eBay's Bid To Conquer All

THOMAS FLUHARTY FOR TIME
EBay's Meg Whitman prevails where many others have failed

Let's say you need to get your hands on a 53-passenger school bus with hydraulic brakes and a six-cylinder diesel engine. Or a 1998 Ford monster truck called Wizard that will let you "give rides all day, crush cars all night." Or four pawnshops--plus a half interest in three check-advance businesses--spread across western Kentucky. Where would you start to look?

There's only one place on earth: eBay.

If the name eBay conjures up Bongo the Monkey, Huggy the Bear and the rest of the Beanie Baby clan, you're about three years behind the times. Computer giant Sun Microsystems is listing up to 150 items a day on eBay, including e4500 servers that sell for as much as $15,000. eBay Motors, which launched last April, is the third biggest auto-sales site on the Internet. And eBay's new Business Exchange, which has listings for $6,000 backhoes and $25,000 lathes, has doubled its offerings in the past quarter.

The Internet collapse continues, and even substantial firms like Amazon and Yahoo are struggling to stay ahead of it. But eBay has never had it better. Revenues topped $430 million last year, up 92% over 1999. The auction king now has 22.5 million registered users, a number that grew at a 125% annualized rate last quarter. And it's on track to do more than $6 billion in gross merchandise sales this year.

With stats like that and the stock up 51% since Jan. 1, the New Economy pundits are scratching their heads. How is it that a flea-market auction site has become the most successful company in cyberspace? And when so many other dotcoms are crashing and burning, will this high-tech highflyer come down to earth anytime soon?

At the heart of eBay's good fortune is perhaps the most compelling business model on the Net. As an online middleman between buyers and sellers, eBay is building an empire that bricks and mortar could not have touched. "If Buy.com goes down, you can still go to Circuit City," says

Meg Whitman, the Harvard Business School-trained CEO of eBay. But if eBay crashes, there's nowhere else to go. And because eBay's job is connecting people--not selling them things--it isn't lumbered with a traditional retailing cost structure. No buying, warehousing or shipping. No taking returns or unloading overstock. "eBay is the only e-tailer that really fulfills the promise of the Web," says Faye Landes, an e-commerce analyst at Sanford C. Bernstein & Co. "And the key is its virtuality."

That virtuality translates into remarkable profit margins. eBay's gross margins last quarter were a stunning 82%. Amazon, which actually has to acquire goods and ship them out, has gross margins averaging 20%. And because so much of eBay's customer recruitment is viral--sellers attracting buyers to the site, and buyers attracting sellers--its customer-acquisition costs are just half of Amazon's.

eBay is also the Internet's clearest example of a company that has exploited its "first mover" advantage. The lore among Internet strategists was that whoever nabbed Web space early would have a commanding commercial lead. The failure of a long list of early-bird dotcoms, from CompuServe to eToys, has proved that wrong.

But eBay did benefit tremendously from being first. The key: by locking up the most buyers and sellers in one place, it created a market no one could afford to leave. If you don't like Amazon, you can do roughly as well at Borders.com . If you leave eBay, you'll be going to a site with many fewer products for sale and many fewer buyers.

CEO Whitman and her cadre have leveraged themselves into all but total dominance of the online-auction market. Attempts by other companies to replicate eBay have bombed. eBay controls more than 80% of the online-auction market, with Yahoo and Amazon lagging far behind. eBay lands all the lucrative cross-promotional tie-ins with companies like Visa and Mailboxes Etc. And the auctioneers keep forging new partnerships with name-brand powerhouses like General Motors (which is allied with eBay Motors) and Disney (which uses the site to auction off authentic studio props, like Cruella De Vil's costumes from the movie 102 Dalmatians).

The goal now is to create entirely new markets. Says Whitman: "The best thing to do to grow your company is to extend a proven concept." The company's marketing division had long known that it was missing out on potential customers. Surveys showed that some buyers are psychologically averse to shopping by auction. They don't like the bidding game, and they are too time pressed. "A lot of people use the Web to simplify their lives," says Landes. "Being involved in an online auction is not necessarily simple."

So when intelligence came back from eBay's Consumer Insights Group that an obscure website launched a year ago called Half.com was a prospective threat, Whitman's gang went to work. Half.com started as a cleverly designed site that allowed people to sell used books, CDs and videos for a fixed price (see following story). The eBay investigators recognized immediately that Half's fixed-price system could become a devastating threat to their floating-price auction model. So they asked for a meeting. And then they bought the company.