The sweet success of eBay

Most people now know that Pez, the character-based candy dispensers, played a crucial role in the creation of site eBay, the biggest online auction.

In 1995 Pamela Wesley, a keen Pez collector, complained to her fiance, Pierre Omidyar, about the difficulty of contacting other collectors to trade with them. Omidyar (who worked at General Magic at the time) decided to try a few of his ideas about efficient markets, auctions and using the net to help ordinary individuals do business. The rest is (stock market) hysteria.

It's less well known that, four years later, in February this year, when he was looking for a wedding present for Wesley, Omidyar turned to the company he founded, eBay. A couple of weeks before the big day, he found a very rare Pez "Bride" dispenser up for sale on the site.

EBay's chairman had to think hard about his bidding strategy, he says. "Since I bid under my real name, I didn't want word to leak out that I was really desperate to win this auction," he explains, while sipping tea in a swanky hotel overlooking Hyde Park. So the 32 year old, who was born in Paris but moved to the States when he was six, held off bidding until a day before the end of the auction and then went in "sensibly" ($900 was his opening offer).

Like most eBay users, he got twitchy as the auction moved to a close, interrupting meetings to check what was happening. In the last 15 minutes, he was outbid a number of times. He raised his maximum to "an absolutely ridiculous amount - because I had to have it" but wound up paying $2,375 (a fair price, given the excellent condition of the item, he says).

As it turned out, his staff had also clubbed together to buy him a matching Pez Groom (similarly rare), so on their wedding day Omidyar was able to present his wife with a matching Pez set. The symmetry of all this is appealing, though what's really interesting about this story is Omidyar's desire to stick to the rules of the game he'd set up four years previously. Ebay, which now lists over 3 million items for sale and claims around 1.5 billion page views per month, has made him wealthy.

According to a recent magazine survey he's America's 35th richest person, with around $4bn or $5bn to his name, depending on stock market fluctuations. He could have just contacted the seller, handed over a suitably large amount of money and saved himself the worry.

Instead, he played the game like the community of ordinary eBay users he credits with making his company such a success. Remaining true to the grassroots, community nature of the net even as he tried to bring commercial ideas online was important to Omidyar when he started eBay. There were a few online commercial efforts then, he says. "But they were all retail based - big companies saying, ïhow can we use the net to sell more stuff to more people and increase our profits?'.

"No one had a real respect for the individual nature of the net. What I wanted to do was create a commercial enterprise that would let individuals benefit from a network that reaches out to millions of people." Omidyar's desire to get a good price for his Bride Pez also says something about the traditional way eBay does business. The company is one of the few e commerce businesses that actually makes a profit (it takes various commissions on the sales it enables and also charges for services it offers on top).

And Omidyar looks troubled by the suggestion that, thanks to its stock price and its profits, eBay could afford to spend to acquire customers now. "We can't just throw tons of money at new markets. Maybe some people might do that - but our business approach is very different. It's the old fashioned way - don't spend more money than you're actually earning."

In person, Omidyar looks every inch the billionaire geek. Bright eyed and bearded, he's dressed in well-pressed casuals, proudly sporting a blue shirt emblazoned with the ebay.com company logo. He had hoped to have one with ebay.co.uk on it, he says. That's the main reason he's here, to boost eBay UK (www.ebay.co.uk), which officially launched last week. Strictly speaking, it's more of a re-launch. The site has been up and running for a while, though now it's been properly localised, with prices in sterling, British product categories and UK-based discussions boards.

As a result, it's time to try to take the press spotlight off the British online auction site QXL. Does he see it as serious competition? "We're solely focused on person-to-person trading. All our competitors have mixed models. It's not clear. Are they really committed to the person-to-person trading community or are they doing retail or selling banner ads? Our singular focus has brought success in the States. I think it will bring us success here too."

Aside from the UK, there are now eBays in Australia and Germany, with more on the way. In the States, the company has begun to open local, city-based sites that make it easier for people to trade bigger items like furniture and cars. "Our mission is to help people trade practically anything on earth," comments Omidyar. "We want to create a global market place."

Omidyar claims that with "over $200m a month in gross merchandise sales", the company is "the largest e-commerce hub - even larger than Amazon's retail operation." Indeed, eBay's biggest problem now is how to avoid becoming a victim of its own success. Recently it's had problems with outages, which are damaging for the small business people who have now set up shop at the site. "It's a huge responsibility," comments Omidyar, pointing out that the company credits back fees to sellers in the event of lengthy outages. "Ebay has become a part of people's lives. They need it to be there with utility-like dependability."

The company's size has made it a target for publicity-seeking pranksters and con artists - the most recent example being the man who put up one of his own kidneys for auction.When the company finds something like that, it closes it down. It also now bans sales of controversial, though not illegal, items, like alcohol and tobacco.

As for fraudsters, Omidyar says that the eBay community is good at self-policing. At the same time, the company has stepped up its own security efforts. The so-called "aggregator" sites that let people search for particular items across a variety of sites, are also causing problems (it's currently in dispute with AuctionWatch -www.auctionwatch.com). Omidyar objects to these sites because they present eBay on the same footing as sites that take less trouble over security, they don't search properly and piggy-back on someone else's effort and money (i.e. his).

EBay has become the kind of big beast that draws parasites. However, you can't help feeling that it doesn't really need to worry about small irritations. It's so big (it has 70% of the online auction market in the States), it's well protected, even against some of the big online names now getting into auctions (eg amazon.com and the likes of MSN, Excite and Lycos and others, who recently joined forces to create a networked auction that runs under the Fair Market name).

Omidyar says that eBay continually checks out the competition. But at the same time, he points out that his company benefits from ïnetwork effects'. This means that the more people who join a network, the more value is created for each person in that network. In other words, in the network economy, size matters. "It's very hard for a new market to draw people away from an existing market. So what we've seen with all our competitors is it's been very difficult for them to get lift off and get started."

Ebay's size and success have led some analysts to predict that its dynamic pricing model will soon dominate online. Omidyar argues that people don't want to haggle for low-price commodities but that flexible pricing will become popular with services and information - any items that are hard to value exactly. Given eBay's size (and the concomitant "network effects"), perhaps the sensible thing is not to attempt to compete with it but to come up with a new idea. Does he have any tips for budding net entrepreneurs?

His advice is to focus on "individual empowerment". He mentions sites like Accompany and Mercata, which let buyers club together to get reductions on certain goods and Epinions, the site which lets people rate and review things (and eventually earn money for their opinions if people begin to rate what they say). Don't just transfer old business models to the net, he says in conclusion. "Things are moving to business models that could not have existed without the internet. Ebay is the first example of that and there are many others. So I would encourage entrepreneurs to focus on this medium, which is almost pervasive, global and instant, and think of something new you could do with that."

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