CASE eBay, Inc.

"We intend to achieve our mission of becoming the world's most efficient and abundant marketplace by creating marketplace conditions that enable our users' success. continuing to foster the vibrancy of the world's largest network of buyers and sellers and by making the online trading experience faster, easier and safer, we better enable the success of our user community." o , . online , ,

OF TREMENDOUS (terastia)ADVANTAGES OF E-COMMERCE IS TRULY ALL OF world's shoppers are potential customers for a vendor,( ) n matter their physical location. Not only has eBay handsomely captured a lions share of the American online auction(dimoprasia) consumer market, but eBay's offerings also extend to some 18 countries, as well as Latin America. As a result, eBay has emerged as a global organization able to reach a significant customer base. Given its electronic medium, eBay is able to expand its reach much less expensive1y than a traditiona1 brick-and-mortar business. Phi1osophically speaking, eBay has created a marketplace here one person's trash is another person's treasure. the Beginning: Scarce Resources and Unlirnited Wants Economics is the study of scarce resources and un1mted human wants. Pierre Omidyar, founder of eBay, had a vision of a utopian community founded o the basis of fundamental economics. The vision underlined the concept of having a selfsustaining Platform that would be ab1e to adapt to user needs without any heavy intervention from a centra1 authority. Omidyar began the business as an: online hobby in September 1995, cal1ing it Auction Web. The enterprise started out as a so1e proprietorship. It was some individual's desired want to own a "broken laser pointer." This scarce resource was provided by Omidyar, through his own personal web site auction that he developed. The site was satisfying this individual's want, but Omidyar knew that there was more to his Auction Web than met the eye.

 unlmted . Pierre Omidyar, eBay, o . , . Omidyar : 1995, Web . . " ." Omidyar, . , Omidyar Web .

Auction Web was incorporated in California in May 1996 with partner Jeff Skoll, a Stanford MBA. The company then became known as eBay (for "Electronic Bay"). When Omidyar and Skoll began generating a large amount of traffic and charging customers only $0.25 for listings, their mailboxes were overflowing with checks, and they did not have time to even open the mail. In 1996, eBay then grew to a one-room office, a part-time employee to handle payments, and a salary of $25,000 each for Omidyar and Skoll. eBay, Inc., was reincorporated in Delaware in 1998 and completed its IPO. Web 1996, Jeff Skoll, Stanford. eBay ( "Electronic Bay"). Omidyar Skoll $ 0,25 , , . 1996, eBay, - , , 25.000 Omidyar Skoll. eBay, Inc, 1998 .

As eBay evolved, Omidyar envisioned a world of buyers where scarce resources were reduced. Through an Internet platform and the auction-based business model, this would be very possible. eBay has grown to become a consumer-driven buyer-seller platform. The idea was to develop a community-driven process, where the community-an organic, evolving, self-organizing web of individual relationships, formed around shared interests-would handle tasks that other companies handle with customer service operations.

On May 7, 1998, eBay's founder, Omidyar, now former CEO, became Chairman of the Board and brought in a seasoned veteran of consumer marketing, a Harvard Business School MBA, Meg Whitman. Whitman was brought in to direct corporate strategy to continue the accelerated growth rate of eBay. Whitman brought global management and marketing experience through years of service in brand management of Playskool and Mr. Potato Head. Upon Whitman's arrival at eBay, her focus was on expansion and global development: "With more than 10 million auctions completed since eBay's inception, we are changing the face of traditional commerce by giving power to individual consumers, as well as by allowing them to extend their buying and selling reach around the world. I am delighted to be joining eBay," she said. 7 1998, eBay, Omidyar , , , Harvard Business School , . eBay. Playskool . . eBay, : " 10 eBay, , , . eBay ", .

