To understand where eBay came from, you have to meet Pierre Omidyar.
Sitting in his San Jose office, which is decorated with Pez dispensers and
books on collecting them, Omidyar is wearing a short- sleeved shirt batiked
with cave drawings and has a long, black ponytail. As eBay's chairman,
Omidyar's primary day-to-day function is to vet big ideas. He is the picture
of calm, commercially oblivious computerdom.
The story of how Omidyar, now 32, created eBay has become part of Silicon
Valley lore: Born in France, Omidyar grew up in Bethesda, Md., and early
on started toying with computers. After college, he moved west to work as a
programmer. In 1992 he started (and two years later left) a company called
eShop, an early e-commerce site later bought by Microsoft. By the time he
reached communications-software maker General Magic in 1995, Omidyar
was the stereotypical antiauthoritarian, libertarian programmer. And he was
starting to have a bad feeling about what the Internet--then in its
infancy--was becoming.
In summer 1995, Omidyar's girlfriend, a Pez-dispenser collector,
complained that it was hard to find like-minded souls to buy from and sell to.
Omidyar saw the vacuum as an opportunity not only to score points with his
spouse-to-be but also to develop a possible antidote to the corporate
infiltration of the Internet.
"I came from the anticommercial side," he recalls. "You had companies
saying, 'This new medium, it's really cool. It reaches all these people. We
can sell stuff to them.' I felt like that's not fair. The individual Internet user
can benefit from this medium as well, and maybe we can create a level
playing field, an efficient market."
When eBay launched on Labor Day 1995, it was that efficient market and
little else. Omidyar made no guarantees about the goods being sold, took no
responsibility, and settled no disputes. It was a simple system: users went on
and bid for items. There were no fees, no registration, no search engine--and
for the first month, no customers.
The business took off almost in spite of its creator. Omidyar's sole attempt at
marketing was to list eBay on the National Center for Supercomputing
Applications' What's Cool site. That was enough: People started piling onto
eBay so fast that by February 1996, Omidyar had to institute a fee to recoup
his rising Internet service- provider costs. By the end of March, eBay turned
a profit.
The business worked much as it does now--a seller describes his item, sets a
minimum bid, and chooses how long the auction will last, between three and
ten days. Before the auction, eBay charges a listing fee ranging from 25
cents to $2 and takes a cut of the final price, starting at 5% for the first $25
and sliding down to 1.25% as the price exceeds $1,000. Although eBay gets
only an average 6 cents for every dollar's worth of goods that trade hands, 5
cents of that is gross profit, thanks to a completely automated system.
In 1996, eBay still had one problem: There was no way to make sure what
you were buying was real or that you'd get it after you paid for it. The
anonymity and physical distance between buyers and sellers on the Internet
encouraged counterfeiting and fraud. In the end, it was the eBayers
themselves who found a solution. In message-board postings to Omidyar,
they suggested he set up a system for buyers and sellers to rate each other.
That became the Feedback Forum, a sort of peer-reviewed credit-reporting
system. Buyers and sellers rate each other and comment on how their
business together went. (A recent posting: "Honest &
Trustworthy--FANTASTIC person to do business with- -asset to eBay!!")
Get negative feedback, and buyers know to avoid you.
The Feedback Forum proved to be the missing element in the formula; what
Whitman would later call the eBay "community" finally took shape. "As high
tech as eBay is, the closest analogue to what they've created is the original
small-town market," says Peter Kollock, a UCLA sociology professor who
has been studying eBay for the past two years. "It's a market that relies on
identity and reputation for risk management."
What's more, Kollock says, preliminary findings suggest that users are
willing to pay up to 30% more in certain markets for items sold by someone
with a high feedback rating. "If you told economists or sociologists that you
were going to set up this huge, anonymous market where people never meet
in person and there's no formal clearing, the prediction you would have
gotten is rampant and massive fraud," says Kollock. "It's amazing how small
that problem is. That's thanks primarily to this reputation system."
