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Subject: September 2002 VMS3.info: eBay Analyzed via the Value Framework
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September 1, 2002 *4,300 subscribers* Volume 4, Issue 9
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Inside this Issue:

eBay Analyzed via the Value Framework
by Mitchell Levy, Author, E-Volve-or-Die.com, Author,
the Value Framework™
and Bob Cormia, Faculty Member Foothill Community College and E-Business Consultant



One could say that eBay legitimized the use of the flea market in business.

eBay created one of the first Internet brands that has both attained and sustained profitability, gaining recognition by Wall Street as a solid "blue chip" company. Transaction liquidity, driven by new member growth, repeat transactions, and increasing dollar value per transaction, have all been fundamental drivers in its success. As the first Internet auction model, it was a disruptive technology, bringing Internet efficiencies to discovery and fulfillment. One could say that eBay legitimized the use of the flea market in business.

Amazon.com, Priceline, and Napster also created disruptive business models, but at a cost. The differentiator with eBay is the active role of their members in an online auction portal, better termed as "marketplace", which provides personal satisfaction; win, lose, or draw. The personal thrill of participation was often an addictive enjoyment. The primary benefit provided by eBay was the answer to the "discovery" issue in the model pyramid (PTP) of the Value Framework™, leading to the phrase "find it on eBay". Consumers with product needs had previously found no efficiency with online classifieds, and consumers with household items no longer of use had no easy way to liquidate.

EBay was originally mislabeled C2C. They were really C2A2C
(Consumer to Application to Consumer).

The Internet easily provided the technical infrastructure to automate the discovery, negotiation, and payment mechanism to complete the PTP transaction process. Creating a strong auction brand early in the Internet boom, and fending off both Amazon and Yahoo, was key to attaining and sustaining profitability. EBay was originally mislabeled C2C. It was really C2A2C (Consumer to Application to Consumer). Today eBay is extending its C2A2C transaction model into B2M2B (business to marketplace to business) through a business and technology alliance developed with Accenture, tapping the $80 billion annual business liquidation market. This alliance could easily double eBay's annual consumer transaction volume of $12 billion. Extension of a successful C2A2C application into a B2M2B marketplace engine is the foundation for eBay's presence in both high value niche markets and broader business sectors. As a marketplace engine, eBay becomes the platform for self-evolving and self-replicating marketplaces, driven through carefully managed business alliances and acquisitions.

eBay also managed well the brand extension with the TekSell and eBay Motors ventures. TekSell sold over $10 million in Sun computers, and eBay Motors accounted for 30% of eBay's revenue on 2001. The recent alliance with Sotheby's to list certified high value collectibles and gems solidified the lucrative high-end consumer auction market. eBay's purchase of PayPal allowed them to "buy" a business model as well as solve electronic escrow issues. PayPal can extend the eBay brand into transaction arenas ignored by Napster, and potentially build infrastructure for broader C2A2C. This will require that eBay manage this acquisition with more forward-looking strategy than Butterfield & Butterfield.

The success story of eBay includes recognition by Wall Street as a blue-chip success. In contrast to most Internet firms, eBay was able to maintain a share price average of $50 during the last two years, a drop of only 50% from its high of $100 in Spring 2000. This has been managed through continued profitable growth, with income estimated at $1 billion in 2002, and member and transaction volume growth of 50% per year. The strategic effort to grow from a C2A2C Internet auction to a true Internet marketplace, including B2C, B2B, and B2B2C transaction models, is a key element in its evolution. The success story of eBay is now told in strategy deployed, managed, and evolved.

Key Summary Points:

  • eBay has experienced year over year growth of 50% in members, transaction volume, and listings, providing the base for solid income on growing revenue.
  • eBay's transaction liquidity, described by PTP in the value framework, is driven by new member growth, repeat transactions, and dollar value per transaction.
  • Creating a marketplace engine for direct B2M2B sales over a C2A2C brand extends the trust and efficiency of the eBay brand into the B2B arena.
  • Working with Accenture to develop the B2M2B liquidation marketplace creates an entry into the space created by Onsale.com, an $80 billion annual market.
  • eBay managed brand extension well, creating eBay motors, which accounts for 30% of its revenue, and TekSell.com, which sold $10M in Sun computers.
  • The recent alliance with Sotheby's solidifies eBay's position in the high-value consumer market, which includes art, jewelry and dealer collectibles.
  • Acquisition of PayPal, which provides an electronic escrow service for consumer payments, creates an additional business model for eBay in electronic payments.


