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Chapter IX eBay:

An E-Titan Success Story

Zhongxian Wong Montclair State University, USA

James Yao Montclair State University, USA

Ruiliang Yan Virginia State University, USA

Jeffrey Hsu Fairleigh Dickinson University, USA

Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

AbstrAct

eBay provides online marketplaces for the sale of goods and services, online payments, and online com- munication offerings. Their three primary business segments are: eBay Marketplaces, Payments, and Communications. The Marketplace platform has grown beyond the initial auction platform to include Rent.com, Shopping.com, Kijiji, Craigslist, mobile.de, and Marketplaats.nl. PayPal enables individuals and businesses to easily and securely transact payments. The overgrowth of eBay may have brought about the management problems in a young company that grows so fast. As the eighth largest global retailer, eBay’s mission is to pioneer new communities around the world built on commerce, sustained by trust, and inspired by opportunity. Their ability to maintain or enhance this position will depend on their abil- ity to adapt to new technologies while facing increased competition and anticipating customers’ needs. This chapter will address management’s philosophies, the corporate business model, its challenges, and network relationships, and examine corporate growth to date as well as future horizons.

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OrgAnizAtiOn bAckgrOund

History

Pierre Omidyar earned his undergraduate de- gree at Tuft’s University and worked for Apple Computer after graduation. He cofounded Ink Development Corporation, later renamed eShop, which was later bought out by Microsoft (eBay, 2005a).

Subsequently while working for a mobile com- munication company and inspired by his future wife’s Pez collection, Omidyar brainstormed the idea of an online auction where people would be able to trade with each other. In 1995, while keep- ing his day job he cofounded AuctionWeb with Jeff Skoll, a Stanford MBA graduate. Omidyar created the concept of serving people on the Web, and Skoll provided the business experience to turn the concept into a business (Bunnell, 2001). The company incorporated in 1996, and with the rapid growth of the company the need for additional capital was recognized in the spring of 1997.

During the 1990s, as a result of Silicon Valley’s successes, there was a tremendous amount of venture capital available for Internet start-ups, the new “darlings” of Silicon Valley. The computer age was changing its focus from electronic manufac- turers to the application of these products to the Web married to business models that promised to change the way people did business. AuctionWeb’s person-to-person online trading was provided its initial funding of $5 million from Benchmark Capital. In exchange the venture capitalist group received stock and warrants representing 22% of the company.

In September 1997 the company formally adopted the name eBay, and began to post banner ads on selected sites and ad placement in certain publications. By year end, eBay’s revenues topped $350 million and 850,000 registered users. In collaboration with the venture capitalist group the fast growing online auction company began

to solicit talents that would allow the company to realize its potential.

Management

The search for a CEO in March 1998 resulted in the recruitment of Meg Whitman. As General Manager of the $600 million Preschool Division of Hasbro, Meg had strong “brand-building” ex- perience. Meg Whitman’s employment package included an option to purchase 7.2 million shares of stock, which represented approximately a 6% ownership of eBay which once exercised made the CEO a billionaire.

The new CEO recognized the need for addi- tional strong management to develop the company which was operating in a new and undeveloped business arena. Howard Schultz, chairman and CEO of Starbucks, and Scott Cook, chairman of Intuit, both experienced in successful enterprises in previously undeveloped consumer markets, were brought in as board members (Bunnell, 2001).