Another force in eBay's evolution was the message boards Omidyar created
as a way of encouraging users to answer each other's questions. By mid-1996
about 5,000 people were using eBay (then called AuctionWeb); one of the
most visible and entertaining was a former mural painter in tiny West
Rutland, Vt. Under the handle "Uncle Griff," Jimmy Griffith spent his days
and nights coaching newcomers through the system and lecturing others on
what he felt was proper online auction protocol. He'd pepper his postings
with pieces of Uncle Griff's fictional biography: that he was a
fiftysomething, cross-dressing dairy farmer in West Upperbuttcrack, Vt.,
and that he still lived with his mother, despite her untimely death 30 years
before. "It was silly," Griffith explains, "but my hero is Judith Martin, Miss
Manners. I was trying to further her idea of etiquette, only extending it to
the way people behave online."
Omidyar brought on Griffith as eBay's first customer-support rep. It was
more than just an odd hire: By offering Uncle Griff a position at eBay,
Omidyar was paying homage to his users. Not only would their auctions feed
the business, but they themselves would build the infrastructure that
supported it.
Under this banner of self-reliance, Griffith established eBay East, which
would be a main customer-support center for the next several years. He
handpicked an enthusiastic, if unlikely, team of local waitresses,
school-cafeteria cooks, and housewives; together they personally answered
hundreds of queries a day from eBay users, guiding them through the
auction process, sorting out glitches in the system.
Back in San Jose, Omidyar and Jeff Skoll--who had joined eBay as president
in 1996--devoted their efforts to eBay's computers. The community would
grow itself, Omidyar's thinking went, as long as the system worked. And
grow it did. By 1997 the company was doubling every three months, far too
quickly for Omidyar and Skoll to handle. By mid-1997, without help from
outside, the two had built one of the most visited sites on the Web, with more
than 150,000 users bidding on 794,000 auctions each day. The average eBay
shopper was spending nearly 3.5 hours a month on eBay, longer than the
average shopper on any other site. The tide of hype began to rise: GOING
ONCE. GOING TWICE. CYBERSOLD! gushed Business Week. It was one
of many such headlines.
In June 1997, Omidyar and Skoll took the eBay business plan to Benchmark
Capital and got a $4.5 million check for 22% of the company. Benchmark
also promised to find seasoned managers to help run eBay. Enter Meg
Whitman.
"What you see of eBay today is the tip of the iceberg," says Whitman,
nibbling on a fruit salad in her San Jose office. Three Teletubbies bake in the
sunlight on her windowsill. "Today {the merchandise} is largely collectible,
largely under $300. What we are starting to see--and we really look to our
users here, we call them our army of entrepreneurs--is that they are starting
to put much more practical items on the site."
Our army. It's an appropriate choice of metaphor. When Benchmark
persuaded Whitman to leave her job heading Hasbro's preschool division
(after stints at Disney and Procter & Gamble, and as CEO of FTD), eBay
was a ragtag band of sellers hawking stuff from their basements. Whitman, a
Princeton economics grad with a Harvard MBA, considers it her job to whip
that mob into shape. Like any seasoned sergeant, she seems willing to
sacrifice a few troops along the way.
Soon after joining eBay in February 1998, Whitman started building her
ranks. Significantly, in a company that had always disdained advertising, one
of her first moves was to snag Pepsi's head of marketing, Brian Swette, to
oversee eBay's embryonic marketing group. Then, in preparation for the
IPO, she started making changes to the site. eBay's gray-and-white face was
dressed up with bright primary colors, and a bizarre anthropomorphic apple
was added by way of a mascot.
Last September, Whitman walled off all firearm and pornography auctions
in separate, age-restricted sites. With the dirty laundry safely hidden away,
she was ready for the road show. She took eBay public on Sept. 24.
The stock single-handedly revived the market for Internet IPOs. On its first
day of trading, the stock went from a split-adjusted $6 a share to $18.08.
Suddenly eBay's top executives were multimillionaires--mere paupers
compared to now: At a recent $183.75 a share, Whitman's net worth is about
$500 million (she has sold shares worth $86 million), Omidyar's $6.7 billion
(stock sales: $321 million), and Jeff Skoll's $2.8 billion (stock sales: $170
million).
