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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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SUMMARY

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.

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:

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.

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:

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.

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

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:

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