eBay: How eBay Lost The E-Commerce War

We as a civilization have reached a point where we can order almost anything we want from almost anywhere on Earth with the reasonable expectation of having it delivered to us within two weeks. It could be an expensive BBQ set, a very expensive Swiss Army Knife or just regular Canadian flip flops for one cent. Chances are if it’s legal, you can probably buy it online.
To honor the wonder that is modern e-commerce this week on Behind the Business we’ll take a look at eBay, one of the industry’s founding fathers. eBay was founded in 1995 by a 28-year-old Iranian-American who was born in France. His name is Pierre Omidyar and he has your usual tech pioneer background: he graduated Tufts University in 1988 with a degree in computer science and was soon thereafter hired as a developer by an Apple subsidiary.
In 1991 he co-founded Ink Development, an early e-commerce company. While working there Pierre came up with a lot of ideas about how a modern online marketplace would work, but his other partners would never seem to agree with him.
The reason for that is that Ink Development’s model was what you would call business-to-consumer, which was pretty much the standard back in the day. Pierre’s ideas didn’t really fit that model though. What he was envisioning was a consumer-to-consumer platform, something that was completely unheard of at the time.
To make his dream a reality Pierre left Ink Development in 1994 and he got a job as a developer at General Magic to pay the bills while he was developing his idea. That company’s engineering team, by the way, was the 1990s tech equivalent of the Avengers, but that’s a story for another time.
One year later in 1995 Pierre had finally finished writing the code to his platform, and he released it on September 3 under the name of AuctionWeb. It looked pretty bad, but let’s be honest, most websites from that era looked bad. Despite its poor design people liked this new platform very much. Its simplicity and lack of regulations made it a strong competitor to the large e-commerce sites of the time. The very first item listed on AuctionWeb was Pierre’s broken laser pointer, which was sold to a collector of broken laser pointers for the generous price of $14.83 AuctionWeb was hosted on ebay.com, which was Pierre’s personal domain.
Pierre’s first domain choice was EchoBay, but that was already taken by a commodities hedge fund, so he shortened it to eBay. Among other things the site also hosted a page for his wife’s biotech startup, a discussion group for Tufts University alumni, and an informational page for the Ebola virus. It was a pretty random website, but the AuctionWeb section lifted it out of obscurity pretty fast.
By February 1996 the website was generating so much traffic that Pierre had to upgrade his personal internet connection to a business one. This sudden jump in costs drove him to start charging commissions on every auction. These fees remain the company’s main monetization model to this day.
In June 1996 Pierre quit his job at General Magic and he hired a programmer friend of his to expand the platform’s functionality. One month later they made their first successful business deal by negotiating a licensing agreement to sell airline tickets directly on the site. It was growing rapidly and by the end of the year over 250,000 auctions were being hosted on AuctionWeb. Just six months later in June 1997 that number had increased to over 800,000.
That same month he renamed the site eBay, and he started sharing his business plan to venture capitalists around Silicon Valley. One particular firm called Benchmark Capital gave Pierre $4.5 million in exchange for a 22% stake in the company. Benchmark also promised to find a suitable CEO to help run the company and in March 1998 they made good on their promise by hiring Margaret Whitman, a former Hasbro executive.
She was a pretty big name in the business world, having also served as an executive at Disney, DreamWorks and Procter & Gamble. She turned the ragtag eBay into a structured corporation pretty fast. In order to make it more appealing to investors she removed the drugs and firearms sections, and to better spread the word she created a whole new marketing division. She was feeling pretty confident and so in September 1998 eBay went public under her guidance with a listing on the NASDAQ for $18 per share Margaret’s confidence was justified because on its very first day of trading, the stock’s price went all the way up to $53.
Less than four months later eBay shares were trading a $300 a piece and Pierre had become an instant billionaire. The company at the time had barely 30 employees, half a million registered users, and annual revenue of $5 million. Although originally eBay was mostly a marketplace for collectible items, it rapidly expanded its assortment until it covered pretty much every legal item that you could sell. At this point I feel that we should settle the age-old debate of whether you should sell your stuff on eBay or Amazon.
I’ve purposefully not mentioned Amazon so far since it deserves a whole video all on its own, but this question is too popular not to discuss. If you’re selling regular everyday stuff that you could easily classify, like hardware, clothes, books, or games, Amazon is the place for you.
Their site is bigger, better organized, and streamlined exactly for this purpose. If, however, you’re selling something more special or unique, you’re better off on eBay. Unusual listings on eBay have become so popular that they even have their own Wikipedia page. Among some of the weird stuff that have been listed are a city in California that was sold twice in the span of four years, a seaworthy Brazilian aircraft carrier, and two undiscovered species of animals.
EBay has seen historical listings like one of the machines that dug out the tunnel beneath the English Channel or a silent movie of Marilyn Monroe smoking pot. There have also been quite a few absurd ones though, like when a DJ’s angry wife sold his sports car for £0.50 or when a grilled cheese sandwich with the image of the Virgin Mary sold for $28,000. EBay, being the major Internet corporation that it is, was pretty eager to acquire other tech companies.
It has made over 50 acquisitions in its short lifespan, the most notable ones being PayPal in 2002 and Skype in 2005. EBay also on StumbleUpon and Magento, but they didn’t like each other very much. In 2008 Margaret resigned to run for Governor of California, a race which she eventually lost, and the mantle of CEO was passed down to John Donahoe. By that point eBay was a massive company with over 15,000 employees and annual revenues of nearly $8 billion. Despite its size though, eBay was already on the decline.
Amazon was making more than twice as much money, and eBay’s performance had been lackluster for three years in a row. Donahoe tried to focus on eBay’s core e-commerce business by getting rid of most of the company’s stake in Skype in 2009. They got less than $3 billion for it, but just two years later Microsoft bought it for the price tag of $8.5 billion. It was pretty clear the Donoho wasn’t doing a good job: he failed to restore eBay’s position in China against Alibaba and in the early January of 2014 he got in trouble with Carl Icahn.
Now, if you’ve never heard of Carl Icahn, well, you should have. He’s a very successful contrarian investor and one of the most famous corporate raiders in history. His trademark strategy is to acquire a large stake in a struggling public company, and then to force its management to enact radical changes. His argument was that eBay’s declining e-commerce business was dragging down the otherwise successful PayPal, which if you remember they’re acquired in 2002. Carl Icahn wanted the two companies to split. John Donahoe was, of course, totally opposed to the idea, and a very heated public relations battle ensued.
Eventually Carl Icahn succeeded and on July 18, 2015 PayPal was spun off as a separate company. Icahn immediately converted his 46 million eBay shares into shares of PayPal, and John Donahoe promptly resigned in defeat. Ever since the split eBay has been struggling to find its place in the world.
With Amazon stronger than ever, eBay’s attempts at pushing their own version of a global online marketplace have been shaky at best. PayPal, in comparison, have been doing great and in just one year they’ve outperformed eBay by 13%. eBay is stuck in the difficult position of slowly becoming the Myspace of e-commerce, and the bad news is that there probably isn’t an easy way to fix this. The e-commerce industry in general is a prime example of Demand-Side Economies of Scale, what you would normally call the Network Effect.
Each new user of a given platform increases that platform’s value to future users, and if you compare the growth of Amazon’s user base to that of eBay, you’ll quickly see where things are going. EBay is definitely in a tough spot and they will need to come up with something truly innovative if they want to stay around for long. I hope you enjoyed the story of eBay. If you did hit that like button, subscribe, and check out my other videos for the stories of more cool companies. Tell me in the comments below which company you’d like me to feature next, and as always: stay smart.