eBay

Group 2 (Management/Marketing)

 

I.             Introduction

A.     Team Members and managerial functions

1.      Hartley Grimm (Management)

2.      Kristen Barson (Marketing)

3.      Nick Krynski (Management)

4.      Jesse Coad (Management)

5.      Danielle Devine (Marketing)

6.      Joyce Jackson (Management)

B.     Perspective of Group in Report – Our group is analyzing eBay, Inc. with a concentration on its strategy as it relates to the company’s competitiveness in relation to its rivals.

II.          Industry Description (Hartley Grimm)

Auctions have played an integral part in commerce over the centuries.  This unique style marketplace has been argued to be the most pure form of competition that exists today, and in the past. This is due to the Auctions unique ability to bring a seller and buyer together.  Auctions however take it one step further than typical consumer markets of just providing a buyer and seller by allowing the buyer and seller to mutually agree on a price for the item. In this sense, auctions, both traditional and electronic, are an excellent example of a pure marketplace.

The auction industry has been evolving from its roots over the past decades. Ancient records indicate the first auctions taking place in Babylon as early as 500BC.  As they currently are now auctions evolved over the years. From slave auctions in Ancient Greece through William III using auctions frequently in Great Britain, auctions have made many transitions. All of these however revolve around the main principal of auctions, getting the best price for both the seller and buyer involved.

Online auctions have taken the market to a new level. By a seller logging into a website and listing their goods, they have opened their item up for purchase by users worldwide that have internet access. This is a much more open and efficient marketplace as sellers are not bound by only buyers physically different. The main contrast in an online auction to a traditional auction is the ending format. Typically a traditional auction would end when a high bid has been reached, where an online auction ends at a specified time. Thus whoever has the highest bid at the end of the pre set time wins the auction. There are many other features that different sites may offer that would differ from a traditional auction.

There are many benefits to an auction format these include:

¾    Liquidity

¾    Market Efficiency

¾    Elimination of the Middleman

¾    Networking of Products

¾    Price Transparency

¾    Quick Efficient Price Efficiency.

These benefits are true in both regular and newer online auctions. Many benefits are encountered by specifically buyers and sellers alone. Buyers have the option of obtaining collectible items, are given the ability to bargain, make anonymous transactions through third parties, and overall transaction convenience.

In the same manner sellers have many benefits over a traditional marketplace when they take their items to auction. These include increased prices that are based on an efficient market, an optimal price for the good where both parties are giving and getting what they want, lower transaction costs by eliminating middleman and other sales agents, and increased direct customer contact by not needing other agents to take care of customer service for you.

There is however some specific benefits to those that partake in an online auction format. These include repeat purchases, super convenience, even lower transaction costs, and mass numbers of potential buyers.  These reasons alone can attribute to the tremendous success that the online auction industry has seen.

Despite being a young industry, online auctions have become a staple in the growing e-commerce world. This growth has happened in a short time, with the first online auction site opening in 1995. This first site was named OnSale, the brain child of  Alan Fisher and Jerry Kaplan. This design was developed from a package the two were designing to conduct online stock trades. Since this time many companies have started, with mixed success. Over 250 online auction sites exist, some with just collectibles, and others like eBay with a variety of offerings.

Online auctions are nothing to laugh at in the marketplace. Accounting for well over $3 billion in sales last year, online auctions have experienced a 230% growth rate since 2000. This growth has happened with the big companies shining through. Happening only through solid business models.

Online auctions are still in a beginning stage with only a mere 6% of all internet users using the forum as a means of taking goods to market. There are estimated to be 600 million auction users at the end of 2003.  This market will only continue to grow as internet subscriptions increase. The growth of internet subscribers is expected to be on an increases through 2006, with a 90% US user base expected by 2010. This will meet the peek for US auctions, with international opportunities abound. These sales will only continue to increase as personal computer sales and more disposable income is available worldwide.

Although classification for online auctions is still up for debate, it is no doubt they are playing a key role in the new role that ecommerce has on everyday life. Being in the growth stage of their life cycle it is hard to predict exactly how far auctions will go, but with their past performance it is expected to see more continuous growth for the big players over the next decade.

III.       Company Description (Kristen Barson)

A.  Mission Statement – “Our mission is to build the world's most efficient and abundant marketplace in which anyone, anywhere, can buy or sell practically anything. We pioneered online trading by developing an Internet-based marketplace in which a community of buyers and sellers are brought together in an entertaining, intuitive, easy-to-use environment to browse, buy and sell an enormous variety of items. Through our PayPal platform, we enable any business or consumer with email to send and receive online payments securely, conveniently and cost-effectively.”

