eBay: An Examination of a Business Model without Boundaries

Christopher Chavez and Daniel Lindquist

The History
Back in 1995, the internet was still a fledging network of hardcore computer users
who used the medium as a way to communicate with one another. The World Wide Web
had just come into existence, and while more users were connecting every day, it was still
a relatively small operation. There were, however, a number of aspiring entrepreneurs
who saw the potential that the internet had for creating a business. One of them, a Silicon
Valley businessman named Pierre Omidyar, had become frustrated with the system of
buying and selling stock. In trying to buy a stock during its IPO, he found that the stock
price jumped 50% before his order was able to go through. He wondered why some
people should be allowed to get one price for the stock and others would have to pay
another. This didnt seem fair to Omidyar, so he decided to start an online auction, where
buyers could determine the price of an item based on the amount of interest there was in
it. This, he figured, would be about as close to a free market system as possible.
Already a millionaire from when Microsoft bought out one of his previous
employers, eShop, Omidyar set to work getting his auction site up and running. He
called it AuctionWeb and decided to use his web consulting sole proprietorship, Echo
Bay Technology Group, to host it. Since EchoBay.com was already taken, he chose to
use the next best option: eBay.com. Omidyar advertised by posting in newsgroups and
other places where netizens then dwelled. When AuctionWeb first went live on Labor
Day of 1995 it attracted a whopping zero visitors. Over the next few days, though,
people started coming to the site and, as word of mouth spread, the site started to become
popular. By the end of 1995, thousands of items had been listed for sale and the site was
attracting quite a number of visitors. In those days, the level of trust between users was
quite high and the few disputes that arose were often mediated by Omidyar himself. It
wasnt long, however, before AuctionWeb outgrew its small roots and needed to move on
to bigger things.
By 1998, Omidyar had partnered with a number of other individuals and eBay had
shifted to become a more corporate entity. They hired Meg Whitman, a Harvard Business

School graduate, to become the new CEO of the company. She quickly set to work
streamlining eBay and determining a new company strategy of connecting people, not
selling things. eBay then moved away from selling collectibles and into more big ticket
items as a way to increase their return on each sale. On September 24, 1998 eBay held an
initial public offering, going on to become the most successful e-business in history.
The Business Model
Originally, Omidyar planned for eBay to be a free service that would let users get
together and buy and sell from one another. Once the site began getting popular, though,
Omidyars ISP started charging him as a business for all the bandwidth his site was using.
Omidyar decided that he would set up a model whereby buyers would not have to pay
anything and sellers would not have to pay anything to list, but that they would have to
pay a certain percentage of the final sales price. People started paying as soon as
Omidyar set up this model and soon he was making more than the amount his ISP was
charging him monthly. This meant that Omidyar had set up the first profitable e-business,
one that had turned a profit within its first month of operation.
Nowadays, eBays business model remains true to its roots but adds a few more
features. In addition to the percentage of the final sales price, there is a small listing fee
that sellers have to pay when listing an item based on the opening bid price set on the
item. There are also fees for special listing options that help to promote the item. All in
all, these methods prove successful because eBay has few expenses. eBay merely acts as
a meeting place for the buyer and seller and all the real costs associated are the
responsibilities of the users.
What makes eBay unique from other businesses is its nature of no boundaries.
With the internet, any person from anywhere in the world can easily find items being sold
by any other person anywhere in the world. There are no geographical boundaries
limiting them. At the same time, that item can go for any price that the buyer is willing to
pay, so there are no financial limitations either. Truly, eBay presents an unequivocal
amount of freedom to its users.
The Success

