The world according to eBay

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The world according to eBay

• MI703 Computer Information Systems

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Priceline

• What is Priceline's core product?
• airline tickets
• What's the customer's motivation? Why do they go
  to Priceline?
• cheap tickets
• Why does a seller go to Priceline?
• to liquidate inventory (which is overstocked,
  perishable)
• sells excess inventory at below market rates.
• Are these good customers that a firm wants to
  fight to keep?
• they're disloyal bottom feeders
• they are focused on price show up after
  checking price everywhere else. Priceline is the
  last place they go.
• It's also not a great experience. Customers
  frequently leave empty-handed because they don't
  get what they want.

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Priceline

• What's so special about air travel that it
  'works' on Priceline? What are the important
  characteristics that make air travel well-suited
  for auctions? Are prices constant in air travel?
• accurate pricing information is hard to come by
• inventory is perishable
• How does Priceline make money?
• customers name price, carriers 'compete' for
  business (not really, PL has inventory in
  advance)
• Make money on the spread between the price a
  customer is willing to pay price airlines will
  offer a ticket

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Difference 1 eBay and Priceline offer different
types of products.

• Priceline deals in commodity goods,
• Commodity all alike (wheat, PC)
• Can get anywhere, exactly the same. A flight is
  the largely same regardless of carrier.
• Economists would say low in scarcity, high in
  substitutes.
• eBay deals in differentiated goods.
• Differentiated differences between products
• Used carquality, miles, year.

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Difference 2 Auction structure.Which is eBay?

• Sealed Bid Auction
• English Auction
• Vickery Auction
• Dutch Auction
• None of the Above
• All of the Above
• Maybe one of the Above, wait to see what others
  say and fake it.

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Auction Formats
Liquidation Auctions (e.g. Priceline)
Seek lowest price on widely available goods and
services
Seek first to maximize existing channels reduce
inventory
suppliers
customers
disincentives to use auction shrink supply over
time
Market Efficiency Auctions (e.g. eBay)
Auction format is favored over the inefficiency
of existing channels
Seek access to unique / rare products or services
suppliers
customers
incentives to use auction increase supply over
time
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Interesting Things about eBay

• Profitable from Day 1
• Fastest growing company in history zero to 3.2
  billion in the first eight years.
• 4.3B in sales in 2005. 8 retailer in the
  world between Target and Walgreens
• eBay handles more transactions/day than NASDAQ or
  NYSE.
• 1.4 billion listings in '04 5 listings for
  every man, woman, and child in the US.

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1 in unique visitor traffic

• 181 million registered users
• would be worlds 6th largest country
• 725,000 people earn most/ all of their income
  selling on eBay.
• If considered employees, it'd be the 2 private
  employer in the US after Wal-Mart.
• 2 billion searches a month, roughly Google.
• By 2001, 20 of all person-to-person package
  shipments in the US are eBay driven.

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eBay The Beginning

• eBay began selling collectibles
• 8 of revenue in 1999 were Beanie babies.
• The Story started because Pierre Omidyar wanted
  to help his girlfriend trade Pez dispensers (btw
  she's now his wife).
• He was in his 20s when he founded eBay - now 33.
• First item auctioned on eBay was a broken laser
  pointer.

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eBays secret

• Auctions are best suited for one-of-a-kind items
  where value is uncertain (differentiated goods).
• So if you want rare goods, what's your 1
  priority?
• to find the rare good
• So where are you going to go?
• where there are the most sellers
• And if you sell them?
• to get the best price
• So where are you going to go?
• where there are the most buyers
• So what is one of eBay's key sources of
  competitive advantage?

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Network Effects

• Network effects product or service becomes more
  valuable the more people that use them.
• Metcalfe's Law (value of a network is equal to
  the square of the number of users)
• Creates a virtuous cycle
• eBay's success attracts more success
• Netflix had a new way of reaching customers
  Long Tail Business
• eBay different in new way of reaching sellers
  Long Tail in item availability.
• Doesnt really matter who selling, matters items.

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Understanding Network Effects (a.k.a. Network
Externalities, Metcalfes Law)
buyers

• When present, product or services become more
  valuable as its installed base expands.
• Why? Users crave
• Exchange opportunities
• Stability
• Extrinsic Benefits
• Characteristics Early competition, bandwagons,
  monopolistic tendencies
• Best products dont always win.

sellers
Users (Windows, PS2)
Developers (programs, game titles)

• Effect on innovation
• Lowers competition with established standard
• Increases innovation within standard

members
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Not just for individuals

• eBay serves as a liquidation market for large
  firms.
• IBM is eBay's single largest seller. 79 of its
  eBay customers are new to IBM (half are small
  businesses).
• Disney sells animation cels used amusement park
  rides that would otherwise end up in a landfill.
• Dell Best Buy use eBay
• In a pitch to the Gap clothing chain they said
  "We have 10,000 Gap items on eBay right now, so
  whether you like it or not, we are a channel.

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eBay 1 with a bullet

• They're 1 overall in
• collectibles
• 40 of all items (roughly) are still collectables
  ('05)
• Bob Dylan's home sold, but Einstein's didn't.
• Bridgeville, CA sold for 1,777,877.
• They're 1 online in
• computers
• photo equipment
• Sporting goods
• Autos. eBay motors moved 13 billion in cars,
  motorcycles, and car parts ('05).

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How often?

