The Attic Of e
By Adam Cohen/San Jose
When Sharon Balkowitsch sold antiques from a stall in Bismarck, N.D., she was a victim of geography. There were few buyers in her hometown of 54,000, and prices were low. She started putting her wares up for auction on eBay last year and suddenly found herself part of the global marketplace. An Art Deco ashtray she bought for $20 was bid up quickly--and sold for $290. A vase she got for $5 went to a California buyer--for $585. She even sold an old tractor online--for $2,300, to a priest from New York. Checks have been pouring in from as far away as Iceland, Egypt and China. "The top month I ever had in the stall I sold 15 items," she says. "Now I can sell 15 items in an hour."
Welcome to the eBay revolution. Auction sites are one of the hottest corners of cyberspace right now. Online bidders are eagerly competing for new ovens ubid.com and used microscopes going-going-sold.com) There are service auctions, where lawyers can underbid one another for assignments to register patents elance.com) and reverse auctions, where buyers name their own price for a ticket to Hawaii and airlines decide if they will go that low priceline.com) There are niche auctions for vintage surfboards webworldinc.com/vintage and movie memorabilia auction.newline.com) express auctions that wrap up in an hour onsale.com and auction sites where the proceeds go to charity webcharity.com)
For an industry that's all of four years old, the dollar amounts are staggering: $4.5 billion in sales this year, and an estimated $15.5 billion by 2001. eBay is the dominant player in the online-auction world, with 7.7 million registered users bidding on some 3 million items. But other Internet heavyweights are hard at work trying to break off some of the market for themselves. Amazon.com added an auction site last spring. (It appears to be starting slowly; as of October, eBay had more than five times as many visitors as Amazon.com's auction site). Yahoo, the most visited site on the Web, introduced its own auctions last year. (Yahoo's big selling point: listing items is free.) And in September, Microsoft, Dell Computer and more than 100 other companies announced that they're linking their websites--and their 46 million users--in a new auction consortium run by FairMarket, a company that creates and runs online auction sites.
Industrial players are also getting in on the online-auction craze, driving down the cost of equipment by bidding to buy it directly from suppliers. There are business-to-business sites for construction equipment ironmall.com and for farm machinery like cotton pickers farmbid.com) Bulk quantities of latex paint are up for auction at paintandcoatings.com and pulpandpaperonline.com has basket centrifuges.
Global auctions are the kind of ideal market Adam Smith could only have dreamed of. Sellers are, at least in theory, guaranteed a price that isn't too low: they get to sell to the highest bidder anywhere in the world. And buyers are assured the price isn't too high because they get to choose the lowest one being offered by any seller in the world. Location becomes unimportant. You're not penalized for being a seller stuck in low-traffic, low-price Bismarck or a buyer shopping in high-cost Manhattan. Auctions also minimize transaction costs ("friction" in e-commerce-speak) and eliminate the need to operate bricks-and-mortar stores. Online auctions "wring out the inefficiencies in the supply-chain process," says FairMarket CEO Scott Randall. They also benefit from Metcalfe's Law (named after Robert Metcalfe, the founder of 3Com Corp.): the value of a network increases by the square of the number of people on it. Every time a conventional online retailer adds a new user, it's just one more person who can buy its products. But every time eBay adds a new user, he can buy from or sell to any of the 7.7 million people already on the network. A retailer, in other words, is one to many, while eBay is many to many.
Online auctions have their limits. Auctions are most useful for setting the price of goods of indeterminate value. (Some of the earliest ones were held by Roman soldiers selling off battle loot.) Auctions make more sense for items whose worth is uncertain (an antique chair or a used forklift) than for commonly sold goods (a new pair of name-brand blue jeans).
But online auctions are shaking up the way America does business. People are quitting their day jobs and finding they can support themselves entirely by selling on eBay and other auction sites. Traditional retailers are significantly augmenting their revenue by selling on eBay, and some are shutting down their stores entirely. Businesses that piggyback onto online auctions--insurers, shippers, escrow services--are booming. Offline businesses that compete with eBay--from antiques stores to classified-ad sections--are bracing for trouble.