Most of eBay’s key executives who were first recruited came from the managerial ranks of traditional business: Meg Whitman from Has- bro; Matt Bannick, vice president of customer service, from McKinsey & Company; CFO Gary Bengier from Kenetech Corporation, an energy service firm; and Marketing Senior Vice President Brian Swette from Pepsi-Cola. The philosophy of the company encouraged hiring experienced management with technical know-how in mar- keting, corporate finance, and human resource management.

going Public

After an unprecedented growth, in September 1998, the NASDAQ market made an 18% down- ward adjustment. September 1998 was also the date of eBay’s Initial Public Offering. Despite market jitters, the IPO underwritten by Goldman, Sachs, Donaldson, Luf kin & Jenrette, Bancam-

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erica Robertson Stephens, and BT Alex Brown, resulted in the sale of 4,025,000 shares of stock for net proceeds of $66.1 million. During the first day of after-market trading, the price per share rose from $18 to $54 before settling back to close at $48. Nine months after the IPO the share price reached $234.

the business Model

Mike Malone, editor of Forbes, believes that eBay’s success is the outcome of two key decisions: (1) To let anybody sell anything and (2) To take a hands-off approach to user transactions (Bunnell, 2001, p. 36). This philosophy was motivated by the founders’ instincts, and this gave their business model infinite scale potential. The following is the application of this philosophy as it has been applied to each of the business segments.

Marketplace

eBay calls itself “the world’s personal trading community” (Crowe, 1999, p. B4). eBay has grown from two million users at the end of 1998 to more than 181 million through 2005, with online bidders along identified to have goal-driven, experiential, focused, and opportunistic groups based on their bidding behaviors in consumer-to-consumer (C2C) private value auctions, for example (Hou & Rego, 2007). eBay has established an interna- tional marketplace with no peers except a few of the stock and commodity exchanges. eBay’s marketplace rationalizes the sale and purchase of used goods. That is to say, eBay always has the maximum numbers of buyers and sellers com- pared to other markets, all of which are smaller (Sinclair, 2007, p. 6). Buyers enjoy a broad base of goods and services, while sellers are rewarded with high conversion rates. With over two billion searches per month, the company offers selection, value, convenience and entertainment for its buy- ers. The sellers are afforded the opportunity of maximizing sales and profits through access to a

worldwide marketplace and minimal marketing costs. The focus is on convenience for its users. Buyers and sellers are able to search multiple categories and participate in auctions with as little friction as possible.

Online tutorials are provided to guide custom- ers through a simple four step process: register, find stuff, bid, and sell. Placement and success fees are paid by the seller. eBay does not certify the sellers or the quality of their products; it operates on principle of caveat emptor, or let the buyer be- ware. Their marketplace brings buyers and sellers together creating a huge market for resold goods, allowing the buyers and sellers to find each other and transact business. However, in recognizing the critical importance of trust between buyer and seller, eBay developed marketplace services designed to increase the user’s comfort level in dealing with relatively unknown partners in cy- berspace. These services are discussed further in the “Trust Factor” section. Additionally, online classified sites, including Kijiji, Marktplaats, and Craigslist, enhance the Marketplace platform and helped situate eBay as number one in C2C classi- fied Web sites worldwide. They service 300 cities in over 30 countries.

Payments

In 2002, eBay acquired PayPal, Inc. in order to provide more satisfying online experiences by eliminating online payment obstacles such as lengthy processing time, inconvenience, and high costs of traditional methods. Initially PayPal offered its account-based system in 38 English speaking countries. Today it is a global leader in online payment solutions in 55 markets with approximately 96 million total accounts, which include 19 million business accounts and 77 mil- lion personal accounts with anticipated revenues for 2006 of over $200 million. It is accepted worldwide by merchants on and off eBay. Built on the existing infrastructure of bank accounts and credit cards, it relies on the most advanced fraud

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protection systems to create a secure real-time payment solution. There are three types of PayPal accounts: personal, business, and premier.

Paypal earns revenues through transaction fees when a business or premier account receives payment, foreign exchange rates of currencies, money withdrawals to a non-U.S. bank, and returns on certain customer balances. Licensing fees are also earned through PayPal debit cards and the PayPal Buyer Credit offering. Perhaps PayPal’s most significant corporate return is its synergy with eBay.