Strategy Deployed
The legend of how eBay began - a California computer programmer building a website for his girlfriend, a Pez collector, looking for other collectors to trade with, is actually a myth. An eBay employee invented the tale to attract publicity for the new company. But the real story about eBay's beginning is no less interesting. In 1995 Pierre Omidyar decided to build a frictionless electronic marketplace, a place where buyers and sellers would have equal footing in negotiating power. If all participants had identical information and a range of opportunities for purchase, items would sell at exactly the point where supply crossed demand. Thus began the process of "disintermediation", where the Internet would eliminate the middleman. Sellers had instant and direct access to an enormous retail market, and buyers to an "apparent increase in supply".

eBay's original name was AuctionWeb, with the goal of replacing classified ads. Sellers would post an item with a minimum price, and if more than one buyer was interested, the true market value would be found. eBay was a "market maker" rather than an e-tailer, as it performed the role of aggregating buyers and sellers in an online venue. In strategy deployed, eBay would make its money from a nominal listing fee paid by the seller, and a small percentage of the selling price.

eBay became an overnight sensation, partially because of the "thrill factor" experience it brought to bidders who had never participated in an auction before.

While disintermediation was at the time a new and novel idea built on the technical architecture of the Internet, it wasn't Omidyar's principal goal. eBay's founder intended to create an online community to replace the neutral electronic marketplace. In strategy managed and evolved, eBay's continual focus on user participation and satisfaction drove the formation of a thriving eBay community.

eBay began life in 1995 as a consumer auction portal, being mislabeled as C2C, when actually it was C2A2C. The application, however, was built on a fragile custom code, which all too often failed for hours, stranding transactions and users alike. eBay brought a disruptive change into auction and classified business models, bringing Internet technologies and efficiencies to a potential market of over 50 million users. eBay became an overnight sensation, partially because of the "thrill factor" experience it brought to bidders who had never participated in an auction before.

Selling Pez dispensers, and later Beanie Babies, was the overnight sensation that launched eBay into visibility on the Internet stage, and starting life out in the consumer arena as a portal was a logical first step. Building it out on custom code, par for the course in 1995, was a strategy that brought much grief to eBay, as the all too often collapse of its trading end would often bring hours of outage.

The Yahoo like simplicity of the user interface and directory, still present today, presented a friendly face to would be sellers and buyers alike. EBay, by solving the discovery and negotiation elements of process, and by guaranteeing performance with strict user standards, brought the trust needed to extend the auctions to an online environment. From a consumer-oriented marketplace, eBay would carefully "manage" their success into larger marketplaces, seeking greater transaction liquidity through strategic partnerships.

Key Points for Strategy Deployed:

  • The original birth of eBay focused on building a "frictionless" electronic marketplace, where buyers and sellers would reach equilibrium pricing
  • The C2C marketplace application that eBay first created was built on very fragile custom code, which brought system outages of several hours all too frequently.
  • eBay initially did not consider the complexity of the infrastructure requirements in creating a transaction stated system in a distributed computing environment.
  • eBay recognized the critical component of "process execution" as their brand experience with consumers, and corrected the vulnerabilities of their application.
  • User experience determined to a great extent the "rapid adoption" of the eBay Internet auction, and "find it on eBay".


