How They Started (9 page)

He thought it unfair that some buyers were favored with one price, while others had to settle for another. Pierre believed an online auction was a better way of arriving at a fairer price for all concerned, and with the development of the Internet such a concept could become a reality. “I’ve got a passion for solving a problem that I think I can solve in a new way,” he said at the time. Pierre wanted to test the Web’s ability to connect people around the world and offer a platform where buyers and sellers could share information about prices and products.

“Instead of posting a classified ad saying I have this object for sale, give me $100, you post it and say, ‘Here’s a minimum price,’” he once said, recalling his early strategy in an interview. “If there’s more than one person interested, let them fight it out.”

It was going to take time and patience to develop his business idea, but Pierre relished such a challenge and worked around the clock, holding down his day job during the week and working on AuctionWeb in his spare time in the evenings and on weekends. In fact, he wrote the initial code for eBay in one weekend. It was a labor of love and an all-consuming hobby. With his concept for an online auction, Pierre wanted, above all, to promote the idea of a community on the Web, one that was built on fairness and trust.

“I’ve got a passion for solving a problem that I think I can solve in a new way.”

Once the code was complete, Pierre launched the site; however, he had no idea what types of things people might want to buy and sell. As an experiment, he advertised his broken laser pointer for sale, and to his surprise, he found a buyer who was interested in broken ones. Pierre created a handful of categories—including computer hardware and software, antiques, and books and comics—in which users were soon listing, viewing and bidding on items.

Because he intended to offer the service for free, it was imperative that he keep overhead as low as possible. To this end, Pierre ran the site from home, paying $30 a month to his Internet service provider (ISP). He also decided to register the business and picked the name Echo Bay Technology, which he thought “sounded cool.” But when he tried to register it, he found that it was already registered to a Canadian mining company, so instead he shortened the moniker to eBay.

To boost traffic, Pierre eschewed advertising and PR and deals with other sites in favor of generating awareness by word of mouth. He posted announcements about the site in online newsgroups to attract attention, and this had the desired effect: computer geeks and bargain hunters emailed one another with details of the site. Despite the lack of paid advertising, eBay soon gathered momentum, and healthy numbers of visitors began listing and buying all manner of goods. Toward the end of 1995, Pierre’s ISP began to charge him $250 a month, suspecting that the growing volume of traffic was putting a strain on its system. This marked a turning point for Pierre and signaled the moment when he decided to turn what was until now just a hobby into a full-fledged business.

Pierre wanted, above all, to promote the idea of a community on the Web, one that was built on fairness and trust.

eBay’s headquarters in San Jose, California.

“That’s when I said, ‘You know, this is kind of a fun hobby, but $250 a month is a lot of money,’” he has since recalled. Pierre had designed the site to be able to collect a small fee based on each sale. Implementing this charge now would provide him with the necessary money to fund overheads and expand the business. He decided to charge 5 percent of the sale price for items below $25 and 2.5 percent for items above this threshold. Later he would add a charge for listing items.

With the new fee structure, the fees collected began to surpass his salary at the time, which made it an easy decision to quit his job and devote his full attention and time to eBay. In June 1996, with the site recording more than $10,000 in revenues for that month and 41,000 registered users, Pierre hired his first employee, Jeff Skoll, who had previously been involved in two high-tech startups. Pierre also set up feedback capabilities on the site to enhance the buying and selling process and reinforce his original mission of creating a trusted community. A year later, eBay was attracting more consumers than any other online site.

“By building a simple system, with just a few guiding principles, eBay was open to organic growth—it could achieve a certain degree of self-organization,” Pierre said in one interview.

In 1997, with the business growing at a phenomenal rate, Pierre invested substantially in advertising for the first time and helped design what has now become the business’s iconic logo. The year marked another milestone as the one millionth item was sold on eBay: a toy version of
Sesame Street
’s Big Bird. By 1998, the site was making a name for itself as the best place to trade for Beanie Babies, tiny stuffed animals that were fast becoming a collector’s item.

Fortune continued to favor Pierre’s sense of timing. Toward the end of 1997 and throughout 1998, business communities around the world were experiencing the dot-com boom, and seemingly everything online at the time became attractive to investors and consumers alike. Pierre recognized that the business was becoming too big for him to handle alone and that the time was right to seek outside help and expertise. He had already filled several roles, among them chief financial officer, president and CEO, as well as chairman of the board.

Pierre decided to seek outside funding and sold a 22 percent stake in the business to venture capital firm Benchmark Capital in return for an injection of $6.7 million, which some reports have suggested was the most lucrative investment ever made in Silicon Valley. Benchmark began the search for an experienced management team, and the new recruits included Margaret (Meg) Whitman, a Harvard Business School graduate who had previously worked for Disney. She took the role of president and CEO, while Pierre remained as chairman. Meg poached senior executives from the likes of PepsiCo and Disney who helped to take the company public in 1998 and presided over a big investment in advertising.

