Five years after she joined eBay as chief executive, Margaret "Meg" Whitman is scarcely seeing any slowdown in the online auctioneer's growth. Its profits last year soared 176%, to $249 million, on a 62% sales jump, to $1.2 billion. And despite the moribund economy and war in Iraq, it's expected to log $1.9 billion in sales this year, a 60% rise.
The reason: The former Walt Disney (DIS
) and Hasbro (HAS
) executive has kept eBay (EBAY
) focused on what it does best: Using its global marketplace to bring efficiencies to inefficient markets such as used, collectible, and overstocked goods. While eBay remains largely a place for small businesses and individuals to sell their wares, it's increasingly attracting the likes of Sears Roebuck (S
), IBM (IBM
), and Disney.
Recently, Whitman talked with BusinessWeek Silicon Valley Bureau Chief Robert D. Hof about how eBay aims to make itself and its marketplace even more efficient. Following are edited excerpts from their conversation:
Q: You've said eBay's value proposition is making inefficient markets efficient. What is it about eBay that does that?
A: We provide a forum that's an efficient market for buyers and sellers to connect, for products that typically don't have an efficient distribution system. Products have a life cycle -- first they're new and scarce, and then it goes into in-season retail, then it becomes overstocked or obsolete or returned merchandise, and ultimately it becomes used and vintage.
The market for in-season retail is very efficient. There are many in-season retailers, all of whom battle each other every day for lowest price. With the tails of that product life cycle, the ability of buyers and sellers to connect is not nearly as efficient. That's what eBay offers -- an efficient market for buyers and sellers to connect on those product categories.
Q: Why haven't more efficient markets for those categories developed?
A: They're not as big. We estimate that the tails of those bell curves in the product categories that we compete in, in the countries we compete in, is quite a large market -- $1.8 trillion, which is a very big sandbox for a company like eBay. But that's a fraction of in-season retail. Also, in-season retail is very understandable to people. These markets are not as visible and haven't had as much focus historically as in-season retail.
There's two reasons those tails are inefficient: There's information inefficiency, meaning you don't know exactly what's available if you're looking for used or vintage Levi jeans. There's also price inefficiency: You don't really know how much you should pay for them.
Q: Has eBay's value proposition evolved over time?
A: The fundamental value proposition has stayed the same. What's surprising is how extensible this model has been. Originally, this was a collectibles Web site, even in 1998. And collectibles are the perfect inefficient market. What has been quite interesting is that this has been extensible to many other categories beyond collectibles -- even used cars.
Q: How do you tell in advance which markets are inefficient?
A: You don't. Our user community is the best R&D lab in the world. What we do is provide an efficient trading platform, and we let the users figure out how to use it. They lead us into product extensions.
We don't have a team of folks sitting in a conference room asking, "O.K., what's the next place we're going?" We let the users identify and find those pockets of inefficiency.
Q: Does eBay have a formal way to track what users are doing?
A: We watch what's going on in the site a lot more carefully and with a lot more rigor. Once we see a trend, we try to figure out how to enable those users to be successful trading in whatever category it is.
In used cars, the head of strategy at the time, Simon Rothman, was interested in collecting small die-cast cars. He was looking for a die-cast Ferrari. He typed "Ferrari" into the eBay search engine and up came a real one.
Q: Last year, eBay bought payment-processor PayPal to make transactions more efficient. What kind of inefficiencies and frictions in eBay's own operations do you still need to fix?
A: The biggest single friction point prior to the acquisition of PayPal was payments. There was not a seamless way to pay on eBay, and PayPal has absolutely helped that.
There are other companies that have provided services to reduce friction. Square Trade, a dispute-resolution service, is one. There's a number of services like Auctionwatch and Andale that automate listing of items. Shipping is still a friction point. There's ways we could make shipping easier -- you don't know until the end of the auction where you're shipping. We could partner with shipping organizations to reduce that friction point.
Q: Is eBay a mainstream shopping destination yet?
A: We are very mainstream in our target customer, which is average Americans, average Germans, average French. Probably Germany and the U.S. are the furthest along in understanding what eBay is and something that many people use on a regular basis. In the last year to 18 months, in those two markets, we have become relatively mainstream. Not as mainstream as Wal-Mart (WMT
) or Safeway (SWY
). The Web is not fully penetrated. Not everyone has bought something online.
The more relevant question is: When is this new way of doing business not perceived to be new anymore? I don't know when that is -- in the next five years, maybe, in the U.S. But the Web is new, e-commerce is new, and eBay is newer yet. To have eBay be as accepted as taking a trip to Wal-Mart, I think we may be quite a long way from that.
Q: The flipside of that is how to get major brands aware of and willing to use eBay as a distribution channel. How are you trying to get past their reticence so far?
A: These companies are in the early stages of experimentation with eBay. The way they view us as an alternative distribution channel, not a replacement channel, simply an augmentation. That said, eBay has always been and will always continue to be the home of small businesses, with maybe 5% or 10% of our revenue coming from big companies.
Q: You've described eBay as a platform, which is a term also applied to Microsoft (MSFT
) Windows. It seems that after several years of shying away from that identity, you have now fully embraced it. What does that mean for eBay and its members?
A: We're evolving very rapidly, and the marketplace teaches us every day what's possible. Many companies are actually building businesses to support eBay, which is the best definition of a platform. There's now a host of companies providing services to support trading on the eBay platform. So we decided to figure out how to make it easier for companies to do that.
The thing is, we're not the only source of innovation. We're so well-served by letting others think about how to make this platform even more powerful.
Q: How are you trying to avoid the perception, which Microsoft suffers from, that such a platform can grow too powerful?
A: At the highest level, we compete for consumer dollars. The marketplace is just enormous. We have to compete for your consumer dollars against a whole host of competitors. So it's a very different situation than the one Microsoft faced.
We realize every single day that our sellers have other places to sell, and our buyers have many other places to buy. What percent of the entire used-car market is sold on eBay? The answer is 0.2%. So don't get too excited.
Q: Is your style of management different, given that eBay is a different animal?
A: Most of the things I do are good management practices at any company: What's the strategy? What are the company priorities behind that strategy? Are we investing against the most important things? Are we communicating to our employees what we want to do. And are they focused on a small number of things? So a lot of what I do every day is what I learned at Disney, Hasbro, and Bain & Co.
The difference here is the speed at which things are getting done and the speed in which our environment changes. And, of course, the speed at which the company is growing. We make more decisions here in a week than I made at other companies in six months.
MARCH 24, 2003
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