The eBay Phenomenon

4 January 2010 Dan Wilson

In this extract from Make Serious Money on eBay UK Dan Wilson charts eBay's progrees from the hiring of its first CEO.

By 1996 eBay was attracting buyers and sellers at an astonishing rate. Founder Pierre Omidyar had to hire people to help him maintain the website and its momentum. In the early years eBay was predominantly a site for collectors and collectables, and its reputation as a great venue for buying and selling was mainly spread by word of mouth.

But it became clear that if eBay was to realise its true potential it would have to become a more professional and conventional organisation. Omidyar, alongside his friend Jeff Skoll, had always run the business in an egalitarian way and was attracted to hiring people with a similar countercultural mindset, but he came to acknowledge that a more sober selection of experienced professionals was required to complement them. To begin with, some graduates of the Stanford Business School were engaged to offer marketing expertise, and soon eBay was advertising its service on AOL using banner ads.

The next logical step was to hire a professional chief executive officer to take over the running of the business from Omidyar. He was perhaps rare as a founder of a successful company in realising that his skills and ambitions were not best suited to running what was fast becoming a big and complicated organisation. eBay found its CEO in the unusual figure of Meg Whitman, who could not have been more unlike Omidyar. She was a Princeton and Harvard graduate from old East Coast stock. She had experience working for some of the biggest companies in America: Procter and Gamble, Bain, Disney, Stride Rite and Hasbro. Even though she didn't have much online experience and was by no means a techie, she saw eBay's potential and brought with her vast marketing experience that would be critical to the company's success. Most important of all, she understood the importance of the community when it came to driving eBay's success.

Soon after Whitman came to eBay, the decision was made to go public and offer shares on the Nasdaq stock exchange. At the peak of the internet boom going public was the ultimate badge of credibility for internet start-ups. It sent a message that a company was serious and meant to stay the distance. Equally, issuing shares to the public was a useful way of raising money to continue investing in the company, although in eBay's case this was less important.

"Omidyar realized his skills and ambitions were not best suited to running what was fast becoming a big and complicated organisation."

Looking back there were lots of companies for whom going public was the peak of their success: many went bust within months.

For eBay the flotation was a tricky proposition. Obviously the business was already profitable and successful and had a million members and millions of items being traded. But it was difficult explaining to stuffy bankers that people are basically good and really are willing to trade with complete strangers on the internet. Was eBay just a fad? Did it truly have a broad appeal that would enable it to grow? eBay was valued at about $715m on the day before its shares went on the market in 1998. By the end of the first day's trading it was obvious that the market liked the company and thought it would be a huge success. So much so, in fact, that trading was brisk and at the end of the first day eBay's valuation stood at $2bn.

Going global

In 1999 eBay began to take the site to a wider international audience. People from all over the world were using to trade wherever they lived. But to succeed, it was necessary to create sites in local languages moulded to the needs of the community members in that country.

The first move was to buy, a German online trading site that closely resembled eBay in its community-based approach. Alando had been started by a group of young entrepreneurs barely months before. It caught eBay's eye and Omidyar travelled to Berlin to have a closer look. He was impressed by Alando and struck by its similarities to eBay, so he bought the company. The site was rebranded as and by the end of the year eBay members could trade in German marks. eBay sites were also established in Australia and Canada.

In Britain there was no site similar to eBay that could be purchased, so was created from scratch. I was part of that founding team and I can tell you that we had lots of fun as we worked hard to get the thing going in Britain. There was already a core of UK members who traded on in US dollars. Sellers would sell uniquely British collectables and goods to Americans, who in return would pay in cash. In those early days there were thousands of envelopes stuffed with money crossing the Atlantic paying for items that were hard to find in America.

In 1999 people in Britain became able for the first time to trade on eBay in sterling rather than dollars. A UK office was set up to start building the site for British traders and to market it by attracting buyers and sellers. In those early days QXL was stiff competition, but the draw of eBay became too much for the ever-growing number of Brits who wanted to buy and sell online, and before long eBay became the number one e-commerce site in Britain. And over the next few years it expanded to encompass India, China and many other European sites and is now present in more than 30 countries all over the world.

What's next?

For a long time eBay was the darling of the stock market and could do no wrong. Even once the internet bubble had burst, the company had casually beaten expectations and posted profits that wowed even the hard-nosed capitalists of Wall Street.

"Donohoe is credited as the architect of far--reaching changes that have been introduced to eBay in the past few years."

Boosted by good results, eBay's stock price soared between late 2002 and January 2005, tripling the value of the company. But then Wall Street lost confidence and punished some disappointing results through 2005 and 2006 by hammering down the share price. Google became the new golden child and eBay languished. Analysts worried that the company might not have the potential to grow as much as they expected. Certainly in comparison with Google, eBay looked a little tarnished, and when it bought Skype in autumn 2005 for $2.6bn commentators were surprised.

The bankers and analysts couldn't see how the expense was justified and doubted that Skype would ever be a profit centre for eBay. Moreover, what did eBay want with an internet telephone company? It wasn't considered a good fit. At the time of writing (July 2009) eBay stock is valued at just $16.30, down from its January 2005 high of $60. In September 2008, eBay agreed to sell Skype to a well-funded consortium.

The stock price may be poor compared to the past, but the lack of investor confidence does illustrate the period of change the company is in and some uncertainty in eBay's future. In 2008, CEO Meg Whitman - who was well respected and had led the company since 1998, delivering some magnificent profits - stood aside for John Donohoe, who had worked at eBay for three years, having previously been head of US management consultant firm Bain.

He is credited as the architect of far-reaching changes that have been introduced to eBay in the past few years: massive fee changes, a move from auctions to fixed-price selling, Best Match in search, requiring greater professionalism from sellers and, most controversially, changes to feedback. The Detailed Seller Ratings and the removal of the right of sellers to leave neutral and negative feedback have proved unpopular with lots of longstanding eBay traders.

The past few years have seen dramatic changes at eBay and sellers are well advised to remember that change and development form one of the central aspects of selling on eBay: nothing stays the same for long. But that's the nature of the internet and one of the aspects of e-commerce that makes it exciting. What's next for eBay? It's impossible to say, although for the foreseeable future it's going to continue to be a key internet player and remain your ideal first step to selling online.

This is an extract from Make Serious Money on eBay UK, by Dan Wilson, published by Nicholas Brealey Publishing.

Nicholas Brealey Publishing is offering our readers the opportunity to purchase the book at the very special price of £9.99 (including free p&p). To order your copy, please contact the publisher direct, with your credit card details by telephone: 020 7239 0360, or send a cheque with your name and address to: Nicholas Brealey Publishing, 3-5 Spafield Street, London EC1R 4QB. Please quote reference CEO/eBay. The deadline for receiving orders is 29 January 2010.