Company Background
Whitman followed Omidyar's vision, believing that eBay's success is attributable to the notion that people are inherently good. eBay, Inc., incorporated in May 1996, operates a marketplace in which anyone, anywhere, can buy or sell practically anything. Through eBay's PayPal service, any business or consumer with e-mail and a credit card or bank account can send and receive online payments securely, conveniently, and cost-effectively. Whitman's goal is to create, maintain, and expand the technological functionality, safety, ease of use, and reliability of the trading platform while at the same time supporting the growth and success of its community of users. Technology is another factor in eBay's success. eBay's trading platform is a-fully automated, topically arranged, intuitive, and easy-to-use online service that is available 24 hours a day, 7 days a week (subject to a weekly scheduled two-hour maintenance period). The platform includes software tools and services that are available for free or for a fee and that allow buyers and sellers to more easily trade with one another. Its software tools are designed to make its trading process easy and efficient. "The depth, breadth and potential of our business gives us great confidence in the future," said Whitman, now President and CEO of eBay. "The eBay marketplace is thriving across geographies, trading categories, pricing formats, listed items, user growth, and the services 0 we offer our community." For Whitman and her executives, this was a major challenge-to uncover eBay's potential.

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Governance
The success of the eBay community and company are fundamentally based on openness, honesty, integrity, and trust. eBay must have a strong board and management team to be effective toward not only stockholders but also stakeholders of the company. eBays focus is on the effective use of building and strengthening the tools for online relationships. Exhibit 1 shows biographies of the members of the Board of Directors of eBay, Inc. eBay , , , . eBay , . eBay online . 1 eBay, Inc

Services Customer Support There is intrinsic value in the customer service that eBay provides. eBay does not necessarily provide customer service to buyers and sellers; however, it provides the tools that allow buyers and sellers to easily trade with one another. These software tools are available to buyers and sellers for free or for a fee (see Exhibit 2). Exhibit 2 Software Tools EBay Anywhere: Provides wireless connectivity to eBay. Sellers Assistant: Allows one to automate e-mail, project management, and list and track listing; provides pictures and HTML and formatting for sellers, Turbo Lister: This desktop-based selling tool facilitates creating listings to post on the eBay site. Turbo Lister helps a seller list items on eBay more quickly and easily. Selling Manager: Automates the selling process,

Freight Resource Center: Allows users to calculate shipping costs. PayPal: Facilitates online exchange of funds.I .

eBay prides itself on giving buyers and sellers the opportunity to be able to contact each other through the use of e-mail, text messaging, and phone. eBay enhances the user experience through pretrade and posttrade services. The listing process is simplified through pretrade services including photo hosting, authentication, and seller productivity applications. Posttrade services include insurance, payment processing, vehicle inspections, shipping and postage, and escrow. Services such as these are provided through third- party contracts.

Trust and Safety Programs

The Feedback Forum allows users to provide comments on other eBay users. Feedback is related to specific transactions of trades they personally dealt with. Positive representations are color coded. Users are encouraged to review feedback before making trades with other users. This creates trust within a community of users. The Feedback Forum reduces anonymity and uncertainty of dealing with unknown trading users.

Safe harbor Program

This program provides trading guidelines and information regarding disputes and the misuse of the eBay service. In this program, eBay staff are investigators of inappropriate behavior: The Safe Harbor group is organized into three areas: Investigations, Fraud Prevention and Community Watch. The Investigations team investigates reported trading infractions and misuse of the eBay service. The Fraud Prevention department provides information to assist users with disputes over the quality of the goods sold or potentially fraudulent transactions and, upon receipt of an officially filed, written claim of fraud from a user, will generally suspend the offending user from the eBay service or take other action as appropriate. The Community Watch department investigates the listing of illegal, infringing or inappropriate items on the eBay.com site and our international websites and violations of certain of our policies.

My eBay This program allows users to receive information about their online eBay activity. This information report includes recent activity, bidding, selling, account balances, favorite categories, and a feedback report. eBay users can also link their personal web pages to the My eBay portal. The About Me home page can include personal information, items listed for sale, eBay feedback ratings, images and links to other favorite sites.

