|Behind eBay’s Comeback |
By JAMES B. STEWART
New York Times
July 27, 2012
Remember Myspace, Friendster, eToys, Webvan, Urban Fetch, Pets.com? Like meteors, they burned with dazzling brilliance before turning shareholder dollars to ash. EBay, Yahoo and AOL, the dominant Internet triumvirate circa 2004, seemed destined for a similar fate. The conventional wisdom has been that once decline sets in at an Internet company, it’s irreversible.
But that was before eBay’s latest earnings surprise, which sent its stock soaring and had analysts scrambling to raise their projections. “Can Internet companies ever turn around? The answer has been no,” Ken Sena, Internet analyst at Evercore, told me this week. “But now, there’s eBay. The answer may turn out to be yes.”
If so, eBay’s success has big implications for struggling companies like Yahoo and AOL, not to mention more recent sensations that have already lost some luster, like Zynga, Groupon and even Facebook, whose shares tumbled this week after its first earnings report as a public company disappointed investors. “EBay has demonstrated that it’s possible to turn the corner even against long odds,” said David Spitz, president and chief operating officer of ChannelAdvisor, an e-commerce consulting company.
EBay shares hit a peak of over $58 in 2004 and made its chief executive, Meg Whitman, a Silicon Valley celebrity. But by November 2007, when she stepped down to enter politics, the telltale signs of decline had set in. Its stock was slumping. Its dominant online auction business had matured, and growth had slowed. Sellers complained about higher fees and poor support. That year, eBay wrote off $1.4 billion on its poorly conceived $2.5 billion acquisition of the calling service Skype, recording its first loss as a public company. Analysts worried that eBay had lost its quirky soul, and was abandoning the flea market auction model that had made it distinctive and dominant in online auctions. By early 2009, its stock was barely over $10, down over 80 percent from its peak.
Ms. Whitman was succeeded by a former Bain & Company managing director, John Donahoe. “One of the unique things about the Internet is a company can be a white-hot success and become a global brand and reach global scale in just a few years — that’s the good news,” he told me this week. “But then somebody can turn around and do it to you. There’s constant disruption. One of the first things I had to do here was face reality. EBay was getting disrupted.”
Little more than four years after taking charge, a buoyant Mr. Donahoe sounded like the chief executive of a surging start-up when he announced eBay’s latest results on July 18. So thoroughly has eBay been transformed that he didn’t even mention its traditional auction business. “Our multiyear effort is paying off,” he said. Profit more than doubled and revenue jumped 23 percent. “EBay is revitalized. We believe the best is yet to come.” In a stock market struggling with recession fears and the European debt crisis, eBay stock this week hit a six-year high.
How has eBay done it when so many others have failed?
Excitement about eBay’s prospects has little to do with its traditional auction business, or even its core e-commerce operations, although its marketplace division posted solid results and had its best quarter since 2006, the company said. Most of its growth came from mobile retailing and its PayPal online payments division, a business it acquired in 2002 for what now looks like a bargain $1.5 billion.
As consumers embrace shopping on their smartphones, “mobile continues to be a game-changer,” Mr. Donahoe said. He noted that 90 million users had downloaded eBay’s mobile app and that 600,000 customers made their first mobile purchase during the most recent quarter. “A woman’s handbag is purchased on eBay mobile every 30 seconds,” he said. “Mobile is revolutionizing how people shop and pay.”
“It’s hard to think of many companies that benefit from mobile,” Mr. Sena said. “Usually it means more competition. But clearly, eBay is one of them. EBay is offering a one-click payment solution. You don’t have to type in a credit card number or PIN. It’s just one click on your mobile phone.”
Mr. Spitz said he was recently stopped at a traffic light and the sun was bothering his eyes. By the time the light turned green, he had used his phone to order and pay for sunglasses. “This is what commerce anytime, anywhere means,” he said. “It’s here.”
Mr. Donahoe deserves credit not only for recognizing that smartphones would change the shopping experience, but for acting on it, Mr. Spitz said. “EBay under Mr. Donahoe pivoted hard in this direction,” he said.
Mr. Donahoe confirms that, saying: “We saw the mobile revolution early and we made a big bet across the entire company. We saw that mobile was an important factor for our customers. It was becoming the central control device in their lives. We didn’t worry if it cannibalized our existing business, because we knew it was what our customers wanted.”