B.     Company History – In September 1995, eBay was founded in Pierre Omidyar's San Jose living room.  From the start, eBay was meant to be a marketplace for the sale of goods and services for individuals.  Individuals may wonder where eBay got its unique title. Before starting AuctionWeb, the site that became eBay, Pierre Omidyar had a one-man consulting firm he called Echo Bay Technology Group. When it came time to register the Internet address, EchoBay.com was taken, so he shortened it to eBay. Looking for a way to create an efficient market, Pierre Omidyar pioneered the auction format for online person-to-person trading.  He created a simple, easy-to-understand mechanism that let buyers and sellers decide the true value of items.  On March 1998, Pierre and his cofounder Jeff Skoll brought in Meg Whitman to sustain the success of eBay as president and CEO.  eBay is considered the world's online marketplace for the sale of goods and services by an assorted community of individuals and businesses.  The eBay community is made up of a variety of people whom include individual buyers and sellers, small businesses and even Fortune 100 companies. Large and small, these members come together on eBay to do more than just buy or sell products.  They have fun, shop around, and get to know one another.  eBay is a developed, Internet-based community in which buyers and sellers are brought together to buy and sell almost anything. The eBay online service allows sellers to list items for sale, permits buyers to bid on items of interest and all eBay users are allowed to browse through listed items in a fully computerized, topically arranged service that is available online seven days a week. eBay's role is to build, maintain and enlarge the technological functionality, safety, ease-of-use and reliability of its trading platform, while, at the same time, supporting the growth and triumph of its community of users.  Currently, eBay is extending to markets overseas.  It is now operating in eight of the top ten countries by online market size outside of the United States. In Asia, eBay is in 80% of its largest e-commerce markets. eBay is gaining users 50% faster in Europe than in the United States.  Gross merchandise sales are growing 135% faster. The faster eBay grows, the more strongly will it hold its top position in the auctioning service market.

  1. Current Status of eBay – As of March 31, 2004, eBay Inc. and its consolidated subsidiaries employed approximately 6,300 persons.  4,600 of eBay’s employees worked in the United States.

1)      Financial Analysis – In 2002, eBay’s revenue was at $1,214,000,000.  Revenue increased in 2003 to $2,165,000,000.  Net income after taxes for 2002 was $242,000,000, while in 2003 net income almost doubled to $454,000,000.  Total assets for 2002 were $4,040,000,000.  Total assets for 2003 significantly increased to $5,820,000,000.  eBay’s total liabilities in 2002 were $483,000,000; however, in 2003 their total liabilities almost doubled to $923,000,000.  Total equity for 2002 was $3,556,000,000, and in 2003 total equity increased to $4,896,000,000.

Annual Financial Analysis

In Millions of U.S. Dollars

Twelve Months Ending          12-31-03

Twelve Months Ending          12-31-02

Twelve Months Ending           12-31-01

Twelve Months Ending          12-31-00

Net Income

454.8

252.2

82.9

45.2

Total Assets

5,820.1

4,040.2

1,678.5

1,182.4

Total Revenue

2,165.1

1,214.1

748.8

431.4

Total Liabilities

923.9

483.8

249.4

168.6

Total Equity

4,896.2

3,556.5

1,429.1

1,013.8

2)      Ratio Analysis – The current ratio for eBay is 2.78, which means that eBay is able to meet its short term financial obligations.  This is a very good standing in the industry due to the other companies in the industry being at 2.14.  The operating margin in 2004 is 30.55, which is more than doubled compared to the industry being at 13.40.  The company’s return on assets was 10.05 percent, while the industry was only at 9.30 percent.  eBay’s return on investments however, are under the industry’s average.  eBay’s return on investment was 11.38 percent, and the industry was at 13.28 percent.  The return on equity is a similar ordeal.  The industry’s average was higher than eBay’s actual return on equity.  eBay came out at 11.78 percent and the industry average was 14.53 percent.  Another disappointment to eBay was the company’s asset turnover.  The industry’s average was 1.87, while eBay’s asset turnover was 0.45. 

Ratio Analysis

Valuation Ratios

Company

Industry

Current Ratio

2.78

2.14

Operating Margin (Profitability Ratio)

30.55

13.40

Return On Assets       (Mgmt. Effectiveness)

10.05

9.30

Return On Investment (Mgmt. Effectiveness)

11.38

13.28

Return On Equity      (Mgmt. Effectiveness)

11.76

14.53

Asset Turnover   (Efficiency)

0.45

1.87

Based on the financial analysis and the ratio analysis, eBay needs to improve their management effectiveness and their efficiency.  The company has incredibly low debt if any.  eBay has increased their income, revenue, assets, liabilities and equity significantly every year.  Those increasing numbers show that eBay is a strong and powerful company.  Overall, the company is doing very well financially and will most likely continue to do so in the future. 

 

IV. Competitive Environment of the Online Auction Industry (Nick Krynski)

A.     Dominant Economic Traits

1.      Market Size – The market for Internet-based businesses is fairly large and growing.  In 2003, business-to-consumer e-commerce accounted for about $222.7 billion in total revenues worldwide, and business-to-business e-commerce was said to account for about $1.4 trillion.  Online auction total revenues for 2003 are estimated to have been nearly $25 billion.  Furthermore, it is estimated that about 60% of U.S. households owned a PC and nearly 70% of the U.S. population had access to the Internet (through work or home computers).  Future growth of this market is expected to be strengthened, and possibly accelerated, by the availability of cheaper personal computers, as well as the hopeful deregulation of telecommunications throughout Europe and Asia (this should lower the average cost of Internet access in those areas).

2.      Scope of Competitive Rivalry – Because of the international existence of the Internet, online retailers and online auction sites can compete internationally; however, there are certain considerations (currencies, delivery channels, languages) that force rivals to compete at the national level.

3.      Rivals – There are a number of online auction sites that operate within the online retail industry.  These sites serve as marketplaces for buyers and sellers (be they businesses or consumers) to purchase a variety of goods and services.  They can range from a more specialized product offering (e.g. SkyAuction.com and travel) to a broader spectrum of goods and services (e.g. eBay, Yahoo Auctions, uBid). 