Communications

Acquired in 2005, Skype provides free software that enables free VoIP (voice over Internet proto- col) between Skype users online. This is actually high quality voice communication to anyone worldwide with an Internet provider. Skype also offers voicemail, instant messaging, call forward- ing, conference calling, and Skype video. Skype facilitates real time trading among buyers and sellers. Skype is particularly effective for buyers and sellers in complex transactions, eliminating delays by providing instant clarification through communication. Skype has 75 million members in 225 countries and is considered the worldwide leader in VoIP.

business climate

Online sales for the third quarter of 2005 totaled over $40 billion, representing a 22% year-over- year increase (Johnson, 2005a). Interpreted for future sales growth, it was concluded that online sales will enjoy a 14% compound annual growth rate over the next five years, resulting in sales growth from $172 billion in 2005 to $239 billion in 2010 (Johnson, 2005b).

With growth experienced to date and antici- pated growth, online sales have become a highly competitive market. Online users have the option to find, buy, sell, and pay for product through a

variety of sources. This is not limited to online retailers, but also includes aggregate auctioneers, distributors, liquidators, and import and export companies. The Web has made the global market a much more manageable playing field. eBay has successfully captured 14% of that market in 2005. Over the past five years revenues and net incomes have increased in multiples, and shareholders’ equity has increased from $1.4 billion in 2001 to over $10 billion in 2005 (Tables 1 and 2). To remain competitive eBay will need to expend resources in technology and marketing, which will be expensive and may reduce profit margins. However, the success of eBay depends on the development and maintenance of the Internet infrastructure.

setting tHe stAge

Initially eBay developed proprietary software capable of supporting scalable user interface and transaction processing which later evolved into a system capable of handling all aspects of the auc- tion process. The system supports the full selling and buying processes, including initial registration for the service, placing bids and managing outbids, listing items for sale, and transaction close. The system also manages various notifications for sellers and buyers, including daily status updates, bid and outbid notices, registration confirmations, account change notices, billing notices, and end- of-auction notices. User registration information, billing accounts, current item listings, and his- torical listings are maintained and archived for record-keeping and analysis purposes. A search engine regularly updates the titles and descriptions of items, as well as pricing and bidding activity. The seller’s billing account is updated every time an item is listed, a feature is selected, or an auction closes with a bid in excess of the seller-specified minimum bid. Electronic invoices are sent to all sellers on at least a monthly basis. The system also supports community bulletin boards and chat

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areas where users and eBay customer support personnel can interact (eBay, 2005b, p. 10).

Computer systems include Sun database serv- ers running Oracle relational database manage- ment applications with a mix of Sun and Hitachi storage devices, along with a suite of Pentium- based Internet servers running the Windows NT and Linux operating systems. For system back up F5 Networks’ load balancing systems and select software from Symantec are utilized. The selec- tion and use of these cutting-edge technologies provided faster data transmission and larger vol- umes of business transactions, which aided eBay to pave its way towards its potentials. This fact was crucially important for such a young and fast growing company since eBay is an entire online company that relies on information technology and information system to achieve its competitive advantage and business objectives.

cAse descriPtiOn

Little thinks in a big Way

As John Little stated, “For some of the people all of the time and for all of the people some of the time, the most convenient way to shop will be on the Web” (Marketing Science Institute, 2006, p. 5). Who would have thought that a small start-up auction company in the 1990s would have emerged to having a market capitalization of over $34 bil- lion? Something as simple as bringing buyers and sellers together from all over the world has made them a successful online community. eBay does not even have to hold any inventory or touch any of its products (Cartwright, 2000). The potential is amazing if you could only imagine the impact it could have on businesses. Companies will have to and already have changed their way of doing business. Every day, we get closer and closer to getting what we want when we want it. Trading on eBay can be something as little as a Pez dispenser to something as big and expensive as a jet.

