Ebay: From Hobby to Billion Dollar Company

As a satirical news story about a Belgium Orchestra looking to sell itself on online auction site eBay made its rounds on the Internet on Tuesday, the San Jose, Calif. firm once again captured a bit of the media spotlight through a unique offering.

It is something that has become an eBay hallmark, reflecting the diversity and expressiveness of the commerce community it has created.

Ebay has proven to be such a success since its debut in 1995 that it has expanded globally in various languages, offering a multitude of products.

The company offers online auctions where sellers post products for all to see in online categorized listings. Buyers bid electronically, with the highest bidder making the purchase. Ebay earns its revenue through the fees it charges for each auction.

Since it launched through founder Pierre M. Omidyar, the online retail market has grown both in terms of competitors and revenues. The expected online retail market for 2006 will be $130 billion, according to Jupiter Media Metrix. Just four years ago it was approaching $50 billion.

In contrast to its beginnings, the company now faces competition from numerous big and small online retailers from around the world.

The company not only competes with online retailers such as Amazon.com, it is also aware that brick and mortar shops such as Wal-Mart want to nab some of its web market share.

Romantic Notion Led To A Great Idea

While popular Internet myth has it that the idea for eBay came after a conversation during a date with his then-fiancée about the difficulties of finding traders for PEZ dispensers, Omidyar has previously said the event played only a small role.

The "whole idea' behind eBay, he said in a 2000 interview with Academy of Achievement, was to help people do business with one another over the Internet.

A computer buff in high school, he graduated with a degree in computer science from Tufts University in 1988. Afterwards, Omidyar started a software company called Ink Development Corporation with his friends. He later sold the firm to Microsoft in 1994, making him a millionaire.

On Labor Day weekend in 1995, he created a simple prototype of the site on his personal web page. His aim was to create an efficient market where participating individuals could all stand on a level playing field.

In a commencement speech at Tufts in 2002, he outlined what made him program the system and why it had to be self sustaining.

"Back when I launched eBay on Labor Day 1995, eBay wasn't my business - it was my hobby. I had to build a system that was self-sustaining,' he said.

"I was working as a software engineer from 10 to 7, and I wanted to have a life on the weekends. So I built a system that could keep working - catching complaints and capturing feedback.'

Self-Sustaining System

Omidyar programmed the system to be simple enough to be self-sustaining. Since he could only give limited time and funding for the site at the time, he didnt' have the chance to program everything, something he was later thankful for.

"I'm trying to tell you, whatever future you're building ... Don't try to program everything. Five Year Plans never worked for the Soviet Union - in fact, if anything, central planning contributed to its fall.'

The autonomous system enabled eBay to expand with minimal input from Omidyar, a feature of the site analysts have praised.

Almost every industry analyst and business reporter I talked to observed eBay's strength was the self-sustaining system flexible enough for the users without the need for heavy control,' he told Academy.

EBay growth

Although the self-sustaining system was important to eBay, Omidyar highlighted another factor that contributed greatly to growth.

The initial pricing scheme for the auction service was to charge a 5 percent fee for the sale price of an item below $25 and 2.5 percent for items above $25, according to '˜The Perfect Store: Inside eBay,' by Adam Cohen.

However within a short time, the hobby, then called AuctionWeb, began to make a profit.

In June, revenue doubled to reach $10,000. At that time, the hobby's earnings surpassed the salary from his day job. It was then that Omidyar decided to make the work for the hobby a full-time effort.

Omidyar quickly realized that beyond commerce alone, the site was driven by the human element of building trust and assuring good communication. Some skeptics didn't see it that way, however.

"People thought it was impossible because how could people on the Internet - remember this was 1995 - how could they trust each other? How could they get to know each other?' he told the Academy.

His critics were backed up a study conducted by the Pew Research Center, which found that in 1995 only 8 percent of Americans felt comfortable using a credit card online.

Trust between people online, or a lack of it, was one of the reasons the Times Mirror company decided to pass on an opportunity to buy eBay for $40 million in 1997.

The main objection was the one Omidyar had been hearing from the beginning: that strangers would never trade with strangers over the Internet in large numbers, Cohen wrote.

People Are Good

Omidyar, an optimist, believed the notion that strangers would never trade with each other was nonsense.

I founded the company on the notion that people were basically good, he said If you give them the benefit of the doubt you were rarely disappointed.

Omidyar said that only a small percentage of transactions on eBay turned out to be frauds. By studying the company's database in 1998 to track flawed transactions, he said that somebody went through the trouble of reporting fraud in only 30 cases out of every one million.

Competitive Advantages

Many of the product listings found on eBay overlapped with those found in traditional classified ads at daily print newspapers. This was the finding of entertainment consultant Larry Schwartz, who had been hired in 1997 to explore the possibility that the Times Mirror Co. could purchase the online retailer.

Schwartz found that eBay had been growing at a torrid rate of 20 percent per month and was changing the landscape for competition for advertising. If Times Mirror had purchased eBay, the traditional print company would have had a foothold in the online market.

"While few people were paying much attention to the online auction phenomenon then, that wouldn't be true forever. EBay could provide Times Mirror with a line of defense that would let it participate in the fast-changing Internet rather than sit back and watch as customers switched from classified ads to online auctions,' Schwartz said.

Ebay's entry as the first online-auction company gave it an unassailable advantage, according to Cohen. Potential online competitors to eBay such as Auction Universe agreed.

"The lead was so great that people would come to Auction Universe, do a search and end up going to eBay,' said a former employer of the competing company.

That advantage and popularity has helped transforme eBay into a global enterprise with a market capitalization of $70 billion and gross revenues of $34 billion in 2005.