Some of the impact will be more profound. Online auctions may destabilize the notion of a fixed price, leading buyers and sellers in all kinds of transactions to negotiate more over what items should cost. And they are likely to further erode the economic barriers between nations, speeding the way to a single world market. The full effects of eBay's hyperefficient, banish-the-middleman revolution haven't yet been felt, but one thing is clear: the pre-Internet model of buying and selling is going, going...
It all began with Pez and a man named Pierre Omidyar, now 32. In the summer of 1995 Omidyar's fiance (now wife) Pam, who collected Pez dispensers, was bemoaning how hard it was to find other people to trade with in the San Francisco Bay Area. Omidyar was already an e-commerce pioneer (Microsoft eventually bought out eShop, a company he co-founded), but lately he had been wrestling with how the Internet could be used to create fairer markets. The Pez dilemma led Omidyar to the flash of an idea: an Internet auction site could function as the ultimate efficient market.
Omidyar wrote some code and over Labor Day weekend of 1995 launched what he called AuctionWeb, which was supported on the $30-a-month Internet service provider he was hooked up to from home. (The site's domain name was www.ebay.com and eBay was the name that stuck.) There were no Pez dispensers--that came later--but there were listings for a whole lot of computer hardware. eBay started out free, but it quickly attracted so much traffic that Omidyar's Internet service upped his monthly bill to $250. Now that it was costing him real money, Omidyar decided to start charging. He concocted a fee scale similar to the one eBay uses today: a nominal fee for listing an item (10[cents] back then, as little as 25[cents] now) and a percent of the final sale price.
The payments that arrived with Omidyar's daily mail were small--in some cases dimes and nickels taped to index cards. But those little payments were coming in piles. eBay took in $1,000 the first month, more than it cost to run. Omidyar really knew he was onto something when he put up a listing for a broken $30 laser pointer that he was about to throw out. He fully disclosed that it didn't work--even with new batteries--and started it at $1. Inexplicably, a bidding war ensued, and someone ended up taking it off his hands for $14. Meanwhile, the site's revenues kept doubling: they were $2,500 the second month, then $5,000, then $10,000. Omidyar eventually had another insight. "I said O.K., I've got a hobby that's making me more money than my day job," he recalls. "So it might be time to quit the day job."
As eBay's only full-time employee, Omidyar soon found himself thrust into a new and unwanted role: grievance officer. Buyers and sellers with complaints about each other were e-mailing him personally and asking him to step in. Omidyar urged them to work things out amicably between themselves. But if eBayers really had to gripe, he decided, they should do it publicly on the site. "I wanted to reinforce the notion that if you're going to bring a complaint about someone, do it out in the open," says Omidyar. "You can't come running to Daddy." He had one other proviso: if traders are going to complain about people they don't like, they should be willing to say something nice about people they do.
That was the genesis of the Feedback Forum, one of eBay's most distinctive and popular features. Omidyar kicked it off with a Founder's Letter in February 1996 in which he laid out a philosophy that still guides eBay: that people are basically good, that they make mistakes, and that they should be given the benefit of the doubt. "I was afraid it would turn into just a gripe forum, but as I watched it develop, I was amazed to realize that people enjoy giving praise." In fact the feedback eBayers posted about one another was overwhelmingly positive.
Within a few months, Omidyar was ready to take eBay up a notch. He brought in a partner with the business background he lacked: Jeff Skoll, a friend and Stanford M.B.A., then working in e-commerce for Knight Ridder. Together they began to bring in more employees--techies, customer-support staff, finance people. In those early days, eBay--operating then as now out of a bland San Jose, Calif., office park--was a goofily informal place to work. Decor ran to Star Wars figures and giant papier-mache Pez dispensers, a wedding gift when Pierre and Pam tied the knot. The first employees had to assemble their own desks, and everyone sat on fold-up beach chairs. Work ground to a halt at 3 p.m. for Nerf soccer games.