Although eBay is an online auction and not a retailer, people could not agree with John Little any more. However, eBay should listen to Little’s opinion that “peer to peer exchange” is the sleeper (Marketing Science Institute, 2006). eBay members do use a rating system to post transactions in which this information is kept centralized. As noted above, something to think about in the future is a “peer to peer exchange” which is in a decentralized environment in which trust management can be taken advantage of at its best. It will be a much different way of doing business than we are used to today. The obstacle to overcome is that the transactions taken place can be viewed by everyone in the network and reliable information may become questionable (Aberer & Despotovic, 2001). Many people and organizations must rethink our way of conducting business as the globe is becoming one market. eBay is a different animal though. This will be learned in further discussion.

As one of the biggest online communities, eBay has to make sure that they are properly equipped to handle their business. eBay’s core infrastructure is provided by Sun Microsystems, a relationship that has existed for over eight years of providing hardware and software to serve their community. Sun Microsystems connects the community of over 160 million users worldwide who are trading more than $1,350 worth of goods every second. eBay has explored ways to lower their costs and increase performance. To assure business continuity, system performance, and sustain their leading position in the field, eBay adopts servers and systems such as Sun Fire X4100 and 4200 plus AMD Opteron processor that allow eBay to meet the demands that their site requires. These advanced technologies also provide eBay’s engineering staff with the ability to have insight on the application behavior and operating system performance.

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the trust Factor

A big part of eBay’s success has been built on trust. The reason trust is so important is that those who are transacting business are dealing with strangers. To make their users comfortable enough to deal with these strangers and do transactions over the Internet, certain platforms have been put into place. The Feedback Forum allows users to comment on other eBay users and set profiles with ratings. A seller’s feedback ratings, reported by other eBay users, can have a measurable ef- fect on his/her auction prices (Lucking-Reiley, Bryan, Prasad, & Reeves, 2007). There is also a SafeHarbor Program (three areas: Investiga- tions, Fraud Prevention, and Community Watch) in place that establishes guidelines for trading and ways to resolve disputes. Reports of misuse are responded to appropriately. The Standard Purchase Protection Program is in place to allow users to communicate with each other on items not received or not as described; however, unresolved items can be submitted as a claim to eBay’s Trust and Safety team (eBay, 2005b, p. 5). As an added layer, PayPal offers a Buyer Protection Program which will cover transactions $1,000 or less if the item is not delivered or not as described. This move was needed to combat with shoppers who feel more secure with the traditional retail sites like Wal-Mart (Savitz, 2005).

The Review of Economics and Statistics is a study that examined how important one’s repu- tation was in doing business on online auctions. There were dramatic results that supported the theory that reputation was very important in people’s buying decisions. Even if the seller had only a couple of positive reports, the chance of a sale were much greater than if one had negative reports then his or her chances of doing business diminished considerably (Livingston, 2005). Negative feedback ratings have a much greater effect than positive feedback ratings do (Lucking- Reiley et al., 2007). Another study showed that “while impulsive buyers consistently pay high

premiums, analytical buyers pay greatly differ- ent premiums depending on sellers’ reputations” (Kim, 2005, p. 79). Of course, there are those who will dispute the effectiveness of eBay’s Feedback Forum. There are those who will argue that honest repeated players will benefit as intended, but there is no legal framework of feedback intermediaries to resolve matters that involves frauds (Rietjens, 2006). Many times it is whom you are buying it from which matters to the customer.

Although eBay lives by their culture of trust, buyers have found that there is reason to beware. The same issues may pop up that you would find when buying something off of a street vendor in New York City. Consumers should beware and companies will need to protect their image from those who are deceitful. Tiffany’s is a fine example of this concern. Tiffany’s was looking to protect its name because there were many obvious list- ings of jewelry selling with their name on it but priced extraordinarily lower than the “real deal.” In fact, two employees from Tiffany’s blocked listings over a 5-month period which resulted in a finding of 73% fakes. eBay has defended them by maintaining that people come to buy and sell on their electronic platform and take the responsibil- ity of verifying those items sold online. eBay is different than retailers and auctioneers who write their catalogue. It is the sellers who write the descriptions, price setup, terms, and collections. eBay’s success has been built on trust; therefore it may be wise to make a better effort to prevent such deceit from happening.