The IPO, too, was a phenomenal success and provided funds for further expansion. Pierre and Meg watched the share price jump from $18 to $50 in a matter of minutes, and within two months of listing, the price had reached $100. By early 1999, Benchmark’s stake was worth $2.5 billion, equating to a staggering return of 50,000 percent. After a secondary offering, eBay’s valuation peaked at $26 billion.

Rapid growth came at a price, however. In June 1999, following a site redesign, eBay suffered a number of breaks in service, with one lasting 22 hours. This had a severe impact on consumer interaction with the site and knocked more than $8 off the price of its shares. Further outages occurred, and company revenues took a severe hit. According to reports at the time, the service interruptions cost eBay $3.9 million of its second-quarter revenues after it refunded listing fees and granted extensions on auctions.

At the time, the 22-hour outage was one of the worst Internet crashes in history, and a backlash quickly ensued as users wasted no time registering their complaints on an Internet newsgroup dedicated to the site. Others raised questions about the robustness of the technology.

Keeping the customer foremost in mind had always been Pierre’s aim, and he set about reassuring customers about the quality of eBay’s service. Staff worked around the clock to address technical problems, and eBay made some 10,000 phone calls to the site’s top users, alerting them to the problems, apologizing for the inconvenience and assuring them that everything possible was being done to get the site back up and running.

A few users however, began turning to other sites that were giving eBay a run for its money with their own versions of online auctions, most notably search engine Yahoo! and online retailer Amazon. The latter had launched online auctions in March 1999 with a model similar to eBay’s, including a commission on sales and a rating and feedback system. New competition, however, appeared to be a good thing, as eBay beefed up its services in response. It expanded the range of products on offer, streamlined the buying and selling processes—and set its sights on global growth.

In 1999, eBay launched sites in the UK, Australia, Germany and Canada, and Pierre and Meg also implemented a strategy that involved selling more expensive goods on the site. This entailed launching a series of regional sites, which they believed would facilitate the sale of larger items that would be cumbersome and expensive to shift, such as vehicles. eBay also began to focus on making targeted acquisitions, and a year later the company bought online retailer Half.com, which allowed users to buy goods directly without going through an auction process.

eBay’s well-known bright signage.

By 2001, eBay had added Ireland, Italy, Korea, New Zealand, Singapore, Japan and Switzerland to its portfolio of international sites, and its user numbers had swelled to 42 million. Such rapid expansion was an impressive feat in itself, more impressive for having been achieved against a backdrop of doom and gloom in the dot-com community. Many Internet businesses had sought a public listing and seen their shares and valuations soar in the same vein as eBay’s. But by 2001 the landscape had changed, and one online business after another went bust.

Such rapid expansion was an impressive feat in itself, more impressive for having been achieved against a backdrop of doom and gloom in the dot-com community.

As for eBay, it suffered through its own travails. The Asian market, for instance, proved very difficult to crack. By 2002, just two years after its launch, the company had pulled the plug on its operations in Japan, admitting that it was struggling to make inroads in a market where competitors such as Yahoo! already had a well-established auction model. According to reports, eBay was able to offer only 25,000 items on its Japanese site, while Yahoo! Japan offered close to 3.5 million. But as one door closed, another one opened. eBay’s entrepreneurial spirit and appetite for global challenges persisted, and the management team set its sights instead on China, buying a third of Eachnet.com, the country’s leading online auction site.

eBay also looked at ways of improving its services, and in 2002 it bought electronic payment system PayPal in a deal valued at $1.5 billion. PayPal was the leading player in the online payment market, and eBay’s own payment system, Billpoint, had failed to dent PayPal’s market share. It seemed to make sense to team up with PayPal’s winning formula, and Meg hoped the acquisition would help speed up eBay’s existing payment processes.

In 2004, eBay introduced the “Buy it now” function, enabling sellers to bypass the auction process and sell immediately to consumers. A year later, it launched a business and industrial category, offering items from the industrial surplus market. Its most surprising move came a year later, however, with the acquisition of Internet telephony provider Skype in October 2005, at a cost of around $2.6 billion. At the time, eBay said it planned to integrate Skype with its auction website to smooth the sales process in those categories that called for better channels of communication, such as used cars and high-end collectibles. The deal also enabled eBay to extend its global reach by accessing an audience in Europe and Asia, areas in which it had so far failed to gain a strong foothold.

While some analysts questioned the logic behind the eBay-Skype deal, and others said eBay paid too much, one thing was clear: by the time it celebrated its 10th anniversary in 2005, eBay had proved itself many times over as an Internet business that was here to stay. It had peaked during the dot-com boom and survived while other high-profile, venture capital-backed brands such as Boo.com, eToys and Webvan had disappeared altogether.

Today, more than seven million new items are listed on eBay each day and more than 112 million items are available at any given time.