newspapers a way to regain revenues lost when classified ads became too expensive for low-cost items.

The company bought Jump, Inc., the developer and operator of Up4Sale, an advertising-supported trading/auction site launched in 1997. Planning to use Up4Sale to introduce complementary future services, eBay operated the site as a separate service.

New CEO: 1998

In May 1998, Margaret C. (Meg) Whitman was appointed president and CEO of eBay, with Pierre Omidyar becoming chairman. Whitman came from Hasbro Inc.s preschool division, where she had been general manager. Before that she headed up FTD Inc., overseeing the transition of that organization from a network of individual florists to a private company and launching its web site. Known for her experience in managing and marketing consumer brands, including Teletubbies and Playskool, Whitman concentrated on raising eBays profile through increased advertising aimed at hobbyists and groups of collectors. At the time, eBay claimed more than 950,000 registered users and hosted more than two million auctions a month in 846 categories. Furthermore, more than 70 percent of the items put up for auction were sold.

Company Perspectives:

We help people trade practically anything on earth. eBay was founded with the belief that people are honest and trustworthy. We believe that each of our customers, whether a buyer or seller, is an individual who deserves to be treated with respect. We will continue to enhance the online trading experiences of all our constituentscollectors, hobbyists, small dealers, unique item seekers, bargain hunters, opportunistic sellers, and browsers. The growth of the eBay community comes from meeting and exceeding the expectations of these special people.

The company had even started listing artwork for sale, although there was skepticism in the art world that this would become a significant category for eBay. As art dealer Andrew Terner told the Minneapolis Star Tribune, Its important to know, to touch, to see, to do due diligence on the artwork, to know exactly what youre buying. For sophisticated collectors, buying art is in the details. I wonder whether an Internet auction can provide that information.

Meanwhile, Sothebys celebrated 254 years in the auction business with its first online auction, of books and manuscripts. The auction, which included some first editions of Poe and Hawthorne, generated $65,000. I dont want to be replaced by a computer quite yet, but I have to say I believe in them, Sothebys executive vice-president and auctioneer David Redden told Allen Breed of the Associated Press.

Going Public

In September, Whitman and Omidyar reincorporated eBay in Delaware and took the company public, watching the price of their stock triple within a few days. Among those selling shares in the $63 million initial public offering was the eBay Foundation, established by eBay several months before the IPO with a grant of 100,000 shares. According to the Community Foundation Silicon Valley, which administered the foundation, this was the first time a company had launched a charitable fund with pre-IPO stock. It is fairly unusual, [and] its a fairly effective way to do it because it doesnt cost them much, a Community Foundation official told the Business Journal-San Jose. At the IPO, the eBay Foundation sold just over 10,000 shares, generating cash with which to make grants.

At the end of 1998, eBay was hosting nearly 1.8 million auctions and reported a profit of $2.4 million on revenues of $47.4 million, making it one of the few Internet retailers to return solid profits. At the same time, its growth and popularity were putting the spotlight on the company and user expectations were becoming more sophisticated.

Acquisitions and Crashes: 1999

The first quarter was again record-setting, with gross merchandise sales of $541 million and net revenues of $34 million. During the quarter, eBay stopped the selling of guns and ammunition on its site. The company announced a second public offering and a four-year $75 million marketing alliance with AOL. It also saw a 3-for-1 stock split. The day before the secondary offering, Amazon.com, the Webs leading etailer, began hosting daily auctions.

In May, the company made three acquisitions. Both Butter-field & Butterfield, a 135-year-old San Francisco auction house, and Kruse International, an automobile auctioneer in Indiana known for collector cars, helped eBay move into a higher-priced market. The third purchase, Billpoint Inc., was a California company that made it easier to accept credit card payments over the Internet. Sellers on eBay could now use Billpoint to instantly accept credit cards and buyers would be able to receive reference reports listing all their transactions. The company issued $275 million in common stock to finance the purchases.

Moving overseas, eBay next entered a joint venture with Australia-based PBL Online. In addition, to provide its members with more news and information about their collectibles, eBay signed an agreement with the Collecting Channel to provide content on the site. The first offering was information about Star Wars memorabilia.

However, June was a rough month for eBay, as the companys web site experienced numerous crashes. The company was a few days away from completing installation of a backup system when outages began occurring, including one that lasted 22 hours. eBay refunded $3$5 million in waived listing fees, conducted free auctions, and moved to hire more computer network experts and senior technology managers. As other big Internet companies such as AOL and E*Trade had found out, site reliability was a critical factor in retaining customer loyalty. Competitors such as Amazon.com and Auction Universe reported increased traffic at their sites as a result of eBays problems.

Within days of the outages, however, eBay gave journalists something else to write about the company: its global expansion. It moved into Europe with the acquisition of Alando.de AG, Germanys largest online trading site, and added a Japanese-language corner to provide customer support for its 6,500 members in Japan and to attract additional Japanese users.