Competitors
We expect competition to intensify in the future as the barriers to entry into these channels are relatively low, as current offline and new competitors can easily launch online sites at a nominal cost using commercially available software or partnering with any one of a number of successful electronic commerce companies. eBay, Annual Report (2002) eBay is in an intensely competitive industry. Profitability can be maintained through preserving and expanding the abundance and diversity of the user community as well as enhancing the user experience. However, Whitman, President and CEO, faces the challenge of high operating expenses, which can lead to declines in net income. The Internet provides new, rapidly evolving and intensely competitive channels for the sale of all types of goods. eBays broad list of competitors is listed in Exhibit 3. In addition, features of eBays fixed-price business compete with the major Internet portals, such as AOL, MSN, Yahoo!, Amazon.com, and others. Seasonality is a factor in eBays globally competitive environment. Users reduce their online activities during holidays such as Thanksgiving and Christmas as well as the change from spring to summer.

Global Business Strategy

Whitman has seen key opportunities for growth in the United States as well as internationally. Whitman cited international acquisitions, online merchandising, and marketing as levers to achieve the company goals. Overall, eBay receives three major sources of revenue growth: U.S. business, International business, and online payments. For future expansion, Whitman wants to focus on new user acquisition and marketing. Online auctions, like many online communities, rely on positive relationships among those transacting business. One area of concern for eBay is the threat from fraudulent auctions (e.g., seller has no intention of shipping item), counterfeits, and knockoffs. Each of these areas erodes the trust needed for eBay to flourish. Even though eBay has in place various monitoring measures and de-listing capabilities, unscrupulous individuals or criminals are often one step ahead of eBay and likely will continue to identify means to undermine the trust-based marketplace. As a result, unethical behavior will continue to be a threat to eBay, and its ability to manage such acts, however strong, must be considered a weakness as potential customers may harbor concern about the eBay environment. For example, Jed Conboy, a district attorney in New York, purchased a baseball he believed was signed by Ted Williams for $367 on eBay.5 The autograph was a fake, and Conboy decided to sue eBay. As in many similar cases, the court ruled in favor of eBay. The primary question is whether eBay is an auction house or a marketplace. If the courts view eBay as a classic auctioneer, the company would have to vouch for the products sold on its site. However, eBays lawyers have argued successfully that eBay is no more than an independent intermediary that does not take sides in the transaction. Up to this point, the courts have accepted this defense. This legal precedent has allowed eBay to grow and prosper without paying penalties for fraudulent products sold on its site.

Acquisition of PayPal
As a result of the 2001 financial analysts conference, on October 3, 2002, eBay acquired PayPal, Inc. PayPal enabled any business or consumer with e-mail access and a credit card or bank account in 38 countries to send and receive online payments securely, conveniently, and cost-effectively. Whitman noted, eBay and PayPal have complementary missions. We both empower people to buy and sell online.6 eBays intentions were to accelerate the velocity of trade on eBay by eliminating the various obstacles presented by traditional payment methods. Based on the same financial infrastructure of bank accounts and credit cards, PayPal and eBay created an international payment system. In July 2002, eBay announced plans to acquire PayPal, an online payment company, for $1.5 billion.7 Although the acquisition provided many opportunities, $7 billion in annual sales on eBay are completed using something other than online payment. And the acquisition of PayPal also came with some legal baggage. A suit was brought against PayPal by First USA Bank in September 2002. alleging infringement of two patents pertaining to assigning an alias to a credit card. PayPal has a solid defense against this accusation, but even if successful in court, the defense will be costly and. divert managements time. A class action suit was also brought against PayPal in February 2002, claiming that the company violated the states consumer protection laws by restricting customer accounts and failing to promptly unrestrict legitimate accounts. If unsuccessful in its defense, PayPal will have to change its anti-fraud operations in a way that could harm the business in addition to paying significant damages. Even if PayPal is successful in this suit, the trial has damaged the companys reputation and will be costly in terms of legal fees and managements time.

Technology
Much of eBays success is based on the companys ability to quickly analyze sales trends and capitalize on the movement in specific product categories. In order to compete in this area, eBay requires extensive data mining and data storage software. By taking advantage of the latest product offerings and implementing the software in a coherent architecture, eBay is able to process millions of transactions a day while gathering information on specific segments. It also revamped its application development architecture to support the Java 2, Enterprise Edition, framework. This programming environment adds a new level of flexibility that was not available with the older C++ development tools. Buyers and sellers on eBay make an average of 30 million searches a day.8 Due to this volume, eBay is constantly trying to improve its search capability. Bidding on items increases dramatically when eBay adds a new search feature; therefore, eBay has constantly invested in improving technology to provide more accurate results as quickly as possible.

