The History of eBay
eBay was founded in Pierre Omidyar's San Jose living room back in September 1995. It was from the start meant to be a marketplace for the sale of goods and services for individuals.
In 1998, Pierre and his cofounder Jeff Skoll brought in Meg Whitman to sustain the success. Meg had studied at the Harvard Business School and had learned the importance of branding at companies such as Hasbro.
Meg culled her senior staff from companies such as Pepsico and Disney, created an experienced management team with an average of 20 years of business experience and built a strong vision for the company -- that eBay is a company that's in the business of connecting people, not selling them things.
They quickly shed the image of only auctioning collectibles and moved into an array of upscale markets where the average sale price (ASP) is higher. ASP is a key metric in determining eBay's transaction fees, so increasing the ASP became an important item. By forging partnerships with namebrands such as GM, Disney and Sun, eBay has managed to do exactly that. Sun has sold
$10 million worth of equipment and it now lists between 20 and 150 items per day.
In 1998, Pierre and his cofounder Jeff Skoll brought in Meg Whitman to sustain the success. Meg had studied at the Harvard Business School and had learned the importance of branding at companies such as Hasbro.
Meg culled her senior staff from companies such as Pepsico and Disney, created an experienced management team with an average of 20 years of business experience and built a strong vision for the company -- that eBay is a company that's in the business of connecting people, not selling them things.
They quickly shed the image of only auctioning collectibles and moved into an array of upscale markets where the average sale price (ASP) is higher. ASP is a key metric in determining eBay's transaction fees, so increasing the ASP became an important item. By forging partnerships with namebrands such as GM, Disney and Sun, eBay has managed to do exactly that. Sun has sold
$10 million worth of equipment and it now lists between 20 and 150 items per day.
The Business Model
eBay has built an online person-to-person trading community on the Internet, using the World Wide Web. Buyers and sellers are brought together in a manner where sellers are permitted to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items in a fully automated way. The items are arranged by topics, where each type of auction has its own category.
eBay has both streamlined and globalized traditional person-to-person trading, which has traditionally been conducted through such forms as garage sales, collectibles shows, flea markets and more, with their web interface. This facilitates easy exploration for buyers and enables the sellers to immediately list an item for sale within minutes of registering.
Browsing and bidding on auctions is free of charge, but sellers are charged two kinds of charges:
When an item is listed on eBay a nonrefundable Insertion Fee is charged, which ranges between 30 cents and $3.30, depending on the seller's opening bid on the item.
A fee is charged for additional listing options to promote the item, such as highlighted or bold listing.
A Final Value (final sale price) fee is charged at the end of the seller's auction. This fee generally ranges from 1.25% to 5% of the final sale price.
eBay notifies the buyer and seller via e-mail at the end of the auction if a bid exceeds the seller's minimum price, and the seller and buyer finish the transaction independently of eBay. The binding contract of the auction is between the winning bidder and the seller only.
eBay has both streamlined and globalized traditional person-to-person trading, which has traditionally been conducted through such forms as garage sales, collectibles shows, flea markets and more, with their web interface. This facilitates easy exploration for buyers and enables the sellers to immediately list an item for sale within minutes of registering.
Browsing and bidding on auctions is free of charge, but sellers are charged two kinds of charges:
When an item is listed on eBay a nonrefundable Insertion Fee is charged, which ranges between 30 cents and $3.30, depending on the seller's opening bid on the item.
A fee is charged for additional listing options to promote the item, such as highlighted or bold listing.
A Final Value (final sale price) fee is charged at the end of the seller's auction. This fee generally ranges from 1.25% to 5% of the final sale price.
eBay notifies the buyer and seller via e-mail at the end of the auction if a bid exceeds the seller's minimum price, and the seller and buyer finish the transaction independently of eBay. The binding contract of the auction is between the winning bidder and the seller only.
Adversity
Since eBay does at no point during the auctioning process take possession of either the item being sold or the buyer's payment for the item, user trust is a key issue for eBay. In the traditional model of trading forums the buyer and the seller usually exchange the item for the payment at the same time and place, meaning that trust does not play as big a role. For eBay to be able to convince users to participate, they must deal with the inevitable delay between the buyer buying the item and receiving it, which is not an issue in the tradition model.
To reduce this anonymity and uncertainty of dealing online, eBay introduced Feedback Forums. At the completion of a transaction, users are encouraged to submit compliments or criticism to the trading profile of the trading partner to the Feedback Forum. By looking at the trading partners history of trades, the user will be able to estimate more accurately the trustworthiness of the trading partner.
This is by no means a foolproof way to combat misuse, since users may be tempted to wait until their reputation is good enough that they can start to trade in expensive items before running away with the buyer's money. This argument may mean decreased scalability of eBay in terms of item price, at least for person-to-person auctions — more users may be tempted to use traditional modes to decrease their risk.
To reduce this anonymity and uncertainty of dealing online, eBay introduced Feedback Forums. At the completion of a transaction, users are encouraged to submit compliments or criticism to the trading profile of the trading partner to the Feedback Forum. By looking at the trading partners history of trades, the user will be able to estimate more accurately the trustworthiness of the trading partner.
This is by no means a foolproof way to combat misuse, since users may be tempted to wait until their reputation is good enough that they can start to trade in expensive items before running away with the buyer's money. This argument may mean decreased scalability of eBay in terms of item price, at least for person-to-person auctions — more users may be tempted to use traditional modes to decrease their risk.
