Friday, October 14, 2011
eBay Case Study
In a modern Internet business landscape where companies come and go regularly, eBay has spanned the test of time. eBay has survived the dot.com bubble, rival companies’ attempts at competition, and changes in leadership. This firm has enjoyed continued success because of the quality of its product and its ability to leverage both technology and business experience in a rapidly changing marketplace.
Founded in 1995 by computer programmer Pierre Omidyar, eBay was meant from the beginning to be a marketplace for the sale of goods and services between individuals. eBay experienced tremendous growth throughout the 1990s, but became an internet power under the leadership of CEO Meg Whitman, who was brought to the company in 1998. Whitman brought in an experienced management team who broadened eBay’s mission and worked to ensure the eBay brand would remain one of the most recognizable among Internet users.
Today, eBay Inc. remains a powerful company. With about 17,700 employees, eBay brought in over $9 billion in sales and had a net income of about $1.8 billion last year alone.[i] Under the current leadership of CEO John J. Donahoe, eBay’s stock has grown since its most recent low in early 2009, although it is still much lower than its highest point in late 2004 and early 2005.
eBay’s core business remains serving as an online auction service that supports a marketplace of buyers and sellers on both a national and international level. Most of eBay’s revenue comes from transaction fees from marketplace sales. When an item is listed on eBay a nonrefundable fee is charged depending on the seller’s opening bid on the item. At the end of the seller’s auction, if the minimum bid is attained, a final sale price fee is charged, which is a varying percentage of the final sale price. However, eBay also receives revenue from numerous other sources, including advertisements on its website and fees paid by merchants for payment processing services.
eBay’s business model can be separated into two segments: Marketplaces and Payments. The Marketplaces segment consists of eBay.com marketplace, StubHub.com secondary ticket market, Rent.com apartment listings, Shopping.com, and Half.com. The Payments segment consists largely of PayPal, an ecommerce payments service and one of eBay’s most important assets. Paypal has added millions of new users and online retailers in recent years, and may replace the Marketplace as eBay’s biggest source of revenue within a few years, already accounting for 37 percent of eBay’s total revenue by late 2010.[ii] The Payments segment also includes Bill Me Later, a subsidiary of PayPal that allows purchases to be made on credit on the websites of many well-known Internet merchants.[iii]
Both segments of the business have different competition. Marketplaces competitors include “retailers, distributors, liquidators, import and export companies, online and offline auctioneers, catalog and mail-order companies, classifieds, directories, search engines, virtually all online and offline commerce participants (consumer-to-consumer, business-to-consumer and business-to-business), online and offline shopping channels and networks.”[iv] Some specific existing public competitors are Overstock.com, Google, Yahoo!, Amazon, and BIDZ.com, Inc.[v] Because of its success and international reach, however, eBay regularly faces new competitors.
A potential new entrant to the large list of eBay’s rivals may be Alibaba, a Chinese Internet firm that has recently announced it was considering buying Yahoo![vi] If this sale occurs, Alibaba would have a vehicle to “expand in western markets”[vii] and become a direct competitor for eBay in the U.S. and Europe.
Alibaba and other competitors face difficult challenges in attempting to unseat eBay’s dominant position. eBay is the world’s largest online marketplaces “with more than 97 million active users globally” as of 2011.[viii] In eBay’s case, it is evident that network effects and moving first (in most cases) have worked to eBay’s advantage to make them a successful online retailer. eBay does face some challenges, however. Currently, Marketplaces growth rates in the “most mature markets” have slowed and eBay is “losing market share in some segments.”[ix] Thus, in order to compete, eBay will need to “expend significant resources in technology and marketing.”[x] eBay has begun to seriously focus on developing new technologies to ensure future success, as evident through the new X.commerce platform recently unveiled in October 2011. These developments show eBay’s focus on growing into a “technology company.”[xi] Although it wants to prepare itself for the future, eBay must ensure that it does not alienate its current merchants who are the key to eBay’s continued success.
