Internet Mini Case 4 eBay Maryanne M.

Rouse

“June 2, 2002 - WASHINGTON: The U.S. Air Force is looking into the Internet auction of sensitive government aircraft-communications equipment. The sales on eBay Inc.'s online auction site, which were reported by Newsweek magazine, were of parts used in aircraft like the SR-71 spy plane and F-16 fighter. "It is actively under investigation by the Air Force Office of Special Investigations," an Air Force spokesman, Capt. David L. Englin, said Sunday. Antiques dealer Norb Novocin told the magazine he bought the parts in Jacksonville, Fla., for $244 in an unclaimed property sale. The seller was a shipping company which had been hired to take the parts in 1989 from Dover Air Force Base in Delaware to Warner Robins in Georgia, the magazine reported. Mr. Novocin said that he initially called the Georgia base about buying the goods but was turned away. After he was contacted by the Air Force, Mr. Novocin said he turned over the names and addresses of purchasers and agreed to stop selling the equipment. © 2002 Dow Jones & Company, Inc.” In 1995, eBay pioneered online personal trading by creating a web-based platform to bring buyers and sellers together in an efficient, entertaining auction format to buy and sell items ______________________________________________________________________________
This case was prepared by Professor Maryanne M. Rouse, MBA, CPA, University of South Florida. Copyright © 2005 by Professor Maryanne M. Rouse. This case cannot be reproduced in any form without the written permission of the copyright holder, Maryanne M. Rouse. Reprint permission is solely granted to the publisher, Prentice Hall, for the books, Strategic Management and Business Policy – 10th Edition (and the International version of this book) and Cases in Strategic Management and Business Policy – 10th Edition by the copyright holder, Maryanne M. Rouse. This case was edited for SMBP and Cases in SMBP – 10th Edition. The copyright holder is solely responsible for case content. Any other publication of the case (translation, any form of electronics or other media) or sold (any form of partnership) to another publisher will be in violation of copyright law, unless Maryanne M. Rouse has granted an additional written reprint permission.

Internet Case 4-1

pure kitsch. with offline auctions accounting for 5%. Canada.as demonstrated by Newsweek’s report of the sale of sensitive aircraft communications equipment on the site. the company operated trading platforms targeted to the United States. grassroots trading company called Auction Web in September 1995. (eBay exited the market in Japan in 2002. the Netherlands. collectibles. and all eBay users to browse through listed items. New Zealand. the site’s popularity soared. Ireland. Sweden. no-fee. automobiles. Through wholly and partially owned subsidiaries. Online Services Internet Case 4-2 . Belgium.) The company’s consumer base had grown from individual consumers to include merchants. the company turned its first profit. France. and the United Kingdom. The eBay dynamic pricing (auction-style) format permitted sellers to list items for sale. antiques.ranging from antiques. eBay began as a no-registration. and government agencies. eBay was incorporated in California in May 1996 and reincorporated in Delaware in 1998. Minimal fees were introduced. global corporations. and by March 1996. Singapore. high-end artwork. Online services accounted for 95% of 2001 revenues. buyers to bid on items of interest. and jewelry to the practical. and downright bizarre . arcane. Germany. electronics. Spain. eBay also provided offline. the company went public in 1998. After its listing on the National Center for Supercomputing Application’s “What’s Cool” list. small to medium-size businesses. traditional auction services for fine arts. Australia. Italy. Austria. and collector cars. South Korea. Switzerland.