Competition moved to the high end of the auction market as 1999 drew to a close. Amazon.com, which had bought a minority stake in Sothebys Holding Inc., paired up with its new partner to launch a joint auction site. Christies International indicated that it would soon be adding an interactive section to its web site, and smaller companies handling decorative and fine art or antiques were also going online. Behind all the action was the tremendous potential for sales. Experts predicted the online auction field would grow to 17.5 million registered buyers and sales of $15.5 billion by 2001, up from 1.5 millions users and $1.5 billion in sales in 1998.

eBay had already recognized the opportunity to use online auctions for high-priced items, but noted that such offerings would have to be presented differently. After acquiring Butter-field and Butterfield, the worlds fourth largest auction house, for $250 million, the company began structuring such a site. Great Collections was launched in October 1999, with partnering auction houses, galleries, and dealers having their own branded areas and offering the same authentication services they did in their brick-and-mortar locations. The branded areas, essentially storefronts, might be a forecast of things to come on the eBay site, where 20 percent of sellers accounted for 80 percent of the transactions.

Key Dates:

1995:
Pierre Omidyar launches Auction Web.
1996:
Omidyar incorporates company as eBay Inc.
1998:
eBay reincorporates in Delaware and goes public.
1999:
Company acquires worlds fourth largest auction house; launches Great Collections auction site for high ticket items.

The online auction business, which eBay pioneered by developing communities of collectors who wanted to buy and sell Beanie Babies, antique coins, and Elvis memorabilia, could obviously offer more than cyberspace flea markets. The issues of fraud and site reliability were still matters of concern, as they were for any e-commerce company. But eBay, with two sites for different segments of the market, 30 regional sites around the United States, German and Japanese subsidiaries, and a large and loyal community of 5.6 million users, was the company all the others had to beat.

Principal Subsidiaries

Butterfield & Butterfield; Kruse International; Alando.de AG.

Principal Competitors

Auction Universe; OnSale Inc.; First Auction; Amazon.com; Yahoo.com; Sothebys.amazon.com.

Further Reading

Alexander, Steve, Digital Auction, Star Tribune (Minneapolis), March 1, 1998, p. 1D.

Anders, George, Customers Loyalty Tested As eBay Repairs System, South Bend Tribune, June 21, 1999, p. C7.

, Nations Latest Cybermogul Got the Bidding Started Online, Orange County Register, September 27, 1998, p. 22.

Avery, Simon, AOL, eBay in $75M Marketing Alliance, National Post, March 26, 1999, p. C8.

Bowers, Richard, Barbie Sold for $7,999 on Internet, Newsbytes News Network, February 14, 1997.

Buel, Stephen, Amazon.com to Challenge eBay for Online Auction Market, San Jose Mercury News, March 30, 1999.

, Online Trader eBay Feeling Growing Pains, San Jose Mercury News, December 29, 1998.

Business in Brief, Atlanta Journal and Constitution, November 24, 1999, p. 3D.

Carrell, Paul, eBay Buys German Online Trader, National Post, June 23, 1999, p. C11.

Collecting Channel to Serve As Lead Content Partner for eBay, PR Newswire, June 4, 1999.

Delevett, Peter, eBay Uses New Wrinkle to Launch Charitable Fund, Business Journal-San Jose, August 3, 1998, p. 7.

eBay Announces Acquisition of Jump Inc., Business Wire, July 21, 1998.

eBays Auction Web Completes Record $10 Million in Auctions, Business Wire, May 1, 1997.

eBays AuctionWeb Tops One Million Bids, Business Wire, December 12, 1996.

Evangelista, Benny, New eBay Site Auctions High-Ticket Items, San Francisco Chronicle, October 20, 1999, p. C2.

Foreign Companies in Japan, Nikkei Weekly, November 29, 1999, p. 8.

Gaw, Jonathan, Nearly Daylong Outage Plagues Online Auction House eBay, Los Angeles Times, June 12, 1999, p. C1.

Green, Heather, Online Merchants: Cyberspace Winners: How They Did It, Business Week, June 22, 1998, p. 154.

Hof, Robert D., eBay Vs. Amazon.com, Business Week, May 31, 1999, p. 128.

Internet: eBay and AOL Extend Relationship, Network Briefing, September 3, 1998.

Kharif, Olga, Online Gun Sales, Chicago Daily Herald, May 24, 1999, p. Business 4.

Meg Whitman: eBay, Business Week, May 31, 1999, p. 134.

Murphy, Kathleen, Fraud Follows Buyers onto Web, Internet World, October 20, 1997.

Net Auctioneer eBay Names Hasbro GM As President and CEO, Network Briefing, May 8, 1998.

Smith, Rebecca, eBay, Butterfield Make a Bid for the Bourgeoisie, San Francisco Chronicle, June 28, 1999, p. E1.

Time Will Tell If eBays Able to Captivate the Art World, Star Tribune (Minneapolis), July 27, 1998, p. 9E.

Williams, Martyn, eBay Eyes Japan Market for Expansion, Newsbytes, June 22, 1999.

U.S. Online Auctioneer Wooing Japanese Trade, Nikkei Weekly, June 28, 1999, p. 11.

Vierira, Paul, Going, Going Online, National Post, November 27, 1999, p. C7.

Ellen D. Wernick

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