The old saying goes that one man’s trash is another man’s treasure. Online auction company eBay (Nasdaq: EBAY) has proved that when you combine one man’s trash with the Internet, it can be very, very profitable.
eBay started out as Echo Bay Technology in 1995 -- but when Pierre Omidyar, the company’s founder, tried to register the domain name echobay.com, he discovered that someone else already owned it. So, eBay it was!
The company’s initial success required a huge leap of faith from customers -- they needed to be willing to trust that strangers would ship them “quality” items they’d never seen in person. With this in mind, eBay took several steps to build customer confidence. Most notable, its website enables buyers and sellers to publicly critique each other -- package never arrived? The item didn’t match its description? The buyer’s check bounced? This feedback helps people to separate the swindlers from the superstars, which, in turn, has helped eBay grow its business.
And on the subject of stars, eBay’s online features include “feedback stars,” which began in 1997. (The stars are color-coded to indicate and award different levels of awesomeness to buyers and sellers.) The company then kicked things up a notch in 2007 by enabling buyers to rate sellers anonymously in four categories. This system uses a five-star rating scale (five stars being the best), and sellers with a rating of 4.3 or less in any category appear lower in search results.
The first item sold on eBay -- a broken laser pointer -- went for a crisp $14.83. The irony is that company founder Omidyar had put that item up for bid as an experiment. He contacted the winning bidder, who responded, "I'm a collector of broken laser pointers." eBay’s market was apparently even bigger than Omidyar may have thought.
That hunch soon exploded into reality, and by 1996, eBay had grown enough to hire its first employee. That year, it also appointed co-founder Jeff Skoll as president, and Omidyar quit his day job so that he could devote all of his time to the burgeoning business. Meg Whitman joined them in 1998 and served as president and CEO until March 2008, when she was succeeded by John J. Donahoe.
It wasn’t long before large companies started to sell their items on eBay alongside of everyday people -- and some even put themselves up for bid, including SynapseLife, an online calendar and organizational business that sold itself for $60,000 in 2007 even though it admitted to generating "no advertising revenue." By the time 2000 rolled around, eBay had become the world’s No. 1 e-commerce site.
How to Bid on eBay
The bidding process on eBay is pretty straightforward: Sellers complete an online form that asks for, among other things, their location, a description of the item they’re selling, and photos if they’re available. All of this is displayed -- along with the seller’s history and ratings, of course -- with a price. From there, eBay establishes the bidding increments (i.e., the minimum amount each bid must be), and every time someone bids, the displayed price increases accordingly.
If you find an item you'd like to buy, you can set a price that’s higher than the incremental amount. In that case, only the incremental increase will show -- but if someone else tries to bid after that, they’ll be told that another person has already placed an even higher bid.
The auctions have limited durations (established by the seller), and buyers can see how much time is left in an auction when they view the item for sale. The person who places the highest bid by the time the auction ends wins. The best part is, participants don’t have to sit vigilantly in front of their computers to see whether they’ve been outbid or won the auction -- eBay’s e-mail alert system automatically notifies them.
Lastly, eBay has a popular feature for sellers called a “reserve.” A reserve price is the lowest price at which someone is willing to sell their item. So for example, if the seller puts an item up for sale at a starting price of $10 -- but doesn’t want to part with it for less than $25 -- she can enter a $25 reserve amount. Bidders won’t see the reserve amount, but they’ll be notified immediately if the reserve is higher than the bid they’ve just placed. If the bids never reach the reserve level, the item won’t be sold.
How eBay Makes Money
eBay tacks on a number of fees for its services: Sellers must pay to list items for sale, and they also have to pay fees when they sell an item. Plus, additional costs are incurred if the seller posts photos on the item’s listing. These fees vary among the websites eBay operates worldwide (the company services the United Kingdom, Hong Kong, Ireland, Italy, Korea, Germany, Australia, Singapore, Switzerland, and a host of other markets), and at last count, it had 85.7 million active users.
Another revenue source is the online payment system PayPal. eBay acquired the business in 2002, so now if someone registers with PayPal to buy an item on eBay, eBay will also collect fees if that person uses his or her PayPal account to make online purchases elsewhere.
Separate from that, eBay owns Internet telephone company Skype. It shelled out a hefty $2.6 billion for the acquisition; Skype reported $143 million in revenue for the third quarter of 2008, a 46% increase over the previous year, plus 32 million new registered users, which ratchets the total up to more than 370 million.
Over the past few years, eBay has also made several acquisitions in the classified (as in the ads at the back of a newspaper, not CIA secrets) arena, including classifieds website Marketplaats.nl, Rent.com, and top global classified advertising websites LoQuo and Gumtree. In 2005, it launched Kijiji, a local classifieds website similar to Craig’s List, in a handful of countries. In fact, it even bought a stake in Craig’s List (of around 28%) in 2004, but the relationship between the two companies soured when eBay sued Craigslist with the claim that Craigslist tried to dilute eBay's stake in the company. At the time of this writing, that lawsuit was still ongoing.
eBay went public in September 1998, and the IPO made Omidyar and Skoll instant billionaires. The stock continued to climb for the next few years, but as of late, the tides have turned. eBay's largest competitor, Amazon.com once trailed behind eBay (at one point, Amazon.com even launched its own auction service), but Amazon.com has since picked up the slack and then some. eBay’s days of growing gangbusters have fizzled into a lingering struggle to keep up with changing trends and a challenging economic environment.
Part of the problem is that the same thing that made eBay famous (its innovative online auction concept) began to hold it back. Trends changed; some customers wanted a quicker means of buying things and didn’t necessarily want put in the effort involved in participating in online auctions.
eBay had already provided some services to answer this need. It rolled out its “buy it now” feature in 1999, which allows buyers to pay a set price for an item and order it right away (although the “buy now” price is usually considerably higher than the auction price). In 2000, it acquired Half.com, an online business similar to its own, except that all of the prices are fixed -- there are no auctions. It also owns shopping.com but hasn’t done a whole lot to promote it.
In 2006, it forged another potential solution by starting eBay Express, a service that pulled together all of the items on its website that were up for sale at a fixed price. Afraid that it might cannibalize business from its existing auction platform if promoted to heavily, eBay avoided making a big to-do about the new service. As a result, it was unsuccessful, and eBay closed it down two years later. In October, The New York Times observed:
“Just three years ago, eBay had 30 percent more traffic than Amazon. Today, its total of 84.5 million active users is barely ahead of the 81 million active customer accounts that Amazon reported in June ... eBay’s market capitalization was three times Amazon’s in 2005 … in July, Amazon’s valuation surpassed eBay’s for the first time.” That month, eBay announced its plans to lay off 10% of its employees -- or 16,000 people -- and the stock hit a five-year low.
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