Patent infringement lawsuits could also have an effect on trust. Recently this year the Supreme Court ruled unanimously that the federal courts must consider other factors before making an automatic injunction against the patent infringer. The ruling was that traditional principles of equity should be taken into account. At the time, the U.S. District Court had almost forced eBay to shut down their service entirely when they noted that MercExchange would not be harmed if they continued to design around the patent. The Buy

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It Now fixed price on their Web site was at stake. This all stems back to when the tiny company from Virginia, MercExchange, had won millions by suing eBay (Holzer, 2006).

growth check

For years after the bubble had burst many had wondered when eBay’s growth would slow down. A good look should be given as to why eBay has grown successfully. Over the past few years eBay has made dramatic moves into areas which are different from when they first began as an online auction market for collectibles (Savitz, 2005). They acquired PayPal in 2002 which put them in the online payment services category to compete with the credit card companies. In fact, many have predicted PayPal to be a key driver of future growth. eBay has made acquisitions overseas to make a presence outside the United States. In 2005, eBay acquired Shopping.com to gain a stake in the online shopping comparison service market (Savitz, 2005). Their acquisition of Skype, the free voice-over-Internet company, had raised a few eyebrows. However, it may very well prove to be a key move to success being that the future is moving that way and Google, Micro- soft, and Yahoo all offer avenues of buyers and sellers to communicate with one another online (Lashinsky & Roth, 2005).

eBay has also added the Buy It Now, which allows for fixed price transactions. Increasingly, people are seeing eBay stores popping up to help sellers of large inventories or slow moving goods. eBay purchased retail listings from Rent.com, a 25% stake in Craigslist’s huge electronic bulletin board, and local market classified advertising sites called Kijiji in different countries. Investors have reacted in a negative sense to events such as when the eBay’s CEO was interviewed at Disney, but she declined and stayed with eBay. Investors also did not like when eBay increased spending of $100 million to bolster their China expansion. eBay has confessed to interfering with their relation-

ship with sellers when they had price increases (Savitz, 2005). Although investors and members may not have valid points, their reaction should always be taken into consideration.

The wild card may prove to be eBay’s position in China. There are about 300 million middle class Chinese. That number alone is larger than the entire population of the United States. The good news is that “of the 50,000 or so merchandise cat- egories in which eBay participates, the company accounts for no more than 6% to 7% of overall trade in any single category” (Savitz, 2005, p. 27). It is also interesting to note that there are still some who have never heard of eBay; but there are many more who have heard of it yet never used it. For those who wonder what is sold on it, perhaps the better question would be what is not sold on eBay. It also would not be surprising to see other large businesses besides Vodafone and Thomson Holidays opening stores on eBay.

the Hype about skype

eBay’s acquisition of Skype for $4.1 billion has been questioned by some even though it will give eBay a presence in the free voice-over-Internet market. Lashinksy mentioned in a Fortune article that eBay felt the need to show a 78-page Power- Point presentation to explain the purchase about how they will build Skype into their business. This is a move that eBay felt it had to make being that Google, Yahoo, and Microsoft all have allowed their users to participate (Lashinsky & Roth, 2005). The eBay executives have explained that it will help to promote their three flagship brands: eBay, PayPal, and Net telephony company Skype to all work in unison to boost their revenues (Cla- burn, 2006). At such a high cost, the company has plans to add Skype into its main site, Rent.com, Shopping.com, Kijiji, PayPal, and a PayPal Wallet for each Skype account. They have a Skype me small button on their site. There is a pay per call advertising service that is using Skype. eBay is also looking at this as a way to expand into China

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and possibly give Japan another try. In 2005 Skype was adding 166,000 new customers each day. At that time there was 57 million customers where 4 million were using the service at one time (Hof, 2005).