The smartphone “has blurred the line between e-commerce and off-line retail,” Mr. Donahoe continued. “Four years ago, you had to be in front of a laptop or desktop to shop online. Now you can do it seven days, 24 hours. We’re going to have to drop the ‘e’ from e-commerce.”
Retailers have warmed to the new eBay. “They’re a great partner,” Gerald L. Storch, chairman and chief executive of Toys “R” Us, told me this week. “In an omni-channel retail world, mobile, social, Internet, physical stores — they’re all linked. Customers want to interact with our brand at every level. EBay is especially strong in mobile and payment systems, but they address all those areas and help us compete. We do everything with them.”
Amazon was supposed to have crushed eBay by now with its bigger scale and state-of-the-art inventory and delivery systems. That didn’t happen, but Amazon remains eBay’s biggest competitive threat. Amazon continues to invest in its delivery systems and it, too, has an effective mobile app and one-click payment system.
Even so, many analysts see plenty of room for both Amazon and eBay, and perhaps even more competitors. “When you look at e-commerce as a share of overall consumer spending, it’s not even 10 percent worldwide,” Mr. Spitz said. “There’s plenty of room for growth.”
Mr. Donahoe agreed. “We’ve never viewed the world as a zero-sum game with Amazon,” he said. “There’s plenty of room for multiple winners.”
Moreover, eBay is likely to benefit from its global reach and scale as e-commerce expands. “Consumers aren’t going to download 30 apps from individual retailers, but they will download both eBay and Amazon,” Mr. Spitz said. EBay and PayPal apps already rank among the top 10 mobile apps, eBay said.
And it’s obviously in retailers’ interests to prevent Amazon from becoming an e-commerce monopoly. EBay stresses, without mentioning Amazon by name, that it doesn’t compete with its retail customers. Some sellers have complained that when Amazon spots a hot product, it starts promoting and selling it itself at lower prices.
As Mr. Storch put it: “We do sell Kindle Fires and other Amazon products, but when it comes to retail, eBay helps us succeed. Amazon is the competition.”
The dynamics of e-commerce aside, several broad themes emerge from eBay’s turnaround:
¶ EBay had to break with its past and seize new opportunities. “It was clear the world had innovated around eBay and eBay had stayed with the same formula,” Mr. Donahoe said. “Saying that was considered heresy. With any company that’s been this successful, there’s enormous momentum to keep doing what you’ve been doing and hope the world will go back to what it used to be.”
At the same time, EBay didn’t entirely abandon its roots — it’s still an e-commerce company. But “we had to make changes that were unpopular with subsets of our customers and other people. You have to have the conviction to do what you know is right,” Mr. Donahoe said. “We spent three years fixing the fundamentals and tried not to worry about what everyone else was saying.”
¶ Technological innovation is critical. “We stepped on the gas with innovation,” Mr. Donahoe said. “We’re more technology- and innovation-driven than we’ve ever been. Mobile gave us the opportunity to start with a clean slate from a technology perspective.” Less than two years ago, eBay acquired Critical Path Software, which was helping to develop eBay’s mobile apps. “We thought they were the best, so we bought them and got a couple hundred of the best software developers in the world working exclusively for us,” Mr. Donahoe said.
The resulting mobile apps have been hugely successful with customers. “They’re a nice, clean, elegant solution, a very pleasant experience,” Mr. Spitz said. “Many people are encountering eBay on a mobile device and coming away with a great first impression.”
New products are in the pipeline. Mr. Donahoe said PayPal Here, a new payment system, would allow customers to “check in” in advance at a shop, be greeted by name when they arrive, complete transactions without a mobile device or credit card and get a text message as a receipt.
¶ Management change is necessary and inevitable. Mr. Donahoe has been chief for just over four years, and has replaced most of eBay’s top management. “A significant change in senior leadership was necessary to take eBay to the next level,” he said. He built a team of managers who shared his dedication “to building a great and enduring company, a company that will last,” as he put it. “No one else has really done that on the Internet, and we’re excited by the possibility.” At the same time, he said, “We can’t take anything for granted. We’re almost paranoid. We get up every morning and we’re focused on delivering for our customers and continuing to innovate. It’s a fast-changing world.”