With riches came the magnifying lens of the public eye. Articles began to
appear about rampant rifle, grenade, and pistol sales at eBay. Worse, the
articles warned of escalating fraud at the company. SmartMoney called
Internet auctions "the perfect venue for scams." The National Consumers
League's Internet Fraud Watch declared auction fraud the No. 1 problem on
the Web.
Omidyar and Skoll had long insisted that the fraud problem at eBay was
minuscule--just 27 reported cases out of every million auctions-- and that if
users would just use the Feedback Forum, the site would police itself. But
Whitman was convinced this laissez-faire policy wasn't cutting it with the
public, and in mid-December--over the objections of Omidyar and Skoll--she
decided to take action.
"eBay comes from the roots of an open, sort of libertarian, point of view,"
she says. "It's a bit of a Vermont thing. Like, let's not get government too
involved here. We had to make a seminal decision: Were we going to be
more proactive to make eBay a safe place to trade or not?"
She got her way. In January the company announced a "comprehensive trust
and safety program." eBay granted buyers free Lloyd's of London insurance
for purchases up to $200, less a $25 deductible. Sellers got a chance to pay
$5 and have their identity verified by credit- rating agency Equifax, and
eBay promised tougher action against shill bidders and deadbeat bidders.
Whitman also banned firearm sales altogether and banished even pinup
calendars and risque postcards to the Adults Only area.
While the changes were mostly toothless, they marked a major shift in eBay
policy. For the first time, the company was making top-down decisions
instead of letting them boil up from below. That top-down pattern would
become common. In early February a major server crashed, which was
routine at the time and is still all too common. The site was paralyzed for
hours. When it finally came back up, outraged eBayers started venting on the
support board. eBay responded first by suspending the customers for 24
hours, then by killing the live board completely, freezing access to instant
customer support. "There was a joke going around: 'I guess there are no
more problems at eBay,' " says Scott Samuel, president of Honesty
Communications, which measures traffic for online auctions. Then,
becoming serious, he adds, "These are your customers--you don't do that."
Whitman has declined to resurrect the live board and recently allowed a new
round of suspensions on another eBay board. Those have fueled online
conspiracy theories that run from the paranoid (that eBay would kick
low-dollar vendors off the system) to the plausible (that it would replace the
Feedback Forum with Equifax).
To the old-guard, populist users, Whitman's moves smacked of authority
flexing its muscles--strictly verboten in the Internet pioneer world and a long
way from that "very open, honest, friendly environment" that she likes to
talk about in the national media. But nothing drove home eBay's willingness
to break with its past more than the announcement that came next: customer
support was being shifted to a new corporate facility in Salt Lake City. The
new facility, just now opening, will be staffed by a temp agency. eBay East
will survive for now, but Uncle Griff's online advice has already taken on a
distinct corporate drone: It features an italicized lawyerly disclaimer that
"eBay is not liable or responsible for any type of damage or loss caused...by
the information below." Griffith now divides his time between Rutland and
San Jose. "Things change," he shrugs.
For her part, Whitman prefers to see the shift as part of an inevitable
maturation, as eBay looks to attract a new type of seller whose main concern
is getting the highest possible price. "eBay started with individuals selling to
one another," she says, but it's moving on to serve as a distribution channel
even for traditional stores and businesses: "When you walk through your
neighborhood, you always see the small shops and wonder how they survive.
Well, a lot of them now keep their storefront, {but} the real money is made
on eBay."
In Whitman's drive to make eBay a conduit for merchants, some of eBay's
old clientele is finding that doing business on the site has become a trying,
unhappy experience. A two-year veteran, who requested anonymity,
persuaded her husband to give up his job to help her sell full-time over eBay.
As the company grew, she grew with it. She grosses $120,000 a year on the
site and says she pays eBay $1,000 a month in listing fees. But now, she says,
eBay is ignoring her in favor of a fancier breed of client. Even though she
has been enlisted in the PowerSeller customer-service program for big-ticket
sellers, her e-mail and phone calls regularly go unanswered. Is she being
taken for granted? "I feel like I'm in a co-dependent relationship," she says.
"I write to them, I get no response. I e-mail them, nothing. I'm being
abused."