however. photo hosting. however. At the time of listing. The seller could also indicate a reserve price. The eBay trading platform was a fully automated. and third-party advertising. Buy-It-Now. Registered sellers could list an item for sale by completing a short online form. which allowed the highest bidders (the number of bids equal to the number of items) to all receive the item at the same price. There was no charge to buyers. the reserve price was not disclosed to bidders. and final value fees. which allowed the seller to set a price at which he or she would be willing to sell without waiting for the auction to end. eBay’s core business model was still person-to-person selling. which accounted for the largest percentage of its revenue.S. including electronic payments. and choosing whether the listing would expire after 3. and international online trading platforms as well as key features offered through those platforms. Opening Value. sellers paid a small placement fee to list an item: Minimum Bid. 7. or Reserve Price Listing Fee Internet Case 4-3 . The company generated revenue from listing fees. easy-to-use online service that was available 24 hours a day. the minimum price at which the seller would be willing to sell the item. Only sellers with sufficiently high feedback ratings could use the reserve and Dutch Auction features. feature fees. or 10 days.eBay defined the online services segment to include U. only registered users could bid on and list items for sale. 5. Sellers with multiple identical items to sell could take advantage of eBay’s “Dutch Auction” feature. sellers could also choose to use the Buy-It-Now feature. topically arranged. selecting a minimum price for opening bids. Anyone could visit eBay and browse through the items for sale. The registration process was both easy and quick. allowing users to bid on and list items immediately.

00 .30 0.01 .00 Bold Item title is listed in bold type $ 2.99 $50.$ 24.05 Internet Case 4-4 .99 $25.00 .99 $10.$199.00 .$ 49.00 Buy-It-Now Allowed the seller to close an auction instantly for a specified price $ 0.55 1.$ 0.99 $200.$ 9.00 and up $ 0.20 eBay generates additional revenue by offering sellers opportunities to enhance their listings by adding features to attract buyers: Seller Feature Description Fee Featured on Home Page Item listed in a Special Featured section and also rotated on the eBay home page $99.95 Featured Plus! Item listed in the category’s Featured Item section and in the bidder’s search results $19.10 2.20 3.95 Highlight Listing is emphasized with a colored band $ 5.

the buyer and seller arranged for shipment and payment.Final value fees were based on the selling price. eBay users were encouraged to review a seller’s feedback profile before bidding on an item. For items sold at over $1. My eBay gave users a report of their recent activity. criticisms. and other differentiating features such as My eBay. Users who had their own web pages could create links to their home pages. those without home pages could use About Me to create them free of charge. items bidders were watching.000. and recent feedback. the fee was 5.000 was as above. selling.25% of the first $25 plus 2. If so (or. Internet Case 4-5 . Users who developed good reputations had color-coded star symbols placed next to their user names to indicate the number of positive feedback ratings received. The fee for items sold at up to $25 was 5. When an auction ended.75% of the amount over $1.01 and $1. For items sold at between $25. the fee for the first $1. The company never took possession of the item. Although eBay had no power to force a buyer or seller to complete a transaction. eBay automatically notified the buyer and seller via e-mail. and positive comments and included ratings. The company’s SafeHarbor staff investigated users’ complaints of possible misuse of the site and could take actions ranging from issuing warnings to suspending users from bidding or listing items for sale. it could ban repeat offenders from trading on the site Platform enhancements included Trust and Safety Programs such as the Feedback Forum. with an additional 1. if the buyer elected Buy-it-Now). account balances. the buyer typically paid for shipping.000.000. SafeHarbor. favorite categories. The Feedback Forum encouraged users to record comments. the eBay system validated whether a bid had exceeded the minimum or reserve price. The company organized feedback to create user profiles that contained complaints.25% of the sale price. about their trading partners. including bidding. both favorable and unfavorable.75% of the amount over $25.