Throughout its history, eBay has been dependent on technological advantages to remain ahead of its competition. One technology that eBay has utilized is Application Program Interfaces, or APIs. APIs function as connection points that allow a program to share data and respond to requests from other software. eBay’s API allows developers to access eBay’s data and functionality, and makes pricing, listing, and other key tasks more efficient. eBay provides this technology to developers for free, which has led to a network of companies creating applications that help make eBay work better, grow faster, and reach a more broad customer base. For example, in 2006 alone more than 40,000 independent developers were building products using eBay’s own API, and these applications are made to work seamlessly with eBay.[xii]
More recently, on October 12, 2011, eBay launched it X.commerce platform. X.commerce is a combination of technology assets and developer communities from within eBay’s portfolio. Essentially, eBay is taking all the APIs and developer communities built up around it assets (which include PayPal, Magento, RedLaser, Milo, and others) and centralizing their technologies. eBay’s goal is to make ecommerce easier by allowing software developers to use its assets to provide solutions for social, local, digital, and mobile commerce. Developers who still want to work with just one of eBay’s assets still can, only now the X.commerce technology allows them to take advantage of all of the other APIs that eBay has to offer.[xiii]
Further reports indicate even more technology expansion. PayPal Access, for example, will allow online shoppers to pay with their PayPal account rather than creating a new account on the retailer’s website. X.commerce will also integrate Milo, an online database of offline inventory, and RedLaser, which will allow consumers to scan an item in-store and buy it using PayPal. eBay is also using technological development to potentially form partnerships with other influential companies. For example, Kate Mitic, Facebook’s director of platforms and mobile marketing, was recently named a member of eBay’s board of directors, and is expected to announce a partnership between Facebook and eBay soon.[xiv] Not only will X.commerce help to centralize eBay and its many assets, but it is also expected to open a gateway of opportunity that will allow eBay and allied retailers to expand and grow. Furthermore, this technology will allow eBay to continue to separate itself from competitors such as Amazon and Walmart.
One of eBay’s most valuable assets is its competitive advantage. eBay’s strongest competitive advantage is its brand. As one of the success stories of the dot.com bubble, eBay gained a positive reputation and a strong brand name. This is largely due to the fact that the company provides strong customer relations and dependable service. One of the keys to eBay’s customer service is its feedback system, a unique technology used to benefit both buyers and sellers. The information it gathers allows eBay members to report their experiences and rely on one another to create a safe and trustworthy marketplace. Additionally, it encourages buyers and sellers to be accurate and dependable in their exchanges. Interactive technologies such as the feedback system provide eBay with leverage over traditional retailers who do not have consumer interaction readily available to them.[xv] Additionally, eBay has used the feedback ratings to gain a competitive advantage over other online retailers. For example, eBay members with a specific percentage of positive feedback have been given a discounted shipping rate during the critical holiday shopping season. Consumers are therefore given incentive to make large purchases from eBay’s marketplace rather than from competitors such as Amazon.[xvi]
Another competitive advantage is eBay’s sizable economy of scale. Its business consists of a global platform of 38 countries. Such a broad platform provides individuals and businesses of all types and sizes with access to the marketplace.[xvii] With such a large user base, product variation and availability increases. Consumers can find almost anything on eBay, as evidenced by the 55,000 categories of products being auctioned.[xviii] As a result of its size, eBay has strong network effects. Its customer base attracts sellers, which attracts more buyers, which in turn establish a dominant market share. eBay also highly values maintaining good relations with its merchants. eBay’s appreciation for small sellers are what provide customers with a “one-of-a-kind shopping experience,” while the large scale businesses are what bring in a large amount of inventory of the latest brand name models.[xix] eBay clearly possesses the phenomena of long tail. They make a profit while offering a near-limitless selection of products to their consumers.
eBay faces both potential challenges and opportunities in its future. eBay has the benefit of being a large corporation with several different segments of its business. eBay is currently looking to expand the reach of its marketplace into new areas. For example, eBay is aiming to become an influential brand in fashion by expanding The Fashion Outlet, which allows brands to sell stock directly to consumers for a fixed price via the eBay site. eBay is working to accomplish this in several ways, such as by increasing its presence in social media.[xx]
eBay’s marketplace segment remains a strength of its business. However, it has occasionally come under criticism for an overly complex fee system and a website that can be frustrating for many users to navigate. eBay must take these concerns seriously, because it faces competition from many other online merchants, such as Amazon, Walmart, and Target. In addition to these domestic rivals, eBay faces international competition across the numerous countries it serves. In addition, eBay has struggled to enter new markets, such as China. Over several years, eBay invested tens of millions to succeed in the Chinese market, only to lose out to rival Alibaba.[xxi]
A large part of eBay’s future success in dependent upon Paypal. Paypal gives eBay the opportunity to become a presence across the Internet. As stated recently by John Donahoe, eBay’s CEO, “Paypal’s target is all of e-commerce…eBay is just one merchant.”[xxii] Yet Paypal’s success has brought competition from industry titans such as Google, Intuit, and cellular carriers. Even start-ups such as San Francisco-based Square pose a threat.[xxiii] In this growing industry, eBay must ensure that its lead time and other advantages keep Paypal ahead of the competition.