4.      Customers – Revenues from online auction sites can come from both sellers and buyers.  Sellers are commonly charged a fee for listing their goods/services and occasionally a commission from all transactions.  These sites can also generate revenue from selling their own merchandise (or other sellers) directly to buyers.  The number of customers worldwide with the potential to access online auction websites is estimated to reach nearly 800 million by the end of 2004.

5.      Vertical Integration – Some Internet-based companies do vertically integrate certain aspects of the value chain.  Some companies, such as eBay and Priceline.com, are active in developing their own software to manage the operations and transactions of their respective websites.  eBay’s recent acquisition of PayPal, Inc. presents an example of integrating a method of payment with its core auctioneering services.  Yahoo provides the services of an ISP to connect customers to the Internet, a search engine to navigate the Internet, and content pages to act as destinations for consumers (to shop, communicate, be informed, or be entertained).

6.      Ease of Entry – The barriers to entry for new entrants into the online retail industry can be fairly low.  Since many of the traditional value chain activities required for business can be outsourced and necessary software can be easily purchased (as opposed to high cost software R&D), the initial capital investment of a new entrant can be quite low.  The largest barrier for new entrants would be the possible costs associated with overcoming existing brands with high-traffic websites.

7.      Technology and Innovation – The development of technology, both hardware and software, is fairly fast-paced in the online retail industry.  Today, advances in computer and Internet technologies are making it easier and more affordable for both consumers and businesses to shop and supply online retailers.  Technology is also allowing companies to streamline their supply-chains and better protect the valuable information accumulated from their websites.

8.      Product Differentiation – Online retailers and auction sites are primarily differentiated by their clientele and product offerings.  Some sites concentrate on business-to-business transactions while others focus more on business-to-consumer or consumer-to-consumer transactions.  Still others wish to participate in all of these transactions.  With regard to product offerings, a number of sites may specialize in a specific category of items while others try and provide a marketplace for various products.

9.      Industry Profitability – Profitability for online retail or online auctioneering is moderate.  It has the potential to be a very lucrative enterprise since it requires less capital investment and offers a more global reach than traditional brick-and-mortar equivalents.  Also, there is a “network effect” with regard to online auction sites, where a large number of buyers of products will result in more sellers, who in turn attract more buyers.  However, profitability is limited by its low barriers of entry (which result in more competition), as well as the need for companies to focus many resources towards developing and maintaining a recognizable brand identity.

B.     Competitive Forces

1.      Rivalry among Competitors – Moderate.  Rivals in the online retail and online auctioneering segments of the Internet economy essentially compete in attracting the attention of potential customers.  This has forced companies to compete based on inventory management, extra offered services and fees, quality of technical support, functionality of the website, and a sense of community among customers (both buyers and sellers).  Rivalry among competitors is further strengthened by the low costs for customers to switch brands, as well as the direct competition between rivals with broader product offerings (Yahoo Auctions, eBay).  Competition among companies has been moderated by the rapid expanding nature of the Internet economy (which causes rivals to compete for new customer demand rather than stealing away another’s customers) and differentiation among rivals’ concentrations (many online retail and auction outlets are specialized in certain product categories and target a specific niche customer segment).  

2.      Potential New Entrants – Moderate.  New entrants may be attracted by the low capital and labor requirements that exist for online retailers and auctioneers.  Also, little government regulation and the wide-spread availability of necessary software and hardware both contribute to fairly low barriers of entry.  However, the importance of brand recognition does moderate this competitive factor.  Well-established brands can be significant in generating online traffic, as well as attracting and retaining customers.  For new entrants, the process of developing and establishing a recognizable brand can be slow and costly.

3.      Substitute Products – Moderate to Strong.  Online auctioneers, such as eBay, find themselves competing against numerous substitute outlets.  Brick-and-mortar auction houses and liquidators allow participants to sell and bid on various goods and services.  Flea markets, garage sales, classified advertisements, and collectibles shows also offer some of the characteristics of online auctions: variable pricing, direct exchange between buyers and sellers, and hard-to-find items/collectibles.  Brick-and-mortar retailers, import/export companies, and catalog/mail order companies all provide other non-Internet-based options for customers.  Online, large retail sites (Wal-Mart) and specialty retailers (Dell, Footlocker) can provide similar convenience and brand recognition.  The large number of substitute outlets gives customers more options, thus strengthening the impact of substitutes as a competitive force.

4.      Supplier Bargaining Power – Weak to Moderate.  The suppliers to online auction sites are, in effect, the clients who sell products through those sites.  It is widely believed that more sellers to a site will attract more buyers.  Casual sellers and hobbyist/collector sellers are considered to make up the majority of suppliers to online auctions and are characterized as large in number and unorganized.  However, it should be noted that these sellers are slowly organizing into groups (e.g. the Online Sellers Association) and could become more influential over time.  Power and corporate sellers are smaller in number; however, their participation is increasing in both volume and frequency.

5.      Buyer Bargaining Power – Weak to Moderate.  The buyers of online auction sites are, in effect, those users who bid on the sellers’ products through the site.  It is also widely believed that more buyer traffic at a site will attract more sellers to participate.  Bargain buyers and hobbyist/collector buyers are considered to make up the majority of buyers to online auctions and, like their seller equivalents, are characterized as large in number and unorganized.  Professional buyers, much like power/corporate sellers, are smaller in number but are increasing in their participation.