• A vehicle sells on eBay every minute.
• a Corvette every three hours
• a motorcycle every 18 minutes
• 560 farm tractors and parts every day
• a book every 2.5 seconds
• a laptop every 30 seconds
• Every hour
• 120 PCs
• 10 diamond rings
• 1200 articles of clothing
• 17 state governments use eBay to liquidate
  foreclosed assets

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eBays future growth International

• Why not just everyone come and use same site?
• Language
• Distance
• shipping costs go up significantly as get out of
  local area. Raises cost to ship over borders.
  Lowers incentive.
• Culture.
• France told Yahoo to ban French users from
  English sites selling Nazi memorabilia. Yahoo
  now tracks users with geographic-filtering
  software Only about 12 of revenues come from
  cross-border transactions.
• Government Regulation.
• Would there even be a debate over listing Nazi
  stuff in France or Germany? No. Why? It's
  illegal
• In Dec. '04 an eBay manager was jailed because
  the service sold a pornographic video, even after
  eBay pulled the video after it was discovered

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International Fun Facts

• A garden gnome sells in eBay Germany every 6
  minutes
• A soccer jersey in the UK every 5 minutes
• A bottle of wine in France every 3 minutes
• Skin care products in China every 30 seconds.

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Why is eBay courting the global market?

• 75 of the world's internet users are located
  outside the US. Offsets slower growth in the US
• Getting in early is the key
• Q1'05 more registered users outside the US than
  in.
• '00 Int'l revenues were 29 million, by '04 46
  of eBays' trading revenues were from abroad
  it's growing twice as fast as the US biz.
• International trading has already (end of '05)
  surpassed US trading.
• eBay has a presence (minority/majority stake) in
  33 countries year end '05. Five years ago it
  had virtually no international presence. B2.0
  1/05
• Leading e-commerce site in 9 of top 10 markets

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Best franchise?

• eBay was voted the best corporate brand in
  Germany.
• All conversations on eBay forums are by locals in
  the local language
• eBay Germany looks German. It doesn't look like
  a US brand
• it's a community-built brand.
• Bought Alando for 47 million just 4 months after
  it was founded by some German business students.
• By the end of '04, Germany was doing 7 billion
  in annualized sales for eBay (vs. 20 billion in
  the US).
• Why successful in Germany?
• Restrictive retail laws
• Most stores closed on Sunday mentioned in
  article also
• Most stores close early.
• Even applies to phone support if you've got
  24/7 to take retail orders you're doing it
  outside Germany.

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A one-loss team (OK, now two )

• Where did eBay lose? Where did it pull out of?
• Japan
• Why?
• Yahoo moved first
• How much of a lead?
• Five months! Five months late and you can forget
  about it!
• Yahoo now sees more than 5 billion in
  transactions a year in Japan. eBay has none.
• Why? Network Effects compounds first mover
  advantage. Metcalfes law, 1st mover advantage
  squared!
• Key is to get in early capture the network
  effect.
• If you're late 2 or 3 you might as well stay
  home. If you're not quick you effectively cede
  the market to Yahoo, Amazon, or others.
• Yahoo is also 1 in Taiwan has operations in
  Singapore, China, and Hong Kong.

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Fixed vs. Marginal Cost

• By year end '06 eBay may earn 1.5 billion on 5
  billion in global revenues.
• It took Microsoft two decades to reach those
  numbers. Shows the globalization power of the
  Net.
• Compare to Dell3B on 55B. Why? No overhead
  costs!
• eBay has 24 margins vs. less than 5 at most
  retailers
• Why does it have such high Margins?
• because it has no inventory, no factories,
  customers do most of the work
• sales, prod. marketing, prod. customer

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v.

• WalMart comparison isn't a fair one the firm
  has 285 billion in sales and 10.27 billion in
  profits. eBay has 44 billion in sales.
• But WalMart also has 16 billion in long-term
  debt. eBay has virtually none
• WalMart has 3.65 margins, eBay has 23.98
  (almost 6.5x better)
• eBay claims avg vendor has 9.9 inventory turns a
  year vs. US retail average of 5.2 turns.

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Key to growth.

• Their business can scale with low marginal costs
  (don't have to build stores, just need to have
  servers in place).
• Fixed amount of money needed regardless of how
  many produce (building, machines)
• Marginal Cost amount of money takes to produce
  one additional product (cloth, shipping).
• How much does it cost eBay to sell one more
  thing, conduct one more transaction, 10 more?
  100,000 more? Nothing
• Value of information goods different because all
  cost fixed cost
• Example of software piracy.

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Information Goods (eBay, software)

• Fixed Costs Cost of a good invariable with
  respect to the number produced (e.g. rent)
• Variable Cost Cost of a good that varies with
  respect to the number produced (e.g. raw
  materials)

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Becoming a Platform

• Moving towards horizontal integration extending
  business at one spot in the value chain.
• Transactions (PayPal)
• Communications (Skype)
• Advertisements (Craigs List)
• Ratings System (eBays own)

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Flattening the World (Friedman 2005)
Outsourcing, Insourcing, and Offshoring
Open Sourcing
Supply Chaining
Informing
Market Making
IT-Enabled Processes
eBay (?)
Emerging Tech, aka Steroids
Operating Systems
Networking
IT Platform
Software Applications
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Problems

• Skype writedown (1.5 B) (October 2007)
• Not well integrated with their existing business
• Skype service deteriorated
• Paid too much (opposite of PayPal problem)
• Havent yet fixed the problem
• Pulling out of Japan and China
• Setting up competitor to Craigs List (???)
• Laid off 10 of workforce (October 2008).

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Whats going on with Ebay
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Analysis Whats going wrong?

• Network effects can only be expanded so faryou
  start to run out of people.
• Fraud is a problem that eBay has never
  effectively dealt with.
• Preoccupied with competition from Google, has let
  Amazon become major threat with Amazon
  Marketplace.
• Refused to break with auction model, even though
  evidence not always successful.

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Response

• Taking advantage of Meg Whitmans retirement for
  massive changes.
• Changing relationships to sellers, giving volume
  discounts
• Changing employee incentives to longer-term
  metrics
• Selling Skype