EBay in Focus: The Challenges of Sustained Growth Essay

Custom Student Mr. Teacher ENG 1001-04 19 April 2017

EBay in Focus: The Challenges of Sustained Growth

Executive Summary

A pioneer and a market leader in the online auction industry, eBay has been able to grow the business significantly in the last decade amidst turbulent times for many contemporary dotcom companies. eBay’s business model proved to be a success and its success story had been much followed not only by investors, but many regular people as well. From its initial revenues of $32 million, eBay had been able to grow its business to $ 782.82 million in just five years. Their great success is hinged on the large community they have built, and the close relationship with the community in building trust and camaraderie in eBay marketplace.

More importantly, eBay’s strategy to focus on a niche market and differentiate itself through strong brand management and continuous improvement in the roll-out of value-added services has enabled the company to defend the market leadership in the industry. While many new competitors have entered into the industry, eBay continued to set its sight in serving and growing the eBay community like no other competitor can. Nevertheless, eBay’s story only illustrates the one maxim in spite all the technological hype in many dotcom businesses. That is, “Customer is King”.

Introduction

With over 42.4 million registered users, USD $9.3 billion in gross merchandise sales, and 423 million of auctions, eBay is not only the market leader but a pioneer of the online auction industry as well. Since 1996, the online auction industry has experienced a phenomenal growth and eBay, as a pioneer in the industry, has revolutionized the wired marketplace since its inception in the mid-1990s. While 2001 marked the economic slowdown in US, especially for high-tech firms, eBay had continued to grow, expand, and established itself as a one of most watched success stories in Silicon Valley . In its own right, eBay has proven its business model and establish itself as the market leader and pioneer in the online auction industry.

The report is based on the case study prepared by Louis Marino and Patrick Kreiser entitled “eBay in 2002: The Challenges of Sustained Growth”. The case study presents eBay as a company that has established itself as the market leaders and have achieved a phenomenal growth during and even after the Internet bubble. The report will focus on analyzing the strategic capabilities of the company, the strategic options to create and strengthen its competitive position, and recommendation on the strategy for the company looking forward to the future.

The Roots of eBay

Pierre Omidyar, born in France, had a passion for compassion for computers even at his early age. In fact, while he was in high school, he had been commissioned to write a program for his school’s library to print catalog cards. He later pursued his passion and graduated with a BS Computer at Tufts University. He had worked for several software engineering firms such as Claris, an Apple subsidiary, and pioneered eShop, an online shopping which had been eventually sold to Microsoft in 1996. In 1994, he worked at General Magic as a software engineer and remained there until mid-1996 when he pursued the full-time development of eBay.

In 1996, Pierre Omidyar first developed a software trading portal to allow Pamela, his wife, to trade Pez dispensers with other collectors. While Pamela was the driving force for the development of the website, Pierre further saw the potential of the trading portal as a means to create a marketplace that builds on the person-to-person trading community based on a democratized, efficient market where everyone could have equal access through the same medium, the Internet.

Hence, eBay was born; eBay stood for “electronic Bay area” which was coined because Pierre’s initial concept was to attract neighbors and other San Francisco Bay area residents to the site to buy and sell items. This fledging venture initially generated revenues of $1,000 in its first month and an additional $2,000 in the second month.

Traffic in the eBay’s website had soon increased significantly that Pierre had to upgrade his service with his Internet service provider. Pierre compensated the increase in cost by charging a listing fee for the auction. Pierre saw that there was no decrease in site traffic and he knew he was on to something. Since its inception, eBay has increased its revenues by an average 93% and its net income by an average of 121% year-on-year (Exhibit 1).

With its impressive year-on-year growth reaching USD $ 748 million in revenues and $90 million in net income, the question remains on how to sustain the phenomenal growth and defend its market leadership in online auction industry. Clearly, while eBay has enjoyed the exceptional growth amongst the internet start-ups in Silicon Valley, eBay has not only attracted the attention of investors when it become a public company, but new competitors as well in it bids and competes for its share in the online auction industry.

Exhibit 1.
eBay Condensed Income Statements: 1996-2001
(in thousands of USD $)
1996 1997 1998 1999 2000 2001
Net Revenues $32,051 $41,370 $86,129 $224,724 $431,424 $748,821
Cost of Sales $6,803 $8,404 $16,094 $57,588 $95,453 $134,816
Gross Profit $25,248 $32,966 $70,035 $167,136 $335,971 $614,005
Operating Expenses $18,828 $22,983 $57,270 $168,300 $300,977 $473,549
Income (Loss) from Operations $6,420 $9,983 $12,765 ($1,164) $34,994 $140,456
Interest Expense and Other Income (Loss), net ($2,607) ($1,951) ($703) $21,377 $42,963 $38,762
EBIT $3,813 $8,032 $12,062 $20,213 $77,957 $179,218
Income Tax $475 $971 $4,789 $9,385 $29,663 $72,495
Net Income $3,338 $7,061 $7,273 $10,828 $48,294 $106,723

Target Market and the online auction industry

By definition, auction is “the process of buying and selling things by offering them up for bid, taking bids, and then selling them to the highest bidder.” Auctions are one of the “purest” democratized markets that exist for goods, in that they bring buyers and sellers into contact to arrive at a mutually agreed price. In fact, an auction is the most common method employed for determining the value of a commodity that has an undetermined variable price.

