Of all the promises of the Internet, nothing works quite like eBay. Its unique combination of commerce efficiency and breadth is largely supported by flat-out entertainment—the non-stop global bazaar atmosphere of thousands of auctions for virtually any product. But every day its evolution is taking it further into a more conventional form of retailing, where consumers can skip the adventurous auction route and pay a fixed-price for a product directly from a major retailer or manufacturer.
And now, after years of non-stop expansion into a new retail universe, eBay
Inc. faces a crucial turning point in its evolution: Can it combine the conventional
world of retail brands and fixed prices with the still-popular auctions, most
of which are operated by small individual sellers? More important, can these
small independent sellers survive while sharing the same web site with the likes
of Sears, Roebuck and Co. and Dell Computer Corp.? And if they don’t, will eBay
itself remain the dominant force it has become or evolve into just another liquidator
for excess branded merchandise?
The answers to these questions lay within the basic formula that makes eBay
what it is: a tool for driving commerce into its most efficient mode. If that
efficiency drive goes too far, eBay could whittle down to a far smaller number
of sellers and cease to be what it is today. But if its efficiency engine continues
to spawn new business opportunities, as it has done throughout its brief history,
then it surely appears that the sky’s the limit for eBay’s expansion.
Survival of the fittest
Sellers attracted by the new business opportunities will find, however, that
eBay is not and never has been for the meek. “It’s very much a Darwinian environment,”
says Scott Wingo, CEO of ChannelAdvisor Corp., which represents thousands of
sellers, from small independents to major retailers and manufacturers. You either
become efficient at what you’re selling, he adds, or you’re out of the game.
Or you start selling something else.
The challenge facing eBay management is both to help sellers be better at
what they do individually and to enable eBay to channel sales of a still growing
array of 18,000 categories of products.
“Our highest order is to understand category management,” says Jeff Jordan,
senior vice president and general manager of eBay U.S.
To
be sure, eBay has built up a formidable presence as a global site for commerce
in the few years since it launched. For an organization that started in 1995
as an auction site for quirky collectible items, eBay is surging at breakneck
speed beyond what anyone had imagined: 55 million registered users worldwide;
$15 billion in the value of transactions, or gross merchandise sales, for 2002;
$4 billion in non-auction, fixed-price sales, and a base for big-name retailers
and manufacturers as well as small sellers of just about any kind of product.
It’s forecasting $3 billion in revenue by 2005, up from $1.2 billion last year,
and overall transaction volume by 2005 of $32 billion.
Earnings also have been surging, and at a slightly faster pace than revenues.
Through the first nine months of last year, eBay earned $162.9 million on $800.2
million in net revenue, up from $64.5 million on net revenue of $529.4 million
in the prior year’s first nine months.
Its market position promises to further that performance, analysts say, but
only if eBay can maintain the kind of dominance it enjoys in auctions as it
breaks out into different modes of selling. “EBay completely dominates the auction
space, nobody’s been able to touch them,” says David Kathman, an e-commerce
stock analyst with Chicago-based investment research firm Morningstar Inc. “But
as they get into more areas such as fixed prices and defined retail stores within
eBay, it will be harder to keep up that dominance.”
Indeed, eBay’s size, scope and fast growth raise even more questions about
its future: Can it continue to grow, or has it reached the limit of expansion?
As it moves more toward fixed-price sales instead of auctions, and sells through
defined stores for categories like consumer electronics, how will it fare against
the likes of Best Buy Co. Inc.’s successful BestBuy.com and the granddaddy of
the web, Amazon.com?
Strong fundamentals
Meanwhile, eBay has another constituency beyond retailers to keep happy: Wall
Street. If eBay’s growth slips, many analysts doubt it will be able to maintain
its lofty stock price—recently $60-$70—at high multiples of 80 times earnings
and 19 times revenue. “It’s an expensive stock and it implies a lot of growth
ahead and margin improvement,” says Kathman, who figures eBay’s stock has a
fair value of about $47 based on current earnings. “The problem is that no one
can be sure how much they can keep growing and how fat their margins will become.”
