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Technology Stocks : eBay - Superb Internet Business Model
EBAY 55.23+0.3%3:59 PM EDT

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To: Timetobuy who wrote (6903)7/31/2001 6:08:56 PM
From: Glenn Petersen  Read Replies (1) of 7768
From The Industry Standard:

What Makes eBay Unstoppable?
By Miguel Helft
Issue Date: Aug 06 2001

Meg Whitman keeps building on what may be the
Internet's biggest success. Now she has to live up to Wall
Street's expectations.

A visitor to eBay's San Jose, Calif.,
headquarters one recent morning came
upon an unusual scene. Some 20 men
and women were milling around until
suddenly a company official emerged and
called for new employees to follow him
for an orientation. The lobby emptied.

At a time when layoff announcements
are numbingly routine, the scene in
eBay's lobby is an oddity - not just in
battered Silicon Valley, but across
corporate America. EBay CEO Meg
Whitman won't say how many people the
online auctioneer is planning to add to its
workforce of 2,400, but the group
orientations are held weekly.

Virtually every technology and Internet
company is either treading water or
drowning, but Whitman's eBay is growing
stronger and healthier every day. What
started as a quaint auctioneer of useless
collectibles has grown into a commerce
powerhouse. In just six years, eBay has
become arguably the only large,
unquestionably successful consumer
Internet survivor.

"EBay is what all of us wanted our
Internet businesses to be," says Mark
Goldstein, former CEO of,
the online unit of discount retailing giant
Kmart. Marvels Michael Dell, CEO of Dell Computer, "It looks like
a great business to me."

Such praise is certainly deserved, but it has helped to inflate
eBay's stock price to Internet-bubble proportions. That means
eBay will have to continue delivering a flawless performance and
dizzying growth, while preserving its prized community spirit.
The slightest falter could leave it in the same straits as its
beaten-down Internet brethren. "This may be one of the biggest
business opportunities we've seen in a long time," says Morgan
Stanley analyst Mary Meeker. "To tap its opportunities, the
eBay team has to continue to execute very well."

So far, it has. From the start eBay set out to build one of the
few truly virtual businesses on the Internet. At relatively low
cost, its site allowed buyers and sellers to do online what they
couldn't do offline: Sell anything, anywhere. In the language of
Silicon Valley geeks, the business model was scalable - it could
grow unbounded with no need for eBay to add stores or
warehouses. The more it grew, the more money eBay would

But what's surprising is not that eBay was scalable, rather it's
the extent to which eBay has scaled. Skeptics predicted early
on that the company's growth would peter out once the
collectibles market was tapped out - and the novelty of buying
at auction wore off. Instead, the opposite has happened. Over
the past year, eBay has successfully transformed itself into a
platform for trading everything from chairs to computers to
clothes. Businesses small and large discovered that eBay is a
cheap and effective way to reach millions of customers. They
have propelled the company into a formidable growth spurt,
even as the overall growth of Internet commerce stalls.

Sun Microsystems and IBM now sell computers on eBay. J.C.
Penney, which boasts a thriving online retail business of its own,
has tested eBay as a virtual storefront. Regional consumer
electronics chains are using eBay to battle the likes of and Best Buy. Every hour, 10 diamond rings, 120
PCs and 1,200 articles of clothing are sold on the site. And
there seems to be no limit to what people will trade: The
Minnesota house where Bob Dylan grew up sold recently for
$94,600, and a Beechcraft "Duke" twin engine airplane sold for

It is part of eBay lore that the
community of buyers and sellers is at the
core of its success. "Our best ideas are
the users' ideas," Whitman says. That
was certainly true with cars. After the
company noticed that users were listing
cars in a "miscellaneous" section, it set
up a category and, eventually, a
separate site for cars. A Corvette is sold
on eBay every three hours, and eBay
buyers and sellers are on track to trade
$1 billion in cars and car parts in 2001.
Whitman, who recently bought a car -
she won't say what kind - on eBay,
boasts that her company has become
the largest auto site on the Internet. "I
think that was pretty surprising to us,"
says Whitman. "This was a Web site
based on small shippable items. Cars are
hardly small and hardly shippable."

Such success leaves eBay as the only
Internet company to live up to its hype.
On July 19, the company reported
second-quarter profits of $24.6 million,
more than triple those reported a year
ago. While most companies were paring
expectations, eBay raised its sales and
profit outlook for the remainder of the
year. Sales on Amazon, for instance,
grew at a sluggish 16 percent for the
same quarter, while overall e-commerce
spending was up 15 percent, according
to research firm BizRate. In contrast, gross merchandise sales,
the total value of goods traded on eBay, surged 73 percent. At
the current rate, nearly $9 billion in goods will be sold on eBay
this year, about three times what Amazon expects in total
sales. And because eBay doesn't own, store or ship the items
its sellers trade, it enjoys hefty profit margins that are the envy
of the industry.