By 1997 Omidyar had lined up a venture-capital firm (Benchmark Capital, whose initial $6.5 million investment is now worth some $4 billion). eBay hired a marketing consultant to come up with the company's catchy, multicolored logo and confronted (and later defeated) threats from two new auction sites backed by well-funded big companies: Onsale and Auction Universe.
eBay had a first choice for its new CEO: Meg Whitman, who had honed her consumer-marketing and managerial skills at Hasbro (Mr. Potato Head was one of her toy lines) and worked as a marketing executive at Disney. At first it didn't look as if she was going to come. She had strong ties to the East Coast--kids in school and a husband who was a top brain surgeon at Massachusetts General--and eBay seemed like a lark. But looking at the numbers and getting a sense of the passion people felt for eBay, she was hooked.
Whitman started imposing discipline fast. She whipped the finances and infrastructure into shape and got the company ready to go public. Within months of her arrival in early 1998, she was leading an eBay team on a road show to win over investors. On Sept. 24, 1998, the initial public offering took place, with shares offered at $18; by the end of the day the price had bounded up more than 160%, to $47. Omidyar, Skoll, Whitman and the rest of the eBay staff were suddenly rich. Back at the office, conga lines snaked through the hallways.
In the year since the IPO, eBay has hit a few speed bumps. The site has been plagued with headline-grabbing crashes, among them a 21-hr. outage in June, four more in July, and a 10-hr. shutdown in August that sent eBay stock plunging 10%. The stakes were higher than ever because the eBay staff was well aware that thousands of individuals outside the company--single mothers, disabled people, seniors--were supporting themselves by selling on eBay. "It was probably the single most stressful time we've had at eBay," says Skoll of the August crash. "Poor Meg would catch an hour's sleep on a cot and then have to face the TV cameras." There have also been occasional embarrassments (and some probable hoaxes) that the press--and late-night talk-show hosts--have had fun with: the seller who put a kidney up for sale (the bidding was up to $5.7 million before eBay called it off); listings for a bazooka and other military weapons (also yanked). And, of course, the 17-year-old boy who put his virginity up for auction.
Still, today eBay is one of the most dazzling sites on the Internet. Log on and feast your eyes on a global garage sale that includes--well, just about any inanimate object you've ever seen, heard of or lusted after. That Partridge Family lunch box that made you feel like the Man in third grade? The bidding starts at $5. That Art Deco clock you always wanted? There were recently 19 of them being auctioned on eBay. Sure there's kitsch (Elvis snow globes, anyone?), and a scary number of Beanie Babies. But there's also luxe (usually a few Rolls-Royces are going at any given moment). Poke around and you'll come across the impressively old (dinosaur teeth!), the bizarrely new (who really needs to bid on last month's TV Guide?) and the just plain weird (anyone for a metal BEWARE OF ATTACK RATS sign?). And you will find thriving subcultures that collect things you didn't know anyone bothered to collect. Really, people: antique waffle irons?
eBay is also one of the Internet's greatest financial success stories. It has defied the 11th Commandment: Internet Start-Ups Shall Bleed Red Ink. It's made money from its first month of operation. After only four years, eBay is worth some $20 billion--more than Sears and J.C. Penney combined--and its stock price has surged 25-fold. The rewards for the key players have been lavish. Whitman, after less than two years at the company, controls shares worth about $1 billion. Skoll's net worth is more than $3 billion. Omidyar's 30% ownership adds up to more than $5 billion.
Why has eBay succeeded so wildly? A big factor is that eBay was first on the block, locking in buyers and sellers early. The more people flocked to eBay, the more it became the place to be. But the real genius of eBay is its success in building a community--"maybe the most real community on the entire Web," says Whitman. There's no question people like hanging out in eBayland. The site gets more than 1.5 billion page visits a month. And at a time when the Internet mantra is "stickiness"--how long users stay on a website--eBay is cyberspace superglue. Each visitor to Amazon.com spends an average of 13 min. a month on the site. On eBay, each visitor's monthly average is about 1 hr. 45 min.
eBay--and the online-auction phenomenon it has spawned--is redrawing America's business landscape. There's scarcely a company in America that won't be affected by the new rules of commercial engagement. "Every week someone will come up to you and say this has changed my business entirely, and you can fill in the blank for what business," says eBay vice president of marketing and business development Steve Westly. "A guy came up to me at the National Auctioneers Association and said, 'I'm in the bull-semen business, and eBay's completely changed the access I have to bull semen.'"