Skype’s viewpoint is that communication is natural. It is a way to build a strong word of mouth. It is only a matter of time when people try Skype that they will begin to realize how simple it is to use. Those who use Skype probably want to be able to use it on their mobile phones. It is very common for people to be walking around constantly using their phones. The ability to com- municate at any given moment should give good results. From eBay’s perspective, acquiring Skype increases their competition and market coverage rather than having them dwindled.

the Missing Link in the Value chain

The traditional value chain and value system analysis is not appropriate for e-commerce companies. Therefore a different approach is needed for market-space than what was needed for the marketplace. “Knowledge creation and innovation are replacing physical processes as value adding activities. New forms of competi- tive advantage are gained through the creative application of resources that cannot be readily duplicated” (Cartwright & Oliver, 2000, p. 24). Network relationships are the key factor that adds value to e-commerce. It has gone from a single linear link of two value systems to a system in which firms that compliment each other become allies. Which is why you will find that competi- tors will create value to a firm while at the same time will be considered in the firm’s competitive analysis.

eBay and Google have worked very closely together over the years; however, eBay is begin- ning to open their eyes and see the search engine giant Google as a serious threat. eBay was one of Google’s first customers who advertised with them. To combat this threat eBay has approached

Yahoo and Microsoft to work together as allies. The alarm sounded last year when Google started a classified advertising service which is a direct competition with eBay’s online auctions. One way for eBay to work with them would be to agree on advertising more in exchange of gaining access to valuable data that has been collected on their consumers. Another way would be to share techni- cal aspects of their systems to help cross-promote business (Guth & Mangalindan, 2006).

In value cluster analysis it is the activities clumped together which make up the value cluster. For eBay there are activities which are internal such as the auction database, monitoring the auction process, payment process, and online community services. They must also consider those activities of the traditional business model that they are missing, such as shipments, pay- ments, fraud protection, banking services, traffic driven from other Internet portals and hardware support. It is the network relationships which will link the two together. Those firms which compli- ment their services such as Google are also their competitors. From a strategist’s standpoint, eBay must understand their relationship among all the elements in the system to be able to understand how those activities will affect the system and what the response will be from the other members. Therefore, eBay is “part of a competitive system that produces its own change” (Cartwright, 2000, p. 26). eBay and e-commerce have developed the “value web” which has given a totally different approach from the traditional value added ap- proach. eBay has taken cooperative advantage to a different level by building a trust between the merchant and customer in its virtual marketplace. This is a much different approach than the tradi- tional methods used in the real world of highly competitive markets. It is eBay’s trust factor that enables this unorthodox approach of having a cooperative culture. They have found it easier to use a cooperative strategy with their customers, stakeholders, and competitors (Cass, 2006).

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According to Guth and Mangalindan (2006), eBay is in an interesting position. In view of the fact that Google’s search technology is probably the best, eBay chose to run its advertisements on Google. Majestic Research has estimated that eBay has almost doubled its payment for advertising on Google than it does on other search engines simply because eBay knows that Google carries approximately triple the amount of traffic than that of the other search engines. The question to ask is if it is better to form closer ties with Google which should help eBay’s business in the short run or divorce their ties with Google being that Google is likely to be a candidate of the biggest threat to eBay in the future. As a result, various offers have emerged from Yahoo, Microsoft, and even Google to have business with eBay. The key business offer is all but advertising. In this new relationship, the company with the best offer may be able to post their clients’ advertisements on eBay’s auction pages. In return, whoever eBay accepts should also be able to run eBay’s adver- tisements on their sites. No wonder eBay is one of the biggest advertisers on the Web.

cHALLenges FAcing ebAy

In 1997, Jamie Kiggen, director of Internet re- search for Donaldson, Luf kin & Jenrette, began following eBay when it was still a small private company, as he was impressed with eBay’s busi- ness model. Though the company was small, it represented a large opportunity combining the scalability of Amazon’s model, the ability to grow revenues at a very rapid pace, with the profitability of Yahoo. Kiggen was overwhelmed by the loyalty of the user base and the word of mouth buzz, which would later evolve into the all too common catch phrase, “I got it on eBay.” The company was young and fragile (Bunnell, 2001, p. 137) then.