Strategy Managed
The success story of eBay is one of managing strategy, alliances, and performance, especially with regards to growth into new markets. Early in the history of eBay it was apparent that immediate success of an Internet auction portal would quickly drive new user growth and activity beyond what the application infrastructure could handle.

eBay realized the value of adding performance to their C2A2C engine for flawless process execution, and became extremely efficient on the process face of the model pyramid (PTP [Process/Transaction Types/Participants]). Repeat use by buyers and sellers alike was key to member growth as well as "repeat transactions". In addition to the PTP element of auctions, eBay also realized the power of passive knowledge in their "information space". So did many local law enforcement agencies, routinely combing the archives of eBay transactions for evidence to arrest and prosecute.

eBay was rare among Internet firms in the late 1990s in focusing on transaction liquidity as a metric for monetizing member value. Immediately Wall Street differentiated eBay as having a profitable revenue model, creating real value for shareholders as well as funding growth. Throughout late 1999 through 2002, eBay grew 50% year over year in member size, transaction volume, and revenue booked on transaction value. Unlike most Internet IPOs that launched and immediately skyrocketed only to plummet18 months later, eBay has maintained an average share price of $50 after the market collapse, down only 50% from its high of $100.

eBay's purchase of Butterfield and Butterfield (a mistake) and its alliance with Sotheby's is its way of crowning itself "King of the Collectible Space".

Significant growth occurred through the management of acquisitions and alliances. Presence in TekSell.com and creating eBay Motors helped them move quickly into high value transactions more characteristic of B2B than B2C. eBay's purchase of Butterfield and Butterfield (a mistake) and its alliance with Sotheby's is its way of crowning itself "King of the Collectible Space". With the Butterfield and Butterfield acquisition, eBay bought inventory (and a on-ground operation) as well as a brand. Operating a physical store presence is not strategically where the company was going. Lessons learned from Butterfield and Butterfield reshaped strategy in expansion through acquisition.

The acquisition of PayPal was consistent with eBay's strategy to acquire and manage technology and services that helped it build a more robust and complete marketplace infrastructure. Although a competing technology was created (BillPoint), it never gained the momentum that PayPal did. eBay essentially "bought a business model" that was congruent with their ability to capture value from consumer transactions. Napster missed this entirely in their ill-fated evolution.

eBay eventually realized that it needed to manage its strategy to simply and consistently be the best practice in marketplaces. Rather than develop specialized expertise in the marketplace domain, eBay would enter new markets using its marketplace engine plus domain expertise from alliances. Managing this strategy allowed eBay to become the ultimate self-replicating marketplace.

Key Points for Strategy Managed

  • eBay responded to performance issues with rock solid process execution
  • The "auction application" grew in function and scalability to evolve into marketplace infrastructure for automobiles, computers, and business liquidation
  • Managing strategy and evolution in iterative cycles creates a positive and synergistic feedback cycle for growing core competency and market presence
  • Managing acquisitions and partnerships through strategy was not easy - Butterfield & Butterfield was a learning experience for the Sotheby's alliance
  • Internet pioneer eBay has had many cycles of positioning, targeting new markets including jewelry, and automotive, but initially resisting the B2Bspace
  • Managing acquisitions and partnerships to remain a strong intermediary in marketplace activities connects corporate ideology with process execution
  • To gain the respect of Wall Street as a solid "blue chip" performer required focus on revenue derived from marketplace liquidity and increasing the "value" of PTP
  • eBay succeeded in creating transaction liquidity in C2C and B2B marketplaces.
  • eBay often failed to consider the consequences of not monitoring what was sold, with popular press going to "organ sales".


Strategy Evolved
eBay.com became the Internet success story through profitable growth, solid earnings, and respect by Wall Street as a mainstream blue-chip company. eBay attained marketplace status, evolving from an "auction portal", through a combined strategy that included performance and an "almost" flawless experience for buyers and sellers, careful brand extension through alliances, and extending business models from C2A2C to B2M2C. They also extended their reach in the payment arena by acquiring PayPal, replacing their internally developed BillPoint. From an evolutionary perspective, eBay's goals should continue to be:

  1. Focus on transaction liquidity
  2. Become best in class through alliances and acquisitions in key vertical and niche markets
  3. Develop an Internet marketplace platform for self-evolving markets

eBay should consider adding alliances with financial institutions including banks to provide loans and short-term bridge financing for high value consumer and business transactions.

eBay built upon the success of its marketplace engine with almost flawless process execution, building a platform for self-evolving markets, including automobiles, computers, and high-end collectables. eBay should consider adding alliances with financial institutions including banks to provide loans and short-term bridge financing for high value consumer and business transactions. Autos would be a prime area for financial services and alliances. Profits from loans would provide a recurring revenue model for eBay, and create a "full-service" brand. Profits from financial services would be most lucrative in the B2B space.