The first known auctions were held in Babylon in 500 BC. Women were chiefly auctioned for marriage during this time. Roman soldiers, in ancient Rome, also conducted auctions to sell the spoil of their victories and wealthy citizens auction their expensive belongings and prized possessions as well. Auctions have been widely used even today and this can be attributed to several reasons. First, they give sellers a convenient way to find a buyer for something would like to dispose of. Second, auctions are excellent way for people to collect difficult-to-find items. Finally, the fact that it is both buyers and sellers come at a mutually agreed price offers a democratized free market to all buyers and sellers.

Online auctions work similarly as the general auctions, the only difference is that buyers and sellers are not constrained by the geographic location. The industry can be segmented in three categories: (1) Business-to-Business (B2B) auctions, (2) Business-to-Consumer auctions, (3) Person-to-person auctions.

eBay was first to establish itself as the market leader in the niche market for person-to-person auctions. Its target market can be grouped into six major categories: (1) bargain hunters, (2) hobbist/collector buyers, (3) professional buyers, (4) casual sellers, (5) hobbist/collector sellers, and (6) corporate and power sellers.

Online auction websites are well-loved by bargain-hunters. They adore the search find a hard-to-find items at a great price and deals in auction sites. They generally view it as a form of an entertainment, i.e. the excitement of the search. Nevertheless, while the bargain-hunters play hardball with price, they still value the product quality and the rational and emotional appeal of the product. Moreover, they value an established community of bargain hunters. Bargain hunters generally make up 8 percent of all active online users, and 52 percent are eBay visitors.

Auctions are also a great place to find specific goods that are considered to be prized by certain individuals. These items are considered valuable as they are considered hard-to-find items. In their purchase decisions, hobbyist/collector buyers value and consider both the quality of products offered and its price. More often, hobbyist/collectors are attracted to eBay for its wide variety and depth of product category and listing in its website.

As auction site grew in popularity and security, a new segment of buyers have also emerged. They are the professional buyers, who are purchasers in the corporate world. Purchasers look for a range of items from buying office supplies to inventory store supplies. Similar to bargain-hunters, their objective is to find the best deal in the marketplace. Their motivation is to contain cost and find a great deal that would give them the best price for their level of their quality needs.

Online auction sites had also been a substitute service for classified ad listing and garage sale. More and more users are using the online site to dispose of items they no longer needed or wanted. They are the casual sellers, who list very few items for sale who use online auction to raise money for a new project or another.

There are also a segment of hobbyist/collector sellers, who deals in limited product category and cater to same social group. These sellers are offer selected items in their collections to others who might want them. These sellers generally use a range of traditional and online outlets to reach their target market.

A segment also emerged in online auction industry, who has used the system as a distribution channel for all its goods. They are called the power and corporate sellers. This segment are typically small and medium-sized businesses, which sells tens of thousands of dollar’s worth of goods every month.

In its 2005 annual report, eBay segments the online auction industry by business segments. Business segments are categorized into: US Marketplace, International Marketplace, Payments, and Communications. Each business segment is measured by transaction revenues, which is the main revenue driver for the market. In 2005, eBay has been able to grow transaction revenues by 39 percent amounting to USD $4.55 billion dollars.

In general, online auction operators could generate revenues in any of five principal ways:

1. Charging sellers for listing their goods or service
2. Charging a commission on all sales
3. Selling advertising on their websites
4. Selling their own new or used merchandise via the online auction format
5. Selling goods (their own or those of other sellers) in a fixed-price format

eBay, however, differentiates itself by focusing on managing the marketplace rather than being into direct online retailing as many dot com start-ups have embraced. Meg Whitman, President and CEO of eBay, notes:

eBay has a different brand proposition than an Amazon.com. The two companies do two quite different things very well. We’re not going to be the retailer. And unline an Amazon, the items are going to be unique and hard to find or value items. This is our only business. A lot of our competitor’s businesses are primarily something else. We know more about managing the marketplace than anyone else in the world. Brands are like quick-drying cement. It’s very hard to expand a brand beyond what the true core of the company is.