However, eBay developed strategies to pre- serve its lofty beginnings. Its outsourcing and

partnering strategies were to focus on customer oriented issues and market opportunities; mini- mize investments in fixed assets; and remain small and agile as an organization (Lucking-Reiley et al., 2007). Being a young and small company they would avert the burden of layers of personnel management which would enable them to take decisive action in a fast changing environment.

Since its inception eBay has had to deal with some serious systems’ challenges: scaling up to meet exploding demand, technological advance- ments, and service outages. eBay must continually improve its systems to manage increasing levels of activity and required new features or services (MacInnes, Li, & Yurcik, 2005). Without the ability to upgrade or effectively integrate new technologies, transaction processing systems, security infrastructure, network infrastructure, or databases to accommodate increased traffic or transaction volume, future business success could be in jeopardy. In a business climate of rapidly changing technology, industry standards, services, and products, the future of eBay depends on its ability to adapt effectively and efficiently.

eBay remains steadfast in accomplishing its mission:

Expanding its user base Strengthening brand recognition Broadening the trading platform by increased product categories and promoting new ones Fostering community affinity Enhancing site features and functionality

As Min, Caltagirone, and Serpico (in press) point out recently, as advancements in Internet technology continue to revolutionize today’s busi- ness practices, it is increasingly more apparent that the Internet has become an integral part of the daily routine. eBay, an e-titan success story has marked its swift and smart steps in e-com- merce history.

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Bunnell, D. (2001). The eBay phenomenon (1st ed.). New York: John Wiley & Sons, Inc.

Cartwright, S., & Oliver, R. (2000). Untangling the value Web. The Journal of Business Strategy, 21(1), 22–27.

Cass, J. (2006, March 2). What culture does a company need to adopt to use cooperative market- ing effectively? Backbone Media. Retrieved June 5, 2008, from http://blogsurvey.backbonemedia. com

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Hof, R. (2005). No head-scratching at eBay about Skype’s potential. Business Week Online. Retrieved June 5, 2008, from http://www.busi- nessweek.com

Holzer, J. (2006, May 16). Supreme court buries patent trolls. Forbes, pp. 67–68.

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Johnson, C. (2005b, September 14). US eCom- merce: 2005 to 2010: a five-year forecast and analysis of US online retail sales. Forrester Research, 1.

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Lashinsky, A., & Roth, D. (2005, October 3). The net’s new odd couple. Fortune, 152(7), 26.

Livingston, J. (2005). How valuable is a good reputation? A sample selection model of Internet auctions. The Review of Economics and Statistics, 87(3), 453–465.

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Min, H., Caltagirone, J., & Serpico, A. (in press). Life after a dot-com bubble. International Journal of Information Technology and Management (IJITM), 7(1).

Rietjens, B. (2006). Trust and reputation on eBay: Towards a legal framework for feedback intermediaries. Information & Communications Technology Law, 15(1), 56.