Such concerns don’t arise in the public statements of eBay executives and
managers. “The power of our business model along with the ongoing dedication
and success of our buyers and sellers gives us great confidence in the future,”
eBay CEO Meg Whitman said during an October conference with analysts.
And the company is beginning to tell its story to the public. In November,
eBay launched a television campaign to build its own brand. “It’s intended to
describe eBay’s unique marketplace,” says Jordan. The TV campaign is being supplemented
by print advertising describing the broad opportunities to buy specific types
of products, such as sports equipment, consumer electronics and motor vehicles.
In addition to its so-far-phenomenal business model, eBay operates with some
strong fundamentals. Unlike Amazon, it has little debt. It operates with an
operating profit margin of 30% or more, says Jeetil Patel, an analyst with Deutsche
Bank Securities Inc. And the latest version of its technology platform — a customized
version of IBM’s Websphere operating platform, along with Oracle Corp. databases
— is recognized as providing ample capacity for growth in sales transactions
and online merchandising displays, a far cry from the platform that raised serious
doubts about the company’s viability when it crashed twice in 1999. EBay’s new
platform will support the company’s drive to channel sales for major brands
as well as small individual sellers, Patel adds.
That platform is vital now to eBay’s success as it evolves far beyond its
early roots as an online tool for selling unusual products by unknown and at
times distrusted individual sellers with cute online monikers. Although its
early format as a bazaar for individual sellers discouraged participation by
companies heavily invested in brands, eBay has since become as well known as
a place to buy and sell major national brands as it is for garage-sale items.
“EBay has made itself a very good place for large companies like Dell Computer
Corp. to do business,” says Mark Sutton, director of marketing and business
development for FairMarket Inc., which provides auction platforms for Dell,
IBM Corp. and others that sell excess products over eBay. “It doesn’t tarnish
their brands at all. Those worries are nowhere in sight these days.”
David Schofman, CEO of FrogTrader Inc., which channels sales on eBay for brand-name
companies such as Callaway Golf Co., says eBay meets two crucial demands for
selling branded products: a huge universe of buyers, including 21 million unique
monthly visitors, and a system for supporting a brand’s image. Indeed, large
numbers of sellers alone won’t do the job, he says. EBay’s category managers
and its technology platform provide ways of promoting a brand’s image, such
as by enabling sellers to build an “About Me” section of promotional information,
similar to having a personal floor rep or the tags on a garment sold in a store.
“It’s very much a relationship business,” Schofman says.
More purchasing options
Although eBay applies the same fee structure to large and small sellers, regardless
of their sales volume, it offers major brands opportunities to toot their horns.
In merchandising options intended for companies with generous marketing budgets,
eBay offers them multiple ways to call attention to brands and individual eBay
stores. For example, retailers can pay about $500 per month to be listed as
an “anchor store,” causing their linked icon to appear in a separate box when
a shopper searches for a particular product category.
EBay says that major brands account for 3-4% of sales, and that it expects
brands to account for as much as 10% over the next several years, as it expands
beyond the 20 or so major retailers and manufacturers currently selling on eBay.
Welcoming brands to eBay is one example of eBay’s willingness to walk down new
avenues. As a result, shoppers browsing through eBay stores as well as other
sections find more purchasing options than in the past. Instead of just auctions,
buyers can opt to purchase many products through a “Buy It Now” mechanism that
lets them skip a product’s auction and pay a pre-set price. Fixed-price sales
account for about 22% of eBay’s overall revenues and as much as 32% of listings.
Although eBay expects fixed-price sales to grow, it figures they will be incremental
to auction sales and not rise significantly as a percentage of overall sales.
The strategy of promoting fixed-price sales and sales by brand-name companies
is also taking root at sites that compete with eBay. But none appears to be
approaching eBay’s scale in both its multiple product categories and its modes
of selling. At uBid Inc.’s uBid.com, for instance, consumer-to-consumer sales
have been discontinued in favor of sales, both auction and fixed-price, of products
owned and shipped by uBid. And a new Electronics SuperStore at uBid is selling
consumer electronics only at fixed prices. (see box, page 18.)
Other primarily fixed-price competitors, such as Yahoo and Amazon, have dabbled
with auctions, but have not drawn eBay’s level of activity. “Amazon and Yahoo
auctions are not getting nearly as much traction as eBay as far as buyers go,”
says Sutton of FairMarket.