such as high-end photo equipment. Xerox.$. the annualized value of cars and car parts sold through the site exceeded $1 billion.15 . All told. By early September 2002. eBay estimated that big companies made up 5% of its sales .20 they could expect from traditional liquidators. it created a new trading category. Internet Case 4-6 . Business and Industrial Sales In early June 2001. Dell. ReturnBuy (a closely held merchandise liquidator). also sold well. on eBay. and within two years. individual items. eBay announced that it would create stores on its web site featuring goods from retailers. While many items were sold in lots. eBay began successfully cultivating such corporate sellers as IBM. when it saw sales of merchandise picking up in an area.roughly $500 million a year. and eValueville (one of the largest liquidators of apparel for Bloomingdales). Postal Service. for example. eBay noticed that users were beginning to sell full-size cars in an area of the site devoted to toy and collectible cars. The key driver of growth in eBay’s business and industrial sales segment was that sellers could recoup $. Such sellers were contributing to a shift in the composition of goods sold on eBay from “collectibles” to “practicals” (“practicals” included everything from computers and sporting goods to power drills and athletic socks). up from just a dozen a year earlier. the U. at least 71 large companies were selling outdated merchandise. Motorola. sold $1 million of outdated phones a month. For example.S.eBay monitored the trading activity in existing categories and. from laptops to tractors. The company formed a separate auto category. Motorola. In late 1998. Recognizing the significant revenue growth opportunities offered by large businesses. Home Depot.45 on the dollar for excess inventory rather than the $. which started using online auctions in April 2002.

With galleries in San Francisco and Los Angeles and representatives throughout the West and Midwest. but PayPal’s earlier Internet Case 4-7 . the more attractive the system became to potential new users). The PayPal Acquisition In early July 2002. The challenge for eBay would be to find a balance between preserving the eBay experience that small sellers and seasoned buyers found compelling while growing new revenue sources. for $1. Offline Businesses eBay’s offline businesses included Butterfields Auctioneers Corporation and Kruse International. eBay agreed to acquire Internet-payment provider PayPal. established in Indiana in 1971. Kruse International. and an analysis of transactions showed that eBay auctions were. PayPal. bringing higher prices than ever before. eBay had attempted to build its own electronic–payment service. antiques. a situation that. was the largest auction house headquartered on the west coast of the United States. created both interdependency and rivalry between the two businesses. was widely used to transact business by buyers and sellers on eBay. before the announced merger. both of which provided traditional auction services. Butterfields. was one of the world’s leading collector car auction companies. an increasingly popular electronic payment mechanism with a “viral” effect (the more people who signed up. Billpoint. Inc. However. and collectibles.. eBay management insisted that the company had not lost sight of small sellers.4 billion in stock. adding to the legitimacy of the site and benefiting all sellers. established in 1865. it specialized in fine art. The company did concede that it provided special promotional benefits and discounts to some corporate sellers but noted that those concessions also drove added buyer traffic to eBay. on average.Some small sellers did not welcome the corporate merchants and expressed concern about the site becoming the QVC of the Internet.

Industry analysts noted that the acquisition made strategic sense for eBay. engineers.) eBay planned to shut down Billpoint when the acquisition was completed. Highly popular among online casinos (estimated to account for 10% . sabotage. 70% were handled by PayPal. software. and intentional acts of violence. and credit card information for traders who used an open account balance. PayPal would no longer facilitate gambling transaction once the acquisition was complete because of the murky legal and regulatory issues eBay believed were involved.8% of total merchandise sales it collected from sellers. and support staff) to meet the demands of exponential growth. PayPal was also used in thousands of other transactions. hardware/software problems. Systems were also vulnerable to break-ins. The system also stored registration. Although the company used multiple. including person-to-person money transfers. including pornography sites and small online businesses that did not accept credit cards directly. billing.entry into the market and superior technology created entry barriers that eBay found difficult to overcome. Internet Case 4-8 . Site Operations and Technology The eBay site operated on an internally developed software platform that comprised a scalable user interface and transaction processing system that supported the trading cycle.15% of the company’s revenue in 2003). (Of electronic payments that occurred among eBay users. its systems were vulnerable to damage or interruption resulting from weather. giving it a chance to capture payment fees on top of the 7% . and was accepted at many e-commerce web sites. including e-mail notifications and confirmations. and sent daily status updates to active buyers and sellers. eBay constantly added to its infrastructure (hardware. and telecommunication failures. redundant host sites and emergency power backup. Although the biggest chunk of PayPal’s business (67%) came from eBay users.