But not everyone is going to win in the new eBay economy. Hardest hit so far are antiques and collectibles shows, which aggregate items like eBay does, but less efficiently. Joe Spotts, president of L&S Management, owns two shows--one in Denver, the other in Kansas City, Mo.--and he says the number of vendors at both has slid 30% in the past 18 months. And eBay is the reason. "It has the potential of absolutely destroying the business," says Spotts. "I've seen several shows around the country that are near shutting down." Flea markets could be the next to suffer. When the National Flea Market Association held its annual meeting in Orlando, Fla., in October, 100 members jammed into a session on the Internet future to hear dire predictions of what the Net would do to their land-based businesses.
Classified ads--and the newspapers that heavily rely on them for revenue--are also vulnerable. An eBay listing is cheaper; there's no limit on length; you can include a photo; and it reaches far more people than any newspaper.
Flea-market aficionados insist that eBay is doing a more abstract kind of damage: it's destroying the pleasures of the offline collectibles world. Al Hoff, author of Thrift Score and collector of "everything but Levolor blinds," says eBay has changed the atmosphere in flea markets and thrift stores. She now comes across entrepreneurs who are trolling the aisles looking for items they can resell for a higher price online. "The code of ethics used to be that you bought things for yourself," she notes. And she objects that eBay's efficiency is making it harder for bargain hunters like herself. A friend recently tried to buy a Pink Floyd eight-track tape on eBay--and watched as it sold for $227. Time was, Hoff says, when you could find eight-track tapes selling for a quarter at thrift shops. "Now everything goes for the highest price anyone in the world is willing to pay for it," she says. Hoff is worried that online auctions may ultimately spell the end of flea markets and thrift shops, and that an important slice of Americana will be lost.
eBay is sticking with its core mission of consumer-to-consumer auctions but is also working to expand its reach dramatically. In October, eBay announced a new venture: eBay Great Collections, a new area on the site for antiques and fine collectibles. Along with the acquisition of Butterfield & Butterfield, the world's fourth largest auction house, Great Collections marks a move by eBay into the high-end market. (The average sale on eBay is currently about $40.) eBay has also begun rolling out local eBays, starting with eBay Los Angeles. The idea is to provide a local market for big items like cars and furniture that can't easily be shipped long distances and for location-specific items like concert tickets.
eBay's most ambitious undertaking right now is its drive to go international. It's a big enough priority that Omidyar has returned to his native France to help oversee the effort. eBay has always had a small percentage of overseas users logging into its U.S. site, but now it is aggressively moving into foreign markets. In June it purchased Alando.de--Germany's equivalent of eBay--and folded it into the eBay site. The company also has sites running for the U.K., Canada and Australia. eBay is far ahead in those countries but vulnerable in places where it is less well known--and where one of its rivals could take hold first. "The battle grounds are France, Italy and Japan--the biggest prize, the second largest Internet market in the world," says Whitman.
It's not just a push for market share. Omidyar and his colleagues are still driven by the company's original goal of creating a global market where everyone competes on an equal footing. One pet project is an effort to bring a Guatemalan village into the global economy by hooking it up to eBay. Consumers in the developed world could buy local handcrafts at lower prices, and eliminating layers of middlemen would allow villagers to keep more of the purchase price for themselves.
The global online marketplace will be here before we know it, and eBay's refrain "eBay everywhere" seems destined to become a reality. It's something the National Flea Market Association members are starting to accept. Several members of the association have begun moving online, working to put together virtual-flea-market sites like Fleamarket.com And even diehard thrift-shop mavens are becoming reconciled to the fact that the future belongs to eBay. "You can't stop the wheels from turning," sighs Hoff. "In fact, I have to confess: I just bought something on eBay this morning."
--With reporting by Michael Krantz/San Francisco
With reporting by MICHAEL KRANTZ/SAN FRANCISCO