Although fixed-price sales are becoming more common, eBay expects them to
account for no more than today’s 22% of sales. And to many observers that’s
a smart approach. “A lot of people think fixed-price is why more people are
selling on eBay now, but you can’t be successful selling on eBay using just
fixed-price,” says Wingo of ChannelAdvisor. “EBay will always have need for
auctions, because that’s their heritage. If you don’t have auctions, you’ll
lose of lot of eBay buyers.”
Good organizational skills
Even as eBay continues to stress the importance of auctions, its retail business
is growing. And as it grows, eBay will have to become smarter in running the
business like a retailer. To achieve that growth, though, category management
will become more and more crucial, says Jordan, the head of eBay U.S. “In most
categories, we have small shares of the total market,” he says. For example,
eBay may already channel more used car sales than anyone, but its expected $3
billion this year isn’t even 1% of all U.S. used car sales.
Jordan says he also sees broad new opportunities to sell in categories such
as tools, home improvement, health-and-beauty and vertical business markets
such as agricultural equipment.
So far, eBay has done a good job of controlling its rapid development, largely
because of its ability to effectively organize its growing number of products
and categories, says Wingo of ChannelAdvisor. As product categories mushroom
in scope, eBay managers quickly organize them in complex groups of categories,
he says.
Printing equipment is a great example, says Jordan Glazier, general manager
of eBay’s business and industrial sales. At first, he expected the printer category
to include a modest selection of computer printers. But the category quickly
blossomed into more than 20,000 listings of all types of business and industrial
printers and related equipment. So eBay built a system of subcategories to better
organize and provide for easier searches, he says. But, analysts say, one of
eBay’s major challenges going forward will be to hire talented category managers
who can keep control of a rapidly growing business.
So far, eBay has shown it can manage categories, even as they grow. So much
so, in fact, that it is now helping sellers keep up with the pace of category
growth. To that end, eBay has introduced tools, such as Sales Assistant and
Turbo Lister, designed to make their listings more effective. In addition, eBay
maintains a program that designates “preferred solutions providers,” such as
ChannelAdvisor and FairMarket.
In addition, eBay’s own category managers often suggest ways that sellers
can better promote their products. “EBay has to be the coach,” says seller Craig
Zimmer, who says eBay category managers along with ChannelAdvisor helped him
organize his listings of laptops and handheld devices, resulting in monthly
sales growth from $25,000 a year ago to $150,000 today.
More revenue opportunities
Category management also offers eBay new revenue opportunities. As categories
expand and get deeper, sellers will have to differentiate themselves. One way
to do that is by paying for the special category features that eBay offers.
EBay’s fees are broken down into several segments. It charges a “final value
fee,” ranging between 1.5% and 5.25% of the final sale amount. It also charges
separate fixed fees ranging from 30 cents to $3.30 based on the value of an
opening bid of an auction or the value of a fixed-price sale. It charges fees
for placement in special categories, such as $40 for motor vehicles. And it
charges special treatment fees, such as $99.95 if a product is listed in a “Special
Featured” section and rotated on the eBay home page, or $5 if an item is emphasized
with a color band. Still other fees ranging from $10 to $500 are charged for
individual store portals.
Another revenue opportunity that eBay is just beginning to explore in a pilot
program is the sale of warranties, beginning with computers and consumer electronics.
It’s working with warranty provider N.E.W. Customer Service Cos. Inc. under
a program intended both to increase consumer demand for products and to increase
revenue opportunities for sellers through finder’s fees that can be as high
as half of the final value fee that eBay levies on each sale. Although eBay
may eventually derive direct revenue from the warranty program, it’s now offering
it only as a value-added option to sellers and buyers, says Mike Rudolph, director
of strategic development.
While eBay attracts major retailers, some fear those sellers by their sheer
size will overshadow the entrepreneurial small sellers, who are widely recognized
as providing the heart and soul of eBay. “EBay’s greatest risk is in angering
the small merchants,” says Carrie Johnson, analyst with Forrester Research Inc.
“The troops are getting restless because they think eBay is abandoning them.”