C.     Drivers of Industry Change

1.      The Rise of the Internet Economy – The growth of the Internet has had a profound impact on virtually every segment of the worldwide economy.  The widespread availability of Internet technology among businesses and consumers has resulted in the very emergence of online retail and online auctioneering.  Business-to-business, business-to-consumer, and consumer-to-consumer markets have been made more efficient with increased information and options made available to all participants.  The Internet has also allowed companies with an online presence to easily expand beyond state, regional, and even national boundaries.  In recent years, there seems to have been a maturing effect with regard to Internet-based businesses (especially online retailers and auctioneers) as failing (pets.com) and successful (eBay) companies have become more distinguishable.  Also, many traditional and established companies have transformed into brick-and-click businesses with a significant online presence.  This has had a definite impact towards making online retail and auctioneering a legitimate competitive arena while also increasing overall competition.

2.      Internet Lifestyles – Computers and the Internet have gradually become a significant part of people’s lives.  However, there have been many people who have shied away from the advantages (convenience, wider variety, more information) of online shopping for various reasons.  Some have been afraid by a perceived lack of security when conducting business or shopping online. Others have been hesitant because they perceive computers and the Internet as far too complex.  As computers and Internet access has become more affordable and prevalent, these reluctant online customers have decreased in number.  More people are becoming increasingly comfortable with computers and the Internet, which in turn has made them more comfortable with online shopping and auctioneering.  This trend is expected to continue and result in substantial growth to the online retail and auctioneering markets.  In 2003 it has been estimated that approximately 33% of the U.S. population participates in Internet-based commerce (online retailing and auctioneering).  By 2007, the International Data Corporation (IDC) projects that over half of the U.S. population will shop online.

3.      Global Spreading of the Internet – The rise of personal computers and increased access to the Internet have become major factors in American business; however, in the past much of the rest of the world has lagged behind the U.S. in the availability of affordable computer and Internet technology.  With recent drives to develop and expand free-trade zones in Europe and Asia, as well as the movement to deregulate telecommunications throughout Europe and Asia, it is hoped that computers and Internet access will lower in cost and lead to future growth of the market worldwide.

D.    Key Factors for Competitive Success

1.      Ability to generate traffic and attract potential clients – An Internet-based business is dependent on its ability to attract “web surfers” and encourage them to participate in the revenue generating activities of the website.  In the case of online auctioneers, the before mentioned “network effect” is the key to attracting both buyers and sellers to the site.  Buyers are attracted to auction sites that have a variety of sellers who supply specific items at competitive prices.  Conversely, sellers are attracted to auction sites that are frequented by a large number of potential bidders.  Online auction sites that can build a virtual marketplace that is well-known to both sellers and buyers will be in a better position to attract both.

2.      Reliability and security – Successful online auction sites must be able to provide stable and secure marketplaces where buyers and sellers can confidently transact business.  Reliability in systems and services (payment, delivery) is essential towards assuring sellers and buyers that the marketplace (website and related systems) is stable and transactions are honest.  Also, security from hackers and identity thieves is necessary to assure all participants that their information (credit card numbers, addresses…) is secure and that their transactions are safe from fraud.

3.      Brand recognition – One of the most valuable resources an online retailer or auctioneer can possess is a widely-known brand identity.  The Internet is a vast world with an overwhelming amount of content and destinations.  Potential customers need to know where a business is located and what it does.  By developing brand recognition through effective marketing, as well as the quality execution of company operations, an online retailer or auctioneer can establish its website as a leading destination for online shoppers (and sellers).

V.    Competitors (Jesse Coad)

A.     Large Online Auction Rivals

1.      Amazon.com – Amazon.com, Inc. is based out of Seattle, WA and currently has 7800 employees.  Amazon is a customer-centric company that sells a range of products that it purchases from manufacturers and distributors through its six global Websites: www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp and www.amazon.ca. The Company offers new, used, refurbished and collectible items, in categories such as apparel, shoes and accessories, home, garden and outdoor living products, baby care products, jewelry and watches, books, kitchen and house wares, camera and photography, magazine subscriptions, cellular telephones and service, music, computers and computer add-ons, office products, consumer electronics, software, DVD’s and videos, sports and outdoors, gourmet food, tools and hardware, health and personal care, and toys. Through its syndicated stores program, Amazon utilizes its e-commerce services, features and technologies to sell its products through other businesses' websites.  In 2003 Amazon had a net income of $35,282,000 and an EPS of 0.361.  Amazon also had an operating margin of 5.99%.

2.      uBid – The next competitor is uBid.com. uBid is a privately owned company based out of Chicago, IL.  The company runs an online auction in which buyers bid for refurbished and closeout merchandise. The company offers 12,000 products such as computers and consumer electronics from manufacturers and other retailers and distributors. Its 3 million users register for the auction at the company's website, where they also enter and monitor their bids.  In 2003 Petters Group Worldwide of Minnesota acquired uBid from Internet investment giant CMGI.  Petters Group Worldwide is a collection of dynamic companies that create, develop, and invest in companies that manufacture, procure, and market consumer merchandise.  Since uBid is a privately owned company I was unable to find any current financial information but they did have revenues of $204,900,000 in 1999.