6 4. eBay emphasized effective merchandising of users’ product offerings. and communication via direct messaging. Dell. Amazon. AmericanGreetings.com 10. To attract new users.com Shopping Visitors 24.com sites 3.com 6.Marketing eBay used market penetration and product and market development to support aggressive growth. the company relied on word of mouth.7 Finance Internet Case 4-9 .5 Property 1. Yahoo. eBay.1 11. The New York Times monthly analysis of web site hits that appeared in the newspaper’s business section on September 9. new features. Amazon. To retain existing users and increase their online activity.com 2. Yahoo. eBay.5 5. and participation in trade shows and other events.com sites 3.com 4.0 8. and print media.com 5. To build brand awareness and interest. public relations. including radio.com At Work Visitors 11. television. AmericanGreetings.9 4. and it engaged in more traditional promotional activities. eBay made strategic purchases of online advertising. provides insight into eBay’s popularity and market share: Web Sites/Retail At Home Property 1. ColumbiaHouse.3 21.com Shopping 4. 2002.0 2.6 17.

freedom of expression. Several states had proposed laws that would limit the ways in which personal information was collected and provided to third parties.wsj. The successive year-over-year growth was primarily the result of increased online auction transaction activity. and intellectual property rights were being debated in 2003 at both the state and federal levels. (Note: Complete annual and quarterly SEC filings are available via the FreeEdgar site. those below-the-line costs had decreased for 43% of sales in 1999 to 34% in 2001. Although the company provided only the platform for exchange. Negative publicity from deceptive sellers could also harm Internet Case 4-10 . however. Because it was unable to prevent fraudulent activity on its site.1 million for 2001). Product development and G&A costs had followed a similar pattern.4 million at the end of 2001).) Internet Fraud and Negative Publicity Laws regarding liability were still evolving and remained vague.eBay’s net revenue from both online and offline activities grew from $41. because of the growing popularity of the Internet and online services. fraud. many potential new laws that would address issues from taxation to privacy. but it was also fueled by acquisitions.com.freeedgar.com. The company had taken advantage of its economies of scale to drive cost of sales from 26% in 1999 to 18% in 2001. a five-year revenue growth significantly higher that the industry average. www. eBay was less leveraged and more profitable than industry competitors.ebay.com. the company’s own site. and gross merchandise sales ($9.1 million. reflected in the growth of the number of registered users (42. it had still been the subject of suits by individuals who believed they had been defrauded on the eBay site. and www.3 billion for 2001).82 million for fiscal 2001. pricing. www. as a percentage of sales. eBay could face potential liability for misuse of its site by users.37 million for fiscal 1997 to $748. Cash provided by operations in 2001 was $252. listings (423. Although sales and marketing had increased on an absolute basis.

including online and offline retailers. Competition eBay’s competitive space was characterized by rapidly changing technology. Yahoo! withdrew from the online auction business in most European markets after negotiating a 2 ½-year marketing pact with eBay. Owning PayPal would open eBay up to new risks. In a surprising move in late May 2002. and uBid. evolving industry standards. France. including payment fraud. CNET. Earlier in the year. eBay would advertise throughout Yahoo! in the United Kingdom. and changing customer demands. eBay had withdrawn from the market in Japan but still actively pursued other Asian markets. Italy. and virtually all online and offline commerce venues and participants. and eBay would be featured as the preferred auction service on Yahoo! in the region. and Spain. Internet Case 4-11 . Ireland. Amazon. catalog and mail-order companies. distributors. Under the terms of the agreement. auctioneers. Concerns about fraud could serve as a damper on eBay’s rapid growth via new user acquisition.the company. liquidators. The company encountered aggressive competition from numerous sources. Marketing strategies pursued by eBay and its online competitors to attract large businesses were likely to shift the power of buyers/suppliers in the industry. Direct competitors in the auction trading via e-commerce subsegment included Yahoo!. Germany. frequent new service and product announcements and enhancements.

Internet Case 4-12 .

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