Ebay Analysis

The History of eBay

eBay was founded in Pierre Omidyar's San Jose living room back in September 1995. It was from the start meant to be a marketplace for the sale of goods and services for individuals.

In 1998, Pierre and his cofounder Jeff Skoll brought in Meg Whitman to sustain the success. Meg had studied at the Harvard Business School and had learned the importance of branding at companies such as Hasbro.

Meg culled her senior staff from companies such as Pepsico and Disney, created an experienced management team with an average of 20 years of business experience and built a strong vision for the company -- that eBay is a company that's in the business of connecting people, not selling them things.

They quickly shed the image of only auctioning collectibles and moved into an array of upscale markets where the average sale price (ASP) is higher. ASP is a key metric in determining eBay's transaction fees, so increasing the ASP became an important item. By forging partnerships with namebrands such as GM, Disney and Sun, eBay has managed to do exactly that. Sun has sold

$10 million worth of equipment and it now lists between 20 and 150 items per day.

The Business Model

eBay has built an online person-to-person trading community on the Internet, using the World Wide Web. Buyers and sellers are brought together in a manner where sellers are permitted to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items in a fully automated way. The items are arranged by topics, where each type of auction has its own category.

eBay has both streamlined and globalized traditional person-to-person trading, which has traditionally been conducted through such forms as garage sales, collectibles shows, flea markets and more, with their web interface. This facilitates easy exploration for buyers and enables the sellers to immediately list an item for sale within minutes of registering.

Browsing and bidding on auctions is free of charge, but sellers are charged two kinds of charges:

* When an item is listed on eBay a nonrefundable Insertion Fee is charged, which ranges between 30 cents and $3.30, depending on the seller's opening bid on the item.

* A fee is charged for additional listing options to promote the item, such as highlighted or bold listing.

* A Final Value (final sale price) fee is charged at the end of the seller's auction. This fee generally ranges from 1.25% to 5% of the final sale price.

eBay notifies the buyer and seller via e-mail at the end of the auction if a bid exceeds the seller's minimum price, and the seller and buyer finish the transaction independently of eBay. The binding contract of the auction is between the winning bidder and the seller only.

eBay's Position in the Industry

Because access to the online trade channel (i.e. Internet) is universal, and the physical assets required to setup an auctioning site are all commercially available, barriers to entry in the auctioning industry are minimal. What comes stronger into play is the network externalities effect, as was mentioned before.

Being in a market with huge network externalities makes it extremely difficult for a competitor to get a large share of the userbase, since most users tend to gravitate towards the service which already offers the most users (since it will presumable have the greatest number of offerings.) This tremendous switching cost has the effect of locking in customers to a single auction service provider -- in this case eBay.

Given network externalities and the relative ease one company can mimick and duplicate another company's innovations online, the main tact rivals can deploy is to lower the price of their service, which is exactly what Amazon and Yahoo have done.

Currently eBay is extending to markets overseas; it is now operating in eight of the top ten countries by online market size outside of the United States. In Asia eBay is in 80% of its largest e-commerce markets. eBay is gaining users 50% faster in Europe than in the United States, and gross merchandise sales are growing 135% faster. The faster it grows, the more securely will it hold its top position in the auctioning service market.

In a very open market, where anyone can enter, the threat of substitute service is greater. An example of which, Half.com, was mentioned before. In fact, the management of eBay believes that fixed-priced trading as is done on Half.com has as much, or even more, potential than eBays core auctioning service.

Adversity

Since eBay