eBay has come a long way from its humble beginnings. It is now an
internationally recognized and respected online e-business. On any given day eBay has
millions of items listed across thousands of categories. One can literally find almost
anything being offered for sale. By working on an international scale eBay can find more
buyers for its sellers and more potential opportunities for its buyers. Customized sites in
each different location make it much easier for natives of each region to use eBay. The
buyers and sellers are responsible for their transactions and eBay never owns the items
that are listed. This is a clever method to avoid a large part of the liability and because
Omidyar got tired of trying to handle mediations and complaints. Feedback was
implemented to go along with each individual account so that buyers and sellers could
keep track of someones history of transactions and how well they went. Forums were
also created where routes for mediation and resolution were discussed and users were
able to help each other. eBay has largely become not just a business but an Internet
community.
As mentioned before, eBay charges its sellers fees to earn money. There is a
general initial listing fee that ranges from $.30 to $3.30 based on the original posting
price as seen in Table A. For some bigger ticket items like property and automobiles the
charges are greater and can be found on the site at
http://pages.ebay.com/help/sell/fees.html. A seller can then opt to add additional
upgrades to the posting for added showiness in hopes of luring more potential buyers.
Among other things, a seller can add pictures or posting highlighting or choose to make it
a feature item. The price range for these features can range from $0.05 to $99.95
depending on what exactly is desired. Once again the price is often higher for larger
ticket items. Once the item has been sold a final value fee is to be paid. This fee is based
on a percentage of the final selling price of the listed item as seen in Table B. Individually
each listing does not net eBay a large amount of revenue; however, when one considers
the volume of business that is being conducted, it is easy to understand that eBay is
financially successful.
In its third financial quarter of 2003 eBay reported consolidated net revenues of
$530.9 million, up 84% year over year. Its consolidated net income was reported as
$103.3 million. Compare this to its reports from its second financial quarter of the year.

At that time, eBay reported consolidated net revenues of $509.3 million and a
consolidated net income of $109.7 million. As one can see, it is doing quite well
financially. The number of users that eBay is attracting is also exceptional. In the second
quarter, 34.1 million out of 75.3 million were considered active users, meaning they had
bought, bid, or listed in the last twelve months. The increase is over 50% in both areas
from the same quarter of the previous year. In the third quarter 37.4 million out of 85.5
million users were considered active. The numbers continue to grow. The value of goods
traded through eBay is astonishing. In the second quarter of 2003 this number is $5.6
billion worth of value going through eBay; this grew to $5.8 billion in the third quarter.
The sheer number of listings, with 265 million in the third quarter alone, makes it easy to
see how a little profit on each can go a long way. It becomes quite clear that eBay is
dependent on volume for its success.
The International Scene
As a result of being an online marketplace, eBay has the ability to go international
and around the world with its unique business style. There are currently eBay sites or site
affiliates for 22 different nations including the US. The list can be seen below in Table C.
While the international sites do not have the same amount of business going through
them, they are still doing quite well. In the third quarter of 2003 eBay reported $256.1
million made in the US compared to $154.7 million made internationally; however, the
growth rate for the international business is 105% for year to year compared to the
domestic 41% growth year to year. eBay continues to grow and grow. The international
sites are customized in the native language of the region and also have different layouts to
reflect the different cultures that will be using the sites. Many of the sites and affiliates in
other nations have been taken over by eBay, as have many sites domestically. With its
massive financial strength eBay has a strong hold over the competition, leaving the few
competitors it has struggling to catch up.

Appendix
Starting Price,
Opening Value or Insertion Fee
Reserve Price
$0.01 - $9.99

$0.30

$10.00 - $24.99

$0.55

$25.00 - $49.99

$1.10

$50.00 - $199.99

$2.20

$200.00 and up

$3.30

Table A Initial listing fees for general items

Closing Value

Final Value Fee

$0 - $25

5.25% of the closing value

$25 - $1,000

5.25% of the initial $25 ($1.31),

plus 2.75% of the remaining closing value balance ($25.01 to $1,000)

Over $1,000

5.25% of the initial $25 ($1.31),

plus 2.75% of the initial $25 - $1000 ($26.81),
plus 1.50% of the remaining closing value balance ($1000.01 - closing
value)
Table B Final value fees for general items

Global Sites
Argentina
Australia
Austria
Belgium
Brazil
Canada
China
France
Germany
Ireland
Italy

Korea
Mexico
Netherlands
New Zealand
Singapore
Spain
Sweden
Switzerland
Taiwan
United Kingdom
Table C eBay international sites

References
Cohen, Adam. The Perfect Store: Inside eBay. USA: Little Brown and Company. 2002.
eBay: A Concise Analysis. <
http://www.cs.brandeis.edu/~magnus/ief248a/eBay/index.html>.
eBay Company Overview. <
http://pages.ebay.com/community/aboutebay/overview/index.html>.
eBay. <http://www.ebay.com>.