Competition
Since participating in the auction industry requires only a web presence, at first sight the threat of competition looms heavily over eBay. In fact, two online heavyweights have entered the market, Yahoo and Amazon. Amazon in partnership with the well known auctioneer Sotheby's.
These (and many other) competitors have not only longer operating histories, but larger customer base and greater brand recognition. So why does eBay currenly control more than 80% of the online auction market, with Yahoo and Amazon lagging far behind?
In my opinion, the answer lies in a combination of penny pinching and first mover advantage. eBay utilized their first mover advantage admirably, quickly and constantly building a
The network effect is important in this market, since the number of buyers and sellers increases the value of the service for other buyers and sellers. If eBay remains price competitive with its competitors there is minimal incentive for the users to switch between auction sites, meaning it becomes more and more difficult for a competitor to displace eBay's trading community.
A different kind of threat is not a direct competitor but a service which can act as a substitute to auctioning, of which Half.com is a good example. Half.com designed a site which allows people to sell used books, music, movies and games at a fixed price. eBay dealt with that threat by buying the company and experimenting with adding their own fixed-price option to their auction listings.
These (and many other) competitors have not only longer operating histories, but larger customer base and greater brand recognition. So why does eBay currenly control more than 80% of the online auction market, with Yahoo and Amazon lagging far behind?
In my opinion, the answer lies in a combination of penny pinching and first mover advantage. eBay utilized their first mover advantage admirably, quickly and constantly building a
The network effect is important in this market, since the number of buyers and sellers increases the value of the service for other buyers and sellers. If eBay remains price competitive with its competitors there is minimal incentive for the users to switch between auction sites, meaning it becomes more and more difficult for a competitor to displace eBay's trading community.
A different kind of threat is not a direct competitor but a service which can act as a substitute to auctioning, of which Half.com is a good example. Half.com designed a site which allows people to sell used books, music, movies and games at a fixed price. eBay dealt with that threat by buying the company and experimenting with adding their own fixed-price option to their auction listings.
eBay's Position in the Industry
Because access to the online trade channel (i.e. Internet) is universal, and the physical assets required to setup an auctioning site are all commercially available, barriers to entry in the auctioning industry are minimal. What comes stronger into play is the network externalities effect, as was mentioned before.
Being in a market with huge network externalities makes it extremely difficult for a competitor to get a large share of the userbase, since most users tend to gravitate towards the service which already offers the most users (since it will presumable have the greatest number of offerings.) This tremendous switching cost has the effect of locking in customers to a single auction service provider — in this case eBay.
Given network externalities and the relative ease one company can mimick and duplicate another company's innovations online, the main tact rivals can deploy is to lower the price of their service, which is exactly what Amazon and Yahoo have done.
Currently eBay is extending to markets overseas; it is now operating in eight of the top ten countries by online market size outside of the United States. In Asia eBay is in 80% of its largest e-commerce markets. eBay is gaining users 50% faster in Europe than in the United States, and gross merchandise sales are growing 135% faster. The faster it grows, the more securely will it hold its top position in the auctioning service market.
In a very open market, where anyone can enter, the threat of substitute service is greater. An example of which, Half.com, was mentioned before. In fact, the management of eBay believes that fixed-priced trading as is done on Half.com has as much, or even more, potential than eBays core auctioning service.
Being in a market with huge network externalities makes it extremely difficult for a competitor to get a large share of the userbase, since most users tend to gravitate towards the service which already offers the most users (since it will presumable have the greatest number of offerings.) This tremendous switching cost has the effect of locking in customers to a single auction service provider — in this case eBay.
Given network externalities and the relative ease one company can mimick and duplicate another company's innovations online, the main tact rivals can deploy is to lower the price of their service, which is exactly what Amazon and Yahoo have done.
Currently eBay is extending to markets overseas; it is now operating in eight of the top ten countries by online market size outside of the United States. In Asia eBay is in 80% of its largest e-commerce markets. eBay is gaining users 50% faster in Europe than in the United States, and gross merchandise sales are growing 135% faster. The faster it grows, the more securely will it hold its top position in the auctioning service market.
In a very open market, where anyone can enter, the threat of substitute service is greater. An example of which, Half.com, was mentioned before. In fact, the management of eBay believes that fixed-priced trading as is done on Half.com has as much, or even more, potential than eBays core auctioning service.
The Future of eBay
eBay has become an online middleman for buyers and sellers in a way which traditional brick and mortar companies cannot touch. Using the web has also brought along with it some challenges, especially regarding trust issues between buyers and sellers.
eBay seems to have dealt adequately with those trust issues, since users don't seem to mind and continue to use their service.
eBay is operationally sound, especially considering it is still in its buildup period and it has a business model that scales extremely well. The management has shown that it responds quickly and well, and has been working hard to expand the business without jeopardizing the core business.
Even though eBay's stock may still be overvalued, the business fundamentals are solid and the only risk is if eBay doesn't grow as fast as it has estimated.
eBay seems to have dealt adequately with those trust issues, since users don't seem to mind and continue to use their service.
eBay is operationally sound, especially considering it is still in its buildup period and it has a business model that scales extremely well. The management has shown that it responds quickly and well, and has been working hard to expand the business without jeopardizing the core business.
Even though eBay's stock may still be overvalued, the business fundamentals are solid and the only risk is if eBay doesn't grow as fast as it has estimated.
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