Marketing eBay is recognized as one of the few successful dot-com companies. To realize such achievements, eBay has developed a great number of marketing strengths. Although eBay has advantages as a first mover, to maintain its competitive edge, the company has identified several ways to create and sustain customer relationships. In particular, the company tries to achieve strengths in each of the four Psprice, promotion, product, and place. The fruits of these endeavors is demonstrated by one of the longest customer hang- times9 on the Internet.10 Furthermore, a strong argument could be made that eBay is synonymous with online auctions and vice versa. eBays offerings are related to pull rather than push marketing. eBays product offerings are a result of this user demand. eBays customers must sell products successfully in order for the digital marketplace to be economically viable; therefore, it is in eBays best interest to ensure that buyers and sellers alike are satisfied. eBay does not produce the items sold on its site, but it provides the tools and forums that enable the efficient interaction between buyers and sellers. These tools and forums are the keys to eBays success. For eBay to gain competitive advantage, customers must perceive a value from eBay that exceeds the values of potential rivals or alternatives. Tremendous brand recognition enables eBay to draw an ever-expanding array of customers. With tens of millions registered users and listings of some 16 million items worldwide, clearly eBay has realized strong product promotion." Surely those wishing to sell or buy items are more inclined to enter a marketplace that has the most significant listing of items. Thus, eBay currently attracts a growing cascade of customers because it appears to be the sensible site for the world of online auctions. Another marketing strength of eBay is its protection of trademarks, copyrights, patents, domain names, trade dress, and trade secrets. eBay employs confidentiality and invention agreements with employees and contractors, as well as nondisclosure agreements with business contacts. Registration and upkeep of these intellectual properties are critical to success. The value that eBay offers is to make inefficient markets more efficient. Traditional offline marketplaces can be inefficient because: a They are fragmented and regional in nature, making it difficult and expensive for buyers and sellers to meet, exchange information, and complete transactions h They offer a limited variety and breadth of goods a They often have high transaction costs due to intermediaries a In particular, large markets with broad buyer and seller bases, wide product ranges, and moderate shipping costs have been successful on eBay. Its marketplace is most effective, relative to available alternatives, at addressing markets of new and scarce goods, end-of- life products, and used and vintage items. eBay has several core competencies that translate into competitive advantages. Competitive advantages are subject to becoming outdated and irrelevant if a company does not work to continuously adapt its strategic outlook. eBay has been able to enable its users to have successful trading experiences through continuous improvements. eBay has also been able to provide exceptional customer service through its Power Seller Program, where people who sell over a certain total dollar value per month receive personal support through an exclusive toll-free phone number.

Financial Performance
EBays income is mainly generated from transactions fees, third-party advertising, end-to- end services, and offline services in its U.S., International, and Payments segments. EBays sales have increased every year, from $224.7 million in 1999 to $1,213 million in 2002. This yields a compounded annual growth rate (CAGR) of 75%. Over the same period, net income increased from $9.6 million1 to $249.9 million. This is a CAGR of 196%. The higher growth rate of net income over sales can probably be attributed to expenses growing at a slower rate than sales. During the period from 2001 to 2002, eBays cash holdings have more than doubled from $524 million to $1,109.3 million. This amount of cash is more than enough to cover debt obligations. From 1999 to 2002, long-term debt has decreased from $15 million to $13.8 million, a CAGR of 3%. From 2001 to 2002, long-term debt increased from $12 million to $13.8 million. In eBays global arena, international sales increased 165% over sales in 2001. International sales make up 26% of total revenues, up from 7% in 2000. Exhibits 4 and 5 are eBays income statement and balance sheet, respectively. The Future Whitman now faces some critical issues. She notes that eBays core competencies and competitive advantages are what allow eBay to be successful. Whitman is confident that eBays business model is sound and the vision of becoming the worlds online marketplace is a matter of enhancing the efficient use and effectiveness of eBays products and services. Whitman faces problems in that eBay needs to be able to develop new services, features,

