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 world’s 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: 1995–96

When Pierre Omidyar’s 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, eBay’s original president.

The Concept

Prior to Auction Web, online auctions were either business-to-business or business-to-consumer. There was nothing comparable to Omidyar’s 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 site’s success appeared due to Omidyar’s 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, eBay’s 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 site’s 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 AOL’s 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. Senate’s 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 don’t 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 company’s 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 newspaper’s 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 eBay’s 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 constituents—collectors, 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, “It’s important to know, to touch, to see, to do due diligence on the artwork, to know exactly what you’re buying. For sophisticated collectors, buying art is in the details. I wonder whether an Internet auction can provide that information.”

Meanwhile, Sotheby’s 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 don’t want to be replaced by a computer quite yet, but I have to say I believe in them,” Sotheby’s 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] 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. 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 Web’s 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 company’s 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 eBay’s 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, Germany’s 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 Sotheby’s Holding Inc., paired up with its new partner to launch a joint auction site. Christie’s 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 world’s 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 world’s 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.

——, “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.

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.

“eBay’s Auction Web Completes Record $10 Million in Auctions,” Business Wire, May 1, 1997.

“eBay’s 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 eBay’s 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