Others say that there will always be a place for small sellers who are good
merchandisers. Wingo of ChannelAdvisor says groups of sellers and product categories
will always flow in and out of eBay. For example, he says, in recent years there
were hundreds of sellers of products like DVDs, music videos and digital cameras,
but the number sank quickly as the best and most efficient sellers grabbed market
share. But as some categories shrink in terms of sellers, others arise, he says.
He points to building supplies and tools as an area attracting a new crop of
sellers.
He says small sellers have the opportunity to move up in scale, though he
admits it’s not easy. “You have to commit 100% time and energy, and you have
to constantly reevaluate and reinvent what you’re doing,” says Zimmer, a ChannelAdvisor
client that competes with brand-name companies. Zimmer says he pays about $30
a month to ChannelAdvisor for hosting and connecting his site to eBay and for
order management and e-mail management.
A test bed
Whether small sellers like it or not, the big guys are on eBay to stay, and
it’s not just because it’s an effective selling medium. They also benefit from
the few-holds-barred atmosphere of eBay because it gives them a chance to test
prices and selling techniques and because the cachet of eBay allows them to
launch marketing initiatives with flair.
For instance, eBay is emerging as a marketplace that can quickly determine
consumer demand for new products or establish the market value of a difficult-to-value
product. “EBay does really well with the early lifecycle of product sales or
end of lifecycle,” says Lorna Borenstein, vice president and general manager
of women’s apparel and home furnishings categories for eBay.
Take BMW. Borenstein notes that when the German carmaker wanted to introduce
its new X4 roadster to the U.S. market this year, it sold the first one over
eBay—fetching more than five times the manufacturer’s suggested retail price
of $33,000 and creating a huge amount of market buzz.
Likewise, soft drink company Dr. Pepper/Seven Up Inc. used eBay to introduce
its new dnL caffeinated soda this fall and created a bigger splash than it had
expected. The first case sold at auction for $5,100, and the company fetched
more than $9,000 for 31 cases in all, 12 times the retail price of $750.
The beverage company says it chose eBay for its product launch because it
wanted to attract a large audience of young people. “EBay certainly produced
the targeted demographic of teens and young adults,” a spokesman for Dr. Pepper/Seven
Up says. “It made sense for us to fish where the fish are.”
Yet the high prices it received were an unexpected bonus, because Dr. Pepper’s
intention was to build an awareness of its new soft drink, whose logo is an
upside-down version of the 7 Up brand, not to sell at the highest price. Dr.
Pepper also hoped to burnish its image with the young crowd by donating proceeds
of the dnL auctions to Rock the Boat, an organization that encourages young
people to register to vote. The auctions were done in association with FairMarket.
And now, b2b
EBay also often takes the initiative in testing new selling methods. Studies
show that women tend to prefer fixed-price sales, while men are more likely
to opt for auctions, Borenstein says. So when eBay starting working with its
men’s apparel sellers to promote sales of new-with-tags items, including overstock
and returned apparel with original product tags attached, it encouraged sellers
to try combining new-with-tag with fixed-price sales. Women account for 75%
of men’s apparel sales. “We’re trying to make sure there’s the right combination
of options on the site,” she says.
Ebay is nothing if not experimental and always open to new opportunities.
And it is demonstrating that willingness again with a new business-to-business
operation. An experiment in the works with Motorola Corp. promises to open up
a whole new market for eBay in b2b sales, says Glazier, the general manager
of eBay’s business and industrial segment. Motorola is placing bulk amounts
of overstock goods like cellular phones up for auction, testing the waters of
eBay as a base for b2b sales. Several other manufacturers are also running pilots
for b2b sales, Glazier says. “The wholesale trade on eBay is about 20,000 to
25,000 listings available at any given time, but it’s growing quickly,” Glazier
says.
As an example of how quickly eBay can build a new market, he points to a new
category for metalworking products. Though fairly new on eBay, metalworking
tools already number more than 10,000 listings, ranging as high as $200,000
for a single listing.
As in other areas where eBay has opened doors, he expects b2b to continue
to spawn new market opportunities. In fact, his take on b2b could be the slogan
for all of eBay: “EBay breaks down boundaries,” he says.
paul@verticalwebmedia.com