3.      Yahoo Auctions – Yahoo is traditionally known as the first navigational guide to the Internet and formed Yahoo Auctions in 1998.  Yahoo is a provider of Internet products and services to consumers and businesses through the Yahoo Network, its worldwide network of online properties. The Company's properties and services for consumers and businesses reside in four areas: Search and Marketplace, Information and Content, Communications and Consumer Services and Affiliate Services. Its basic products and service offerings are available without charge to its users. It also offers a variety of fee-based services that provide users access to value-added content or services. The Company also sells marketing and advertising services to businesses across its properties and services.  When the Yahoo started into its auction services in 1998 they charged no listing fee.  They decided to change all that in 2001 because they were missing out on some profit potential in comparison to eBay who charged a listing fee.  The list price caused the number of listings to fall by 1.8 million from 2 million to 200,000.  By December, 2001 through marketing promotions the number of listings went back up to around 500,000.  Today Yahoo Auctions is offered in 16 different countries and translated into 11 different languages.  During 2003, Yahoo completed the acquisitions of Inktomi Corporation and Overture Services, Inc. in March and October, respectively. Inktomi is a provider of Web search and paid inclusion services on the Internet. Overture is a provider of commercial search services on the Internet, including pay-for-performance search services.  In 2003 Yahoo had a net income of $237,879,000 and an EPS of 0.255.  Yahoo also had an operating margin of 17.60%.

4.      Priceline.com – Priceline.com Inc. is based out of Norwalk, CT and currently has 293 employees.  Priceline is a reverse auction that provides an e-commerce pricing system, known as a demand collection system, which enables consumers to use the Internet to save money on a range of products and services, while enabling sellers to generate incremental revenue. Using its consumer proposition, Name Your Own Price, the Company collects consumer demand, in the form of individual customer offers, for a particular product or service at a price set by the customer. The Company then either communicates that demand directly to participating sellers or accesses a proprietary database of inventory available to priceline.com for purchase and, based upon the customer's offer price, elects whether or not to accept that customer's offer. Consumers agree to hold their offers open for a specified period of time and, once fulfilled, offers generally cannot be canceled.  In 2003 Priceline had a net income of $10,425,000 and an EPS of 0.577.  They also had an operating margin of 2.36%.

B.     Small Online Auction Rivals (I was unable to find any financial information on any of these companies) – There are a number of smaller online auction competitors to eBay most of which are privately owned and specialize in a specific product line. 

1.      Bid4assets.com – Bid4assets.com was founded in February of 1999 and offers high-end assets, selling real estate, personal property, bankruptcy claims, and financial instruments to government and private organizations. 

2.      AAA Online Auctions – AAA online auctions specializes in the sale of liquidated merchandise from various stores and wholesale overstock products to a variety of consumers at the lowest possible price. 

3.      OnSale – OnSale, Inc. was founded in July of 1994 and launched its website in May of 1995.  OnSale is basically a miniature eBay in the sense that its product line is about the same with the only difference being that OnSale is on a much smaller scale. 

C.  Conclusions on Competitors – Overall the large online auctions dominate the smaller ones because the smaller auctions have a more specialized product line.  The large auctions have a more diverse product line and offer more of a “one stop shop” to meet the customers’ needs.  It is for this reason eBay and their major competitors own so much of the market share.  Priceline could however become a major threat to eBay and its competitors because it allows consumers to name the price they want to pay for an item instead of bidding on an item.  This “reverse auction” could allow sellers to make more profits by holding out until they find a buyer willing to pay more money for the item.  This is a major threat to eBay and its fellow competitors because it might take away from the number of listings that are posted on the auctions because the sellers could make more profits at priceline.  It will be interesting to see what goes on in this industry in the future.

 

eBay

Amazon.com

Priceline.com

Yahoo Auctions

uBid.com

Net Income

$441,771,000

$35,282,000

$10,425,000

$237,879,000

N/A

Operating Income

30.55%

5.99%

2.36%

17.60%

N/A

EPS

0.815

0.361

0.577

0.255

N/A

 

 

VI.  eBay SWOT (Danielle Devine)

B.     Strengths –  eBay had its advantages from the beginning, being a first mover into the online auction industry in the mid 1990’s.  They dominated market share and had a perfect record of positive net income to sustain the advantage. eBay’s mission was to “help people trade practically anything on earth.”  Their strategic objectives meet this mission every year still making it the number one auction site online.  They wanted a community-like trading atmosphere, which everyone could have equal access through the same medium, the Internet, at a very low cost.  No one is charged to enter the site, buyers are not charged a fee for bidding, and only sellers are charged an insertion and “final value” fee. With that accessibility, the business was an instant success.  Due to the market dominance and upcoming competitors, eBay was constantly improving and refining their business model and strategy to keep up with the market growth.  This flexibility was a sure competitive advantage to keeping on top.  Another competitive advantage that eBay has is its desire to keep customers confident, satisfied, and feeling safe.  They did this by installing the Feedback Forum (rating system) to help build trust for hesitant first time buyers/users and establishing a community-like atmosphere; along with encouraging customer feedback and actually using it to make improvements. This made buyers/sellers feel important in the decision making process and more loyal to eBay.  To even further customer satisfaction, eBay is the first to be accessible from mobile phones.  There is even an eBay University accessible online or traveling throughout the U.S. that informs all users on how to use the site.  These strengths are key competitive advantages that make eBay the success that is today. They were crafted in such a way that can not be easily duplicated, sustaining enormous market share. 