Active e-business marketplaces promise the value of "process knowledge", a term describing how a marketplace could monitor discovery, negotiation, and satisfaction components of PTP. Over time, "best fit" solutions would become apparent, helping define successful paths for complex queries through business marketplaces with tens of thousands of suppliers. While the Internet bust dampened the projected marketplace growth, the goals of using data mining tools to capture abstract business intelligence continue. eBay would benefit by integrating sophisticated data mining tools to create the "Semantic Marketplace" modeled after the current activities of the World Wide Web Consortium to build the Semantic Web

Fostering community and adding marketplace intelligence are critical components in strategy evolution. Fostering community built the human component of the eBay community that propelled it forward with 50% annual member growth. eBay members had a "My eBay" page that served as a control panel for posting their interests and monitoring session activity. eBay created a "mentoring" program to help new users navigate the nuances and complexities for mastering participation in its auction marketplace. A community forum supported the new and seasoned eBay members with dialog forum, events, and chat, charity venues, and eBay values. The early days of eBay's press were often filled with stories of auctioning organs and other sundry items. eBay coming of age included a more active role in monitoring marketplace activities. By fostering a vibrant community, congruent with ideology and values, eBay can continue to cement the three components of successful portals; community, content, and commerce.

Key Points for Strategy Evolved

  • Auction application evolves into marketplace infrastructure
  • eBay evolution from C2C website to portal to B2B marketplace
  • Strategy to grow from C2A2C and C2M2C into broader B2M2B
  • Extending their business model, through the PayPal acquisition, brought eBay into the payment arena and extended PTP liquidity into businesses outside or eBay
  • The path to increasing market valuation focused on the dollar value in addition to the number of PTP transaction turns, taking eBay into higher value markets
  • Transaction liquidity built on the number and dollar value of PTP transaction turns is a model for all portals trying to reach "valuation" by Wall Street
  • Building and supporting community as an ideology, and the critical connection of community, content, and commerce, is core to the success and evolution of eBay



About the Authors:

Mitchell Levy, is President and CEO of ECnow.com (http://ecnow.com), an e-commerce management consulting company helping individuals and corporations transition from the industrial age to the Internet age through strategy, marketing, and off-the-shelf and customized on-line and on-ground training. He is the author of E-Volve-or-Die.com (http://e-volve-or-die.com), author of the Value Framework (http://ecnow.com/value), Executive Producer of VMS3.info (http://VMS3.info), the Founder and Program Consultant of the premier San Jose State E-Commerce Management Certificate Program (http://ecmtraining.com/sjsu), Former Chair of comdex.biz at Comdex Fall, and Chairman of the Pay-per-Performance PR Agency Media Attention Now TM (http://ecnow.com/mediaattention), the on-line learning content production company Transition Learning (http://transitionlearning.com) and the CEO Networking organization CEOnetworking (http://ceonetworking.com). Mitchell was at Sun Microsystems for 9 years, the last 4 of which he managed the e-commerce component of Sun's $3.5 billion supply chain. Mitchell is a popular speaker, lecturing on ECM issues throughout the U.S. and around the world.

Read more about Mr. Levy: http://ecnow.com/ml_bio.htm
Public speaking appearances I've given: http://ecnow.com/speaking.htm
Read about ECnow.com's media coverage: http://ecnow.com/media


Bob Cormia, is an Internet technologist and e-business consultant. Working at SuperBusiness NET, Bob developed strategic positioning, product definition, and account management. Bob developed the e-commerce curriculum at Foothill College while working as a market analyst for G2R, specializing in IT strategy development for Fortune 5000 enterprises. Bob joined eCongo.com in Fall 1998, developing corporate strategy, product development, and launching FreeCommerce on the Internet. In March 2000, Bob joined Calkey.com as an advisor in training and education development in using UML (Unified Modeling Language). In Fall 2001, Bob joined Foothill College as a full-time instructor in the Computer Technology Information Systems division, where he will teach e-commerce, Web strategy, Internet projects, and XML.


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