Year Ending December 31 2000 2001 Net revenues $1,214,100 $748,821 Cost of net revenue: 213,876 134,816 Gross Profit: 1,000,224 614,005 Operadng expenses: Sales and marketing .349,650 253,474 Product development 104,636 75,288 General and administrative 171,785 105,784 Payroll taxes on stock option gains 4,015 2,442 Amortization of intangible assets 15,941 36.591 Merger related costs ... Total operating expenses 646,027 473.579 Income from operations 354,197 140,426 Interest and other income, net 49,209 41,613 Interest expenses (1,492) (2,851) Impairment of certain equity investments (3,781) (16,245) Income before income taxes and minority 398,133 162,943 interests Provision for income taxes (145,946) (80,009) Minority interests in consolidated companies (2,296) 7,514 Net income $ 249,891 $ 90,448 Net income per share: Basic $ 0.87 $ 0.34 Diluted $ 0.85 $ 0.32 Weighted average shares: Basic 287,496 268,971 Diluted 292,820 280,595 Note: Notes were deleted. Exhibit 4 Consolidated k Income Statement: eBay, Inc. (Dollar ^mounts in thousands, except amount) Source: eBay, Inc., SEC Form 10-K (December 2002), p. 95.

2002 $431,424 95,453, 335,971 166,767 55,863 73,027 2,337 1,433. 1,550 300,977 34,994 46,337 (3,374) 77,957 (32,725) 3,062 $ 48,294 $ 0.19 $ 0.17 251,776 280,346

per share

and functions in order to stay ahead of its increasing competition. Whitman needs to decide how eBay can exploit its potential and consider the following approaches to ensure future growth of the company: Invest large portions of revenue in research and development in order to develop new service features and functions 2. Make acquisitions and strategic partnerships to increase success in new categories and specialty stores 3. Recruit personnel familiar with certain market segments to allow eBay to develop services better suited to those particular segments 4. Enter the business-to-business auctions market to allow eBay to offer higherpriced items and collect higher commissions 5. Make strategic alliances with shipping companies such as FedEx
1.

In growing, eBays management will have to take care not to destroy brand value and image as well as remain an auction site, eBays area of core competence.

Year Ending December 31 Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable Funds receivable Other current assets Total current assets Long-term investments Restricted cash and investments Property and equipment net Goodwill Intangible assets net Deferred tax assets Other assets

2002

2001

$1,109,313 89,690 131,453 41,014 96,988 1,468,458 470,227 .134,644 . 218,028 1,456,024 279,465: 84,218 13,380 $4,124,444

$ 523,9 199,45 101,7C 58.6P 883.8C 286^99 129,61 142,34 187,82 10,81 21,54 15,58 11,678,52

Liabilities and StockholdersEquity Current liabilities ' .. Accounts payable v$' 47,424 $ 33,23 Funds payable and amounts due to customers 50,396 Accrued expenses and other current liabilities 199,323 94,59 Deferred revenue and customer advances 18,846 15,58: Short-term debt 2,970 16,11 Income taxes payable 67,265 . 20.61 Total current liabilities .386,224; 180,13' 12,008 3,629 15,864 37.751 13,79! 111,84: 22,87* 33.23: 567,97; 3,108,443 (5,253) 414,474 ! 38,498 3,556,473 $4,124,444 311 249,391 Long-term debt Deferred tax liabilities Other liabilities Minority interests Total liabilities Commitment. Stockholders equity: Convertible Preferred Stock, $0,001 par value; 10,000 shares authorized; no shares issued or outstanding Common Stock, $0,001 par value; 900,000 shares authorized; 277,259 and 311,277 shares issued and outstanding Additional paid-in capital Unearned stock-based compensation Retained earnings 5 Accumulated other comprehensive income (loss) Total stockholders equity Total liabilities and stockholders equity Note: Notes were deleted.

Exhibit 5 Consolidated Balance Sheets: eBay, Inc. (Dollar amounts in thousands, except per share amounts) 27'. 1,275,24( (2,367; 164,635 (8,645 1,429,131 Sl.678.52S Source: eBay, Inc., SEC Form 10-K (December 2002), p. 94.