¾    To help people trade practically anything on earth.

¾    eBay is the number one online auction site.

¾    eBay’s dominance of the market and its perfect record of positive net income from 1996-2001.

¾    Person-to-person trading community in which everyone could have equal access through the same medium, the Internet.

¾    eBay’s intent on improving and refining their business model and strategy due to rapid market growth.

¾    Buyers are not charged a fee for bidding, but sellers are charged for an insertion fee and a “final value” fee.

¾    The Feedback Forum (rating system) helps to build trust among hesitant buyers and sellers, along with establishing a community-like atmosphere.

¾    Initiated customer feedback and actually making improvements based on the information.

¾    Access eBay from mobile phones using, “eBay Anywhere”.

¾    eBay University was created to inform new users across the nation on how to use the site.

C.     Weaknesses – Being the first internet auction site has all the innovative advantages like: entire market share and setting industry standards.  But, there are many flaws the company has to work through to keep it on top which could either set them off or put them to the bottom.  It is how they successfully deal with the weaknesses that will keep them afloat and put them ahead.  The main weakness of an online auction site is its security.   eBay requires sellers to provide a credit card number and bank account information which some think is too much.  People want to be assured that their credit card numbers will be safe online and their personal information will be protected.  There is no way to totally assure customers of this security until they use the site and experience it for themselves.  Also, some people are just not going to use the internet because they want to see the merchandise in person.  These weaknesses make up a small percentage of the population.  eBay is growing by millions of customers a year, and to keep up with the vast expansion, they are loosing the “sense of community”, which lured the initial users in to make eBay what it is today.  eBay was catering to the wholesalers and big corporations instead of supporting the individual that brought the e auction site to life.  eBay was also referring losing bidders to similar auctions from other sellers, being accused of “stealing sales”.  It seemed that the customer was no longer number one, and that infuriated millions.  On top of that, the site crashed for 22 hours due to overload, which caused more doubt in already hesitant minds.  Stock prices plummeted and the reputation of the newly immerge company was questioned.  Luckily, eBay has dynamic leaders that made a key competitive strategy “the voice of the customer”.  They will continue to take the bad with the good and improve on it.

¾    Internet shoppers concern about credit card security and possible sale of personal information to marketing firms.

¾    Due to the fast growth, one of eBay’s key competencies, the sense of community, is slowly disappearing.

¾    Some people still want to see goods in person.

¾    eBay requires sellers to provide both credit card number and bank account information; some see this as too personal.

¾    At one point eBay was “stealing sales” by referring losing bidders to similar auctions from other sellers.

¾    eBay’s site crashed and was down for 22 hours, shaking user confidence and causing stock to plummet.

¾    eBay attempts to attract large companies, forgetting about its traditional customer base and values.

D.     Opportunities – Managements vision for eBay was to “create a place where people could do business just like in the old days’ when everyone got to know each other personally, and we all felt we were dealing on a one-to-one basis with individuals we could trust.”  The advantage eBay has over competition is that it meets all those objectives in a way that adapts to society in the new century, via the internet.  The next step is to create more ways to beat out competition to sustain that advantage.  One way is to increase product offerings through acquiring other companies, adding new product categories, and offering specialized services.  A sure way to attract more customers would be to have some kind of security service backed by the government.  Having some kind of “seal of approval” that information can not be stolen.  Security is the main weakness of the internet and if eBay can come up with some kind of assurance, they can be the number one trusted site.  Trouble-free commands and features added to the growing website to keep it simple will assure a user friendly site.  The easier to navigate the more browser eBay will have.  With these simple features, eBay can then expand into more international markets were computers are growing.  The U.S. is number one in internet use, but Asia and Europe are close behind along with many other developing nations that eBay can get into.  They could even develop some kind separate category apart from individual buyers/sellers that will cater to the business-to-business/consumer.  That market alone is expected to reach trillions of dollars and eBay needs to be a part of obtaining those users.

E.     Threats – eBay as a market leader has several threats facing the company.  Companies are making software packages that make it easy for firms to create and operate online auction sites.  These sites allow smaller niche market auctions to take place providing several other options to eBay.  Mail order companies and retailers are also going online with liquidations and warehouse sell outs giving bargain hunters more of a choice.  They are not substantial enough to currently hurt eBay, but in time they could develop into major internet sites if run properly.  With the right security measures, eBay stands a good chance of blocking out internet crime.  But there is always a hacker that can get into the system and steal personal information, use identity theft and ruin a person’s credit history.  Inside the website, users can practice fraudulent or illegal activity for example: trading counterfeit goods, creating lawsuits from the original manufactures, false bidding to raise prices, and selling stolen merchandise.  No matter how many preventive measures eBay takes, these problems will always exist.

¾    Commercial software packages that make it easy for firms to create and operate online auction sites.

¾    People using fraudulent or illegal activity for example: trading counterfeit goods, false bidding, and stolen merchandise.

¾    Computer hackers stealing personal information.

¾    More classified advertisements in newspapers, garage sales, flea markets, and liquidators going online to inform people locally.

¾    Mail order companies expanding their businesses online, along with retailers.

¾    Other auctions sites catering to a niche market.