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APPendix

Year Ended December 31 (In thousands, except per share amounts)

2001 2002 2003 2004 2005

Consolidated Statement of Income Data: Net revenues $748,821 $1,214,100 $2,165,096 $3,271,309 $4,552,401 Cost of net revenues 134,816 213,876 416,058 614,415 818,104 Gross profit 614,005 1,000,224 1,749,038 2,656,894 3,734,297

Operating expenses: Sales and marketing 253,474 349,650 567,565 857,874 1,230,728 Product development 75,288 104,636 159,315 240,647 328,191 General and administrative 105,784 171,785 332,668 415,725 591,716 Payroll tax on employee stock options

2,442 4,015 9,590 17,479 13,014

Amortization of acquired intangible assets

36,591 15,941 50,659 65,927 128,941

Total operating expenses 473,579 646,027 1,119,797 1,597,652 2,292,590 Income from operations 140,426 354,197 629,241 1,059,242 1,441,707 Interest and other income, net 25,368 45,428 36,573 77,867 111,148 Interest expense (2,851) (1,492) (4,314) (8,879) (3,478) Income before cumulative effect of accounting change, income taxes and minority interests

162,943 398,133 661,500 1,128,230 1,549,377

Provision for income taxes (80,009) (145,946) (206,738) (343,885) (467,285) Minority interests 7,514 (2,296) (7,578) (6,122) (49) Income before cumulative effect of accounting change

90,448 249,891 447,184 778,223 1,082,043

Cumulative effect of accounting change, net of tax

-- -- (5,413) -- --

Net income $ 90,448 $ 249,891 $ 441,771 $ 778,223 $1,082,043

Per basic share amounts: $ 0.08 $ 0.22 $ 0.35 $ 0.59 $ 0.79

Table 1. Five-year income statements

Table 2. Five-year consolidated balance sheet data As of December 31

(In thousands, except per share amounts) 2001 2002 2003 2004 2005

Cash and cash equivalents $ 523,969 $1,109,313 $1,381,513 $1,330,045 $ 1,313,580 Short-term investments 199,450 89,690 340,576 682,004 774,650 Long-term investments 286,998 470,227 934,171 1,266,289 825,667 Working capital 703,666 1,082,234 1,498,606 1,826,279 1,698,302 Total assets 1,678,529 4,040,226 5,820,134 7,991,051 11,788,986 Short-term obligations 16,111 2,970 2,840 124,272 -- Long-term obligations 12,008 13,798 124,476 75 -- Total stockholders’ equity $1,429,138 $3,556,473 $4,896,242 $6,728,341 $10,047,981

Items to note: Although revenues and net income are increasing over the five year period, both gross margin and operat- ing income on a year over year basis have declined, indicating higher costs associated with running the business.

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eBay: An E-Titan Success Story

As of December 31 (In millions) 2002 2003 2004 2005

Registered users (1) 61.7 94.9 135.5 180.6 Active users (2) 27.7 41.2 56.1 71.8 Gross merchandise volume (3) $14,868 $23,779 $34,168 $44,299 Active accounts (4) 7.9 13.2 20.2 28.1 Total payment volume (5) $7,000 $12,226 $18,915 $27,485

Table 3. Key metrics (2002–2005)

Cumulative total of all users who have completed the registration process on one of eBay’s trading platforms. All users, excluding Half.com, Internet Auction, and our classifieds Web sites, who bid on, bought, or listed an item within the previous 12-month period. Amount includes users of eBay India since their migration to the eBay platform in April of 2005. Total value of all successfully closed items between users on eBay’s trading platforms during the period, regardless of whether the buyer and seller actually consummated the transaction. All accounts that sent or received at least one payment through the PayPal system within the previ- ous three-month period. Total dollar volume of payments initiated through the PayPal system during the period, excluding the payment gateway business, regardless of whether the payment was actually sent successfully, or was reversed, rejected, or was pending at the end of the period.

1.

2.

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5.

Figure 1. Four-year stock price comparison vs. Internet competitors (Note: On February 17, 2005 there was a 2 for 1 stock split for eBay)

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ebay Amazon yahoo

139

eBay: An E-Titan Success Story

Figure 2. Four-year stock price comparison vs. brick and mortar competitors (Note: On February 17, 2005 there was a 2 for 1 stock split for eBay)

$0

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$40

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ebay costco Wal-mart target

Exhibit 1.

Section III Cases on

Business-to-Business E-Services