Sustaining Growth in the midst of growing competitive pressures

Competitive Environmental Analysis

In his book Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter discusses the five forces of competition in an industry. He illustrated the five competitive forces as: (1) Rivalry between competing sellers in an industry, (2) potential entry of new competitors, (3) the market attempts of companies in other industries to win customers over to their own substitute products, (4) the competitive pressures stemming from supplier-seller collaboration and bargaining, and (5) the competitive pressure stemming from seller-buyer collaboration and bargaining.

Porter’s five forces of competition is a widely used tool to determine the company’s current strengths and competitive position. Having a clear picture of the balance of power in a competitive industry will help in planning for a sustained growth in the industry. In the Exhibit 2, we analyzed and plot the competitive forces in the online auction industry in which eBay is competing.

Exhibit 2. Porter’s Five Forces of Competition Analysis on eBay

In the exhibit above, it is clear the threats of new entrants, particularly Internet directories such as Yahoo!, MSN, and Online retailers such as Amazon, to broaden their product/service categories in the market posts a significant threat to eBay . In addition, buyers have a significant bargaining power with online auctions operators because they can easily switch to competing sellers . The key bargaining power of eBay is its large community that attracts new buyers and creates repeat business from bargain hunters. More importantly, the community provides the critical mass of customers needed for an online auction to operate profitability and sustain growth.

Looking Forward to the Future and Lesson Learned

While many dot com start-ups have failed during the 1990s, eBay has continued to grow and enamored a number of investors to help them further grow the business. This only illustrates eBay’s reliance not on technological superiority, but its focus on serving the needs of its customers. eBay’s close relationship with the eBay community has proven to be its competitive advantage in the midst of growing threats in the market – entry of new competitors into the industry. Moreover, this affinity has garnered a strong brand recognition and brand name for new buyers and sellers. It is their customer-focus that will provide them the continued success and further cement their leadership in the auction industry.

Looking forward, eBay’s market leadership and success story continue to attraction attention from competitors and investors alike. While the industry does not show any slowdown in user activity, eBay should continue to expand its services and products into specialty sites, further develop and enhance value-added services in its portfolio to continuously attract new buyers and sellers into the community, and continue to focus on its efforts on maintaining the character of the eBay community.

To protect its current market position, it is important for eBay to continue to expand to other specialty sites and further develop and enhance its value-added services to differentiate its product offerings from competitors. This strategy will continue exploit eBay the competitive advantage being the pioneer and introducing innovative product offering to for eBay’s community. This would keep the company’s products and services fresh and exciting enough to stand out in the midst of all the changes that is taking place.

Lastly, it is also important for eBay to continue to focus its efforts on maintaining the character of eBay community and to continue to nurture that trust and camaraderie, so as not to lose sight of the eBay’s foundation and shared values that it had established with its community. eBay is the community that encourages open and honest communication among all its members valuing trust, honesty, openness, and respect for every person. It is always important to hold on to their corporate identity in the turbulent and fast-changing market.

Bibliography

BBC News (September 12, 2005). eBay buys Skype in $ 2.6 Billion Deal. [Online] Available: http://news.bbc.co.uk/2/hi/business/4237338.stm

Blumberg, Max (2005). eBay, Skype, and Community Ownership. [Online] Available: http://maxblumberg.typepad.com/dailymusings/ebay_strategy/index.html

CBS News (Jan. 5, 2005). eBay’s Bid for Success. [Online] Available: http://www.cbsnews.com/stories/2002/10/30/60II/main527542_page3.shtml

CNN.com (July 28, 2005). Companies Piggyback on eBay’s success. [Online] Available: http://www.cnn.com/2005/TECH/07/25/spark.ebay/

eBay 2005 Annual Report.

eBay website: http://www.ebay.com/

Kane, M. (July 8, 2002). eBay Picks up PayPal for $ 1.5 Billion. CNET.com News. [Online] Available: http://news.com.com/2100-1017-941964.html

[email protected] (March 9, 2005). In eBay’s success May Lie Hints of Trouble Ahead. [Online] Available: http://knowledge.wharton.upenn.edu/article.cfm?articleid=1150&CFID=867072&CFTOKEN=89691486

Kotler, P. and Amstrong. Principles of Marketing. 10th ed. Prentice Hall, US.

Powell, B. and J. Ressner (August 22, 2005). Why eBay must win in China. Time Magazine [Online] Available: http://www.time.com/time/asia/magazine/article/0,13673,501050829-1096554,00.html

Porter, M (1985). Competitive Advantage: Creating and Sustaining Superior Performance. (NY: New York Free Press).

Shneiderman, B. (2000). Designing trust into online experiences. Communications of the ACM 43 (12): 57-59.

Thompson, A and AJ Strickland. Strategic Management: Concepts and Cases. 13th ed. McGraw-Hill, US.

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