- The Washington Times - Monday, July 16, 2001

LONDON Failed Internet entrepreneurs wanting to start again could do worse than set up in competition against EBay, the online auction company that is the world's most valuable e-commerce business with 30 million registered users.
Just ask the successful ones who have tried it. People like Josh Kopelman, the 29-year-old founder of half.com whose online flea market was so successful that EBay bought it last month for $300 million.
Or Pierre-Francois Grimaldi, founder of iBazar, the Paris-based online auction market bought by EBay in February for up to $112 million. And why not ask Sung Moon Kwon? He was a main shareholder in the Internet Auction Company, a Korean-based company bought by EBay in January for about $120 million.
If you remain unconvinced, there are always the three young Semwer brothers in Germany who sold their Alando online auction house to EBay for $14 million two years ago.

Acquisitions 'just option'
"International expansion is core to our business. Although acquisition is not necessarily the preferred mode, it is an option," said Meg Whitman, EBay president and chief executive who was in London in late June visiting her latest European additions.
Mrs. Whitman, arguably Silicon Valley's highest-profile woman, did not invent EBay, which was founded in San Jose by Pierre Omidyar in 1995, now the company's chairman. She was headhunted in 1997 to become chief executive, having been head of Hasbro's $600 million Playskool division, where toys such as Mr. Potato Head hang out.
Since she arrived, EBay has ballooned from an obscure online auction site to a business worth $18.7 billion, despite the dot-com slump and one 3.5 times more valuable than Amazon, its most famous e-commerce rival. The 5 percent EBay stake Mrs. Whitman was given on joining is worth $935 million.
But despite EBay's phenomenal success there is one fundamental question that nags at the back of every cynic's mind. How much of the company's growth is due to the actions of Mrs. Whitman and how much is due to the actions of EBay's myriad entrepreneurial users?
This might sound like one of those interminable chicken-and-egg questions that might keep Mrs. Whitman's brain surgeon husband awake at night but it is one that Mrs. Whitman turns over constantly.

Users build company
"What is really interesting about EBay," said Mrs. Whitman, "is that we provide the marketplace, but it is the users who build the company. They bring the product to the site, they merchandise the product, and they distribute it once sold.
"In many ways, the users really do build the market, and we provide the platform for that being a success, which is unlike any other e-commerce business."
EBay is a chunk of software that allows buyers and sellers to talk to each other and create a marketplace on the Internet. The advantage it has, for the moment, over competing marketplaces is scale.
Sellers attract buyers who attract sellers. People with things to buy and sell will go to the biggest marketplace to maximize their chances of success. Think of a cell culture separating and expanding and you have a picture of how EBay grows.
By keeping the EBay site vibrant and fun Mrs. Whitman can help persuade users to keep coming back.

Share price is bouncy
Wall Street analysts who have seen the EBay share price bounce from an April low of $30 to $65 in June still puzzle over what is going on exactly.
"One question, for instance, that you have to ask is whether the move into allowing businesses to sell to each other and to consumers using EBay was planned or did it just happen?" asked Daniel Peris, Internet analyst at Argus Research.
"There is no question that the best ideas are generated from users," answers Mrs. Whitman. "We watch very carefully what the users trade, particularly in the miscellaneous category. We can then split out a new category and help users grow it.
"One of the fabulous things about this EBay model is that the users really point the way for what is going to work. You could argue the best research and development resources in the company are the users, not the executives."

No inventory, sales staff
All this organic simplicity translates into a financial model for a company that has no factories, no warehouses, no inventory, no sales force and no capital requirements.
"We had a gross margin in the first quarter of this year of 82 percent and an operating margin of 22 percent. Long term, this model should deliver operating margins of about 30 percent," said Mrs. Whitman.
Innovations that users have created and which EBay has seized upon to expand the marketplace include new categories such as car sales, new formats such as customized storefronts introduced in June for sellers with multiple items, and more sales of items using the more familiar fixed prices rather than the seven-day auctions EBay was built on. The acquisition of half.com falls into this latter category.
"I think fixed-price transactions on EBay could eventually be bigger than the auctions business," said Mrs. Whitman
The storefronts, which also use fixed prices alongside auctions, are turning EBay into a virtual shopping mall with no limit on the size of company that can take part.
"IBM could do it. Sony could do it. Marks & Spencer could do it," said Mrs. Whitman.

Take is 1.5 to 5 percent
To her credit, EBay's success, unlike most other Internet businesses, is measurable in positive cash flow and profits. The value of goods traded on EBay is more than $5 billion. Each time an item is sold, EBay takes a slice of the price. That translated into net sales in 2000 of $431.4 million and gross profits of $336 million, a gross margin of 77.8 percent. Net profits were $67.6 million.
EBay's take is 5 percent on items worth $25 or less, 2.5 percent for items priced between $25 and $1,000 and 1.5 percent on items costing more than $1,000.
"We have $1 billion of cash and liquid assets on the balance sheet," said Mrs. Whitman. "We generate a lot of cash and in our first quarter this year we generated $40 million of positive cash flow. In fact, we have been cash-flow positive in every quarter since inception, bar two."
So what could go wrong? Among the main dangers are serious technical glitches and EBay has certainly had those. The site once crashed for 22 hours, prompting 3,500 angry e-mails to Mrs. Whitman from furious customers. The business survived and has thrived, revealing the value of the EBay brand to American users.

Rival No. 1 in Japan
"We have to listen very carefully to our customers," said Mrs. Whitman. "They will only revolt if they are dissatisfied."
A price war with a big competitor with an equally vibrant marketplace is another threat.
For instance, Yahoo! Auctions is No. 1 in Japan where EBay is No. 2, although Yahoo is a long way behind EBay in America. But the size of the market makes it attractive for competitors to enter. Figures from Nielsen Net Ratings showed that in May alone, auction spending was $556 million, compared with $223 million a year earlier.
So what will Mrs. Whitman's next acquisition be?
The countries EBay is looking at include the Scandinavian markets as well as eastern Europe and the Chinese-speaking territories of Hong Kong, Taiwan and Singapore. Latin America is also a big potential market.

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