 

VII. eBay’s Current Strategy (Joyce Jackson)

A.     Current Strategy Effectiveness – When Meg Whitman became CEO and president of eBay in 1997, one of her first priorities was to access whether or not eBay would continue its current strategy or make adjustments in order to increase its profitability.  One of the tools she used to gather this information was a Company situation analysis.  Below is a CSA for eBay for the last five years.

¾    The net profit margin is a commonly sited measure of a firm’s success with respect to earnings on sales.  The higher a firms net profit margin, the better.  A snapshot of eBay for the last five years shows a continual increase in the NPM.

¾      Return on Equity is important to the online industry because it measures the return earned on the common stockholders investment in the firm.  The basic rule is the higher the return, the better off are the owners.  According to the numbers, eBay’s ROE eroded to 0.9% by the end of 2003.

¾    The gross profit margin is important because it signals a rise in prices or improvements in the supply chain.  The main idea is the higher the gross profit margin, the lower the relative cost of merchandise sold.  Over the last five years, eBay’s GPM has swelled to over 80%.

¾    Return on Total Assets measures the overall effectiveness of management in generating profits with its available assets.  The higher the ROA, the better the investment job by the management team.  As you can see above, eBay’s ROA has steadily increased over the last five years.

B.     Value Chain – The value chain is the series of activities a firm engages in to create the value from which it extracts profits.  eBay’s model was created with flexibility and scalability providing many different kinds of services for various types of customers.

¾    E-stamp –  E-stamp allows people to ship packages via first-class, parcel post or priority.  One of the bonuses of using this service is that parcel with e-stamps are exempt from Postal Services security regulations.  Another feature is packages weighing up to 5 pounds can be dropped into the local postal service mailboxes eliminating the trip to the post office altogether.

¾    I-ship – eBay developed a relationship with Freightquote to assist buyers with the cost of shipping.  When shipping packages customers want to know exactly how much it’s going to cost to avoid surprises at the end of the transaction.  Freigthquote provides this much needed service for eBay.

¾    Mailbox – eBay formed a partnership with Mailboxes, Etc. to provide customers with all the materials they need to package well. 

¾    IEscrow – To help guarantee that buyers get what they pay for, eBay formed an alliance with iEscrow.  When a check is written eBay buyers can put the transaction into the iEscrow system,  which holds onto the check until the buyer receives the item.

¾    Billpoint – To facilitate a person-to-person credit card payment system, eBay teamed with Wells Fargo Bank to offer its customers Billpoint, a company that specializes in transferring money from one cardholder to another.  eBay’s objective was to make credit card payments a “seamless and integrated part of the trading experience”.

C.     Competitive Position Compared to Rivals – When eBay first began its competition consisted of classified ads in newspapers, garage sales, flea markets, collectible shows, and local auctions.  As the company evolved to include more items like household goods, office equipment, toys, etc., so did its types of competitors.   As a result traditional brick-and-motor retailers, import/export companies, and catalog and mail order companies all have become a part of eBay’s competitor list.  The most important comparative factors in the online auction industry have given eBay a sizable advantage over its rivals.  Below is a Competitive Strength Assessment for the online auction industry today.

As you can see by the overall strength ratings eBay’s leads the online auction industry by a comfortable margin.  Its closest competitor is Ubid.com, with Egghead.com and Yahoo Auctions trailing the pack.  EBay’s first mover status and its commitment to continually add new categories and product offerings have made it the undisputed king of person-to-person auction market.

D.    Strategic Issues eBay Faces

1.      Should it continue its aggressive expansion strategy or focus its efforts on maintaining the character of the eBay community?

2.      Should it continue to expand into the international markets?

3.      Should it further broaden its offerings to include more categories, an increased number of specialty sites and sellers, and new fixed-price options?

VIII.  eBay’s Future Strategies (Note: each alternative strategy was written by a different person)

A.     Alternative Possible Strategies

1.      Develop Business-to-Business Market (Danielle Devine)

a.       Advantages of new entities:

¾       The separate entity in eBay for B2B & C2C/B2C could keep current customers happy with community-like atmosphere.

¾       B2B market is expected to grow substantially over the next few years.

¾       Forecasts of B2B are expected to grow several trillion in the next few years.  If eBay develops a special entity for them now with added services it will be a huge profit market to enter.

¾       Each entity would operate independently, but collectively they would provide a wide range of customer service to for a competitive advantage.

b.      Disadvantages of new entities:

¾       The new entities will consume a lot of eBay’s resources being that they will enter into a trillion dollar market; eBay may focus more towards the B2B industry rather than its original customers.

¾       eBay’s initial image of a backyard auction may shift away to a more cooperate, industrial image.

¾       eBay may not be up to par with its technology to handle millions of new customers, causing a site failure.  This kind of result will lead to profit loss and a drop in market share.

 

2.      Expansion of Product Offerings (Nick Krynski) – Currently, eBay is the clear leader among online auctioneers in the U.S.  This domestic domination may have a negative affect on the future growth opportunities open to the company, especially if it stays strictly to its current product offerings.  eBay could take on a “one stop shopping” strategy with regard to its product categories by expanding into other offerings like downloadable music, travel, and financial securities (stocks, bonds…). 

¾       eBay could develop a “music exchange” similar to Roxio’s Napster 2.0 or Apple’s iTunes that would allow a la carte downloading of music and develop a community marketplace for music-lovers. 