EBay looks good not only when compared to the bludgeoned
e-commerce sector but also when contrasted to the Internet
industry as a whole. A year ago, the company was on the verge
of being acquired by Yahoo, which was then worth $100 billion
or so. The two companies' reversal of fortune was starkly
apparent at last week's Industry Standard Internet Summit.
Whitman was the only speaker whose presentation was
interrupted by spontaneous and sustained applause from a
crowd of Internet executives and investors with little reason to
cheer these days. Following her speech, Whitman sat down to
listen to Yahoo's new CEO, Terry Semel, and its co-founder
Jerry Yang. There was no cheering from the audience - just
scattered remarks amid onlookers that Yahoo's management
team seems to lack a clear vision of how to lead the company
out of its hole.

EBay's success relies heavily on two factors: It's been a profit
machine from day one, and Whitman has kept her focus as she's
invested steadily in the company's growth. In the past year,
eBay has branched out from its sometimes cumbersome auction
format. First, it acquired, a site where sellers list new
and used items for a fixed price. has been an
unqualified success, and eBay recently expanded it from its core
of books and CDs to include computers, consumer electronics,
sporting goods and other items.

On its auction site, eBay added a feature called "Buy It Now,"
which lets users acquire an item immediately, bypassing the
lengthy auction process. Nearly 35 percent of all items listed on
eBay now offer that option, speeding up the rate of trading on
the site. And just a month ago, the company set up a program
that allows businesses to set up storefronts on the site.
Without a shred of promotion, the pilot program has attracted
18,000 businesses, well ahead of eBay's projection of 2,000.

EBay's international investments are paying off, too. The
company recently acquired iBazar, a pioneering European trading
site. Meanwhile its older German, Canadian and U.K. operations
have grown briskly. EBay is now the No. 1 auction site in all of
its 18 international markets except for Japan, where Yahoo has
a sizable lead. "The magnitude of the challenge is large, but we
have not, by any stretch of the imagination, given up on the
[Japanese] market," Whitman says.

Buy It Now and represent 11 percent of eBay's
revenues, and international operations account for 14 percent.
Over time, Whitman expects that U.S. auctions, international
sales and fixed-priced sales will each account for a third of
eBay's business. But eBay has also racked up healthy revenues
from side businesses, including its Billpoint payment system and
services such as shipping and escrow. And its advertising
business is perhaps the biggest surprise. EBay places ads on a
small percentage of its pages through an alliance with AOL Time
Warner. Yet advertising accounts for 10 percent of revenues, or
about $18 million in the most recent quarter. That means eBay
earns more in advertising than all but the biggest ad-supported
Web sites. CBS, for instance, had $4.9 million
in advertising revenue for the same period.

Success has put eBay in an unusual bind. The company now
finds itself downplaying its potential to a Wall Street audience
that dismisses that caution as conservative. Last September,
Whitman promised that eBay would generate $3 billion in
revenues with operating margins of 30 percent to 35 percent -
roughly $1 billion in operating profits - by 2005. While the
ambitious targets raised some eyebrows, most analysts now
agree that eBay will meet those goals ahead of schedule. And
many expect more. In particular, they believe profit margins can
be even greater.

"I think the investment community is
recognizing that this is a business that
could drive significant returns over and
above the targets they set," says Lauren
Cooks Levitan, an analyst with Robertson

In fact, many believe that eBay will
become a profit-making juggernaut much
like Microsoft in the 1990s. "Microsoft
rode the wave of personal computing,"
says Anthony Noto, of Goldman Sachs.
"EBay is going to ride the wave of

Whitman and her team are doing what
they can to temper those expectations,
in no small part to give themselves some
wiggle room. "I respond with real
firmness," says CFO Rajiv Dutta. EBay,
he says, is still a young company that
will require heavy investments to
continue driving growth. Balancing that
growth potential with shorter-term
profits will remain a delicate task. "It
would be very wrong for us to make this
into a very big cash cow," Dutta
cautions. "Could we make it? Absolutely.
Would it benefit shareholders? Absolutely

But Wall Street's not listening. The
company trades at 151 times expected
2001 earnings - compared to 35 times for AOL Time Warner and
41 times for Schwab. And consider the following: EBay's market
value of more than $16 billion tops those of the remaining 25
publicly traded e-commerce companies combined. While many of
the survivors are hanging on for dear life, the list also includes
the likes of Amazon, Expedia, Homestore, and "The company is great," says Michael Legg, an
analyst with Jeffries & Co. "The stock is expensive."

With no real competition on the horizon, Whitman sees her
biggest challenge elsewhere: keeping eBay nimble and
maintaining the community spirit even as it expands. There are
already signs that some sellers have grown disheartened
because of increased pressure from bigger businesses hawking
similar wares on eBay. Maintaining what Whitman calls a
"small-town feel on a global scale" may indeed be the company's
greatest task.

Whitman takes pains to distinguish her company from
run-of-the-mill retailers, but she has managed to achieve what
online merchants have only dreamed of: EBay has come closest
to being the Wal-Mart of the Internet. "EBay has always been
the value-price channel," says Munjal Shah, president and CEO
of Andale, a company that makes software to automate sales
on eBay. "Now it is the value-price channel where you can find

That's what makes it so Wal-Mart-like: EBay has already shown
it can thrive when a slowing economy turns shoppers into
bargain-hunters. But being like Wal-Mart also carries a
drawback: It doesn't feel much like a small town. Then again, if
eBay can mint profits a la Wal-Mart, community may not matter
that much after all.
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