So why not go to Amazon ? Because she still gets the highest price for her
auctions at eBay--a function of the "network effect" that Whitman says
creates a kind of snowball phenomenon as both sellers and buyers seek out
the largest market under one roof. "This might be one of those businesses
where the big actually get bigger through the natural benefit of a larger
market," says Whitman. In other words, eBay got there first, and there's no
stopping it now.
But in the immature world of e-commerce, how can she be sure that her
network won't disintegrate just as quickly as it came together? It's easy to
assume that her reforms are inevitable adjustments in the wake of the
IPO--after all, she has to answer now to a higher authority than the whims of
a bunch of tchotchke-obsessed levelers. But as eBay abandons the small-town
market in favor of the bloodless, high-end mall, it risks creating a site no
different from Amazon , uBid, or any of the 1,000 other online auction
sites. Whitman is gambling with the raw appeal and personality that got the
company this far. According to NetRatings, an online rating company,
people spend three times as much time on eBay as on any other site. Will its
new formula inspire the same intense loyalty?
"How you grow and how you succeed are two different things," says Philip
Anderson, an associate professor of Internet strategy at Dartmouth's Tuck
School of Business. "The name of the game in making any market is critical
mass. eBay's got that. Now they have to have a brand that doesn't just say,
'We have a bunch of cool stuff for sale,' but one that says, 'We deliver
perfect transactions.' eBay's brand doesn't say that right now. For eBay to go
on a buying spree isn't smart. They need to build their brand first."
In other words, instead of worrying about quick-fix revenue streams like
Butterfield & Butterfield, eBay should be trying to perfect its computer
systems and instill indestructible loyalty in its customers. Oddly enough,
those are the two areas that are suffering most: Though less frequent, server
crashes still plague the site, and alienated eBayers are looking
elsewhere--including Amazon , generally considered to have the best
customer service on the Net. Ross Wright, an eBay trader since January
1998, has already listed on both sites. Wright says that generally his fellow
eBay vendors have found Amazon 's auctions to be disappointing, but he's
e-mailing other vendors and buyers, trying to get them to check it out.
Instead of an all-powerful network, it seems eBay may be becoming but one
choice among many.
Even those traders who should, by rights, be diehard eBay loyalists are
getting a wandering eye. Louie Maistros, the laid-back owner of Louie's Juke
Joint, used to rely on a handful of touristy weekends to keep his New Orleans
voodoo-supply and record shop alive. About six months ago, at the
suggestion of a neighbor, Maistros listed a few items on eBay; within a week
he had pulled in $1,000. This year Maistros' eBay auctions should make up
15% of his sales. "I was, like, now why did I open this store again?" he says.
But if Maistros is hooked for now, he feels no more loyalty to eBay than he
would to any other vendor. When asked why he doesn't list on Amazon , he
pauses, then seems to make a decision. "When I first heard about Amazon ,"
he replies, "I just kind of blew it off. You know, they're not going to have
the quantity of people that eBay has. But recently I've heard of a lot of
people going over there. I'll probably look into it this week."
COLOR PHOTO: PHOTOGRAPH BY DAVID STRICK ALL SMILES eBay
CEO Whitman has half a billion reasons to be happy. COLOR CHART:
FORTUNE CHART eBay's Stock Outstrips The Field eBay Amazon Sotheby's
Tech index COLOR PHOTO: WYATT MCSPADDEN THE WAY WE WERE
eBay's Vermont customer-service team (Jimmy Griffith is at left, with cane)
will soon give way to temps in Utah. COLOR PHOTO: DAVID STRICK IDEA
MAN Flanked here by the shadows of two of his inspirational Pez dispensers,
eBay founder Omidyar now gets paid just to think. COLOR PHOTO: WYATT
MCSPADDEN NO SALE For months, eBay execs have boasted of their plan to
help San Pedro la Laguna, Guatemala, sell online. So far, the firm has sent three
PCs; the village has yet to be connected to the Net. COLOR PHOTO: WYATT
MCSPADDEN VOODOO ECONOMICS As eBay starts to look and feel like
other auction sites, customer loyalty may fade. Elly Maistros and her husband,
Louie, plan to check out Amazon . |