As one of the oldest “dot.com” websites, eBay has remained successful over a long period of time. Yet in the modern business world, no one company can remain idle while competitors continuously innovate and grow. Through the correct use of technological innovation and experience, eBay can continue to succeed into the future.
Endnotes
Financial and Personal Finance News. 23 May 2011. Web. 12 Oct. 2011. <http://money.cnn.com/magazines/fortune/fortune500/2011/full_list/201_300.html>.
[ii] Kopytoff, Verne G. "PayPal Looks Beyond EBay to a Mobile
Future." The New York Times. 28 Nov. 2010. Web. 14 Oct. 2011. <http://www.nytimes.com/2010/11/29/technology/29paypal.html>.
[iii] EBay." U.S. Securities and Exchange Commission. Web. 10 Oct. 2011.
<http://sec.gov/Archives/edgar/data/1065088/000106508811000003/ebay10k20101231.htm>.
[iv] Ibid.
[v] EBay Inc.: NASDAQ:EBAY." Google Finance. 13 Oct. 2011. Web. 13 Oct. 2011.
<http://www.google.com/finance?q=ebay>.
[vi] "Alibaba 'interested' in Buying All of Yahoo." CNNMoney - Business, Financial and
Personal Finance News. 01 Oct. 2011. Web. 13 Oct. 2011. <http://money.cnn.com/2011/10/01/technology/alibaba_yahoo/index.htm?source=motleyfool>.
[vii] Ibid.
[viii] "Who We Are - EBay Inc." EBay Inc. - EBay Inc. Web. 13 Oct. 2011.
<http://www.ebayinc.com/who>.
[ix] EBay." U.S. Securities and Exchange Commission. Web. 10 Oct. 2011.
<http://sec.gov/Archives/edgar/data/1065088/000106508811000003/ebay10k20101231.htm>.
[x] Ibid.
[xi] Geron, Tomio. "EBay's Platform Play For Shopping Online and Offline: X.Commerce."
Forbes.com. 12 Oct. 2011. Web. 12 Oct. 2011. <http://www.forbes.com/sites/tomiogeron/2011/10/12/ebays-platform-play-for-shopping-online-and-offline-x-commerce/?partner=yahootix>.
Dec. 2006. Web. 14 Oct. 2011. <http://www.cioinsight.com/c/a/Case-Studies/Inside-eBays-Innovation-Machine/>.
ECommerce-Guide. 12 Oct. 2011. Web. 14 Oct. 2011. <http://www.ecommerce-guide.com/article.php/3939551>.
Top Insight for Investors & Entrepreneurs. 12 Oct. 2011. Web. 13 Oct. 2011. <http://wallstcheatsheet.com/trading/new-ebay-technology-focuses-on-developers.html/>.
Web. 12 Oct. 2011. <http://www.iacis.org/iis/2005_IIS/PDFs/Chen.pdf>.
ECommerce Bytes-Independent News and Resources for Online Retailers. 19 Sept. 2011. Web. 12 Oct. 2011. <http://www.auctionbytes.com/cab/cab/abn/y11/m09/i19/s01>.
[xvii] EBay." U.S. Securities and Exchange Commission. Web. 10 Oct. 2011.
<http://sec.gov/Archives/edgar/data/1065088/000106508811000003/ebay10k20101231.htm>.
[xviii] Howard, Theresa. “EBay Spends Bigger on Advertising.” USA Today. 3 January
2005. <http://www.usatoday.com/money/advertising/adtrack/2005-01-02-track-ebay_x.htm>.
2008. Web. 12 Oct. 2011. <http://ebayinkblog.com/2008/05/09/small-sellers-our-competitive-advantage/>.
Week. 11 Oct. 2011. Web. 12 Oct. 2011. <http://www.marketingweek.co.uk/disciplines/digital/ebay-looks-to-become-%E2%80%9Cconsidered%E2%80%9D-fashion-choice/3030872.article>.
[xxi] Wingo, Scot. "Could Ebay's Worst Nightmare Come True?" IStockAnalyst. 11 Oct.
2011. Web. 13 Oct. 2011. <http://www.istockanalyst.com/finance/story/5471010/could-ebay-s-worst-nightmare-come-true>.
[xxii] Ibid.
[xxiii] Kim, Ryan. "Square Readies for Battle with PayPal." GigaOM. 10 Oct. 2011. Web. 14
Oct. 2011. <http://gigaom.com/2011/10/10/square-readies-for-battle-with-paypal/>.
Subscribe to:
Posts (Atom)