¾       The company could develop a more comprehensive system for travel products (airline tickets, hotel reservations, car rentals…).  Currently, eBay has a fairly broad and unstructured “travel” category; however, the company might be able to better attract travel customers if it had a more focused system to present and sell travel options to customers.  Its system could be similar to the “reverse auction” system used by Priceline.com.  This system could be developed internally or obtained through a merger/acquisition of Priceline.com (or similar company). 

¾       eBay could offer a market for trading financial securities such as stocks and bonds.  The system used for this could be similar to the “alternative trading system” used by ex24.com, Inc (this system allows investors to trade bonds or shares of stock directly to other investors).  Again, eBay could develop this system internally or obtain it through a merger/acquisition of ex24.com, Inc. (or similar company). 

This strategy would allow eBay to expand beyond its current offerings and attract different segments of customers; furthermore, it would produce new revenue sources for the company.  However, this strategy could also distract eBay from its core online auction focus.  This also could alienate current eBay users by diluting the community-feeling, which was said to have attracted many.  Moreover, many of these new product areas are already dominated by another company.  eBay would therefore be required to invest significant resources towards either aggressively competing or acquiring others.

3.      Continuation with International Expansion (Kristen Barson) – Currently, eBay is doing international business with 22 countries.  Some of the countries include; Canada, Australia, The United Kingdom, Japan, South Korea, and Europe.  Although eBay is doing very well internationally right now, there are some disadvantages in continuing international expansion in other countries.  A major disadvantage for eBay would be trying to acquire a country with little or no technical innovation.  For example, slow technology with the computers, or basically no sophisticated technology at all could slow down the company and trigger a loss of sales.  Entering new markets could prove a significant expense for eBay since the cost of labor, advertising and technological support when entering a new market typically runs $2 million to $4 million per quarter for at least three to six quarters.  Another heavy problem involves government regulation of e-commerce sites.  An example would be web surfers in France gaining access to sales of Nazi memorabilia.  It is against the law to sell any kind of racist object because it is an offense to the memory of the country.  However, if eBay continued to expand internationally, they would expand their services to a broader customer base.  With the expansion of the customers, an increase of potential sales could occur.  By going into other foreign countries, eBay would pick up a greater amount of market share, which would be a big advantage over eBay’s current competitors. Also the fact of getting eBay’s name out there to other countries could potentially bring in business for them down the road.  

4.      Expansion of Company Focus (Jesse Coad) – One alternative for eBay would be to expand its company focus to other areas.  One possible way to do this would be for eBay to offer their own search engine as well as other internet services.  This would allow eBay to compete with other search engines like: Yahoo, MSN, Lycos, and Excite. It would also allow eBay to be a universal website that reaches all its users needs, whether it be information or purchasing items online.  Another option that eBay could do to expand its company focus would be to offer reverse auctions, where the buyers put in a price they want to pay and the sellers can set the prices they are willing to accept for their item.  By doing this option would give buyers and sellers the option to shop or offer their product in either the auction market or the reverse auction market based on the one in which they receive the best deal.  This option would also help eBay gain more of the market share by allowing the customer more freedom in the sale or purchase of an item.    From a competitive standpoint this option could help eBay compete with priceline.com.  One negative impact of these two options would be that eBay would be changing their reputation that made them so successful in the first place.  There is also the possibility these options could fail because the consumers may stay loyal to the companies they have used in the past.

B.     Recommendation – We believe that eBay would best be served by continuing to pursue international expansion, as well as developing a business-to-business auction market.  Expansion into other product offerings might result in new revenue streams and the attraction of new and different consumer segments; however, this type of strategy might further dilute the community feeling valued by many of eBay’s current registered users.  This action could also distract eBay from its primary focus – providing a marketplace for online auctions – and force the company to concentrate time and resources on product offerings with limited profitability (due to the leadership position of rivals and the potential initial investment necessary).  Expansion of eBay’s focus away from strictly online auctions offers similar advantages and concerns.  Through this strategy eBay could grow into different market areas of the Internet economy and establish additional revenue streams (online advertisement revenues, subscription service fees…); however, the company could also expand beyond the customers’ perceived image of eBay, thus leaving new elements unwanted and unused.  Also, eBay would be forced to compete against established rivals (Yahoo, Lycos, Google…) who possess advantages in knowledge, experience, and brand recognition.  In contrast to these strategies, continuing international growth and developing a business-to-business market may allow eBay to grow while retaining its valuable image.  With regard to international growth, eBay could look to developing nations with large and emerging middle classes, like India.  Currently, eBay is determining whether or not to acquire an Indian online auction site named Baazee.  If the company’s analysis can illustrate a sensible gain from the acquisition, we believe eBay should move forward.  In addition, eBay could benefit by developing a business-to-business market.  The global business-to-business e-commerce market in 2003 was estimated to be $1.4 trillion; furthermore, this market is expected to grow to $5 trillion by 2006.  By establishing a presence now, the company could benefit from this substantial growth projected for the future.  eBay might be able to penetrate this market by adapting its consumer-to-consumer online auction format to better suit the needs of the online business market (with value-added services to streamline delivery and payment); however, the business-to-business market should remain a separate entity from the present eBay operations (with different websites).  This move might be able to defend against any perceived change of image with regard to the present users of eBay’s website.  This strategy would also require the company to invest in new systems and personnel; nevertheless, we believe that a successful penetration into this market would more than justify the initial cost.