On Mar. 1, in a public forum that was part of BusinessWeek's continuing "Captains of Industry" series, eBay Inc. CEO Margaret C. Whitman sat down with Editor-in-Chief Stephen B. Shepard at the 92nd Street Y in Manhattan to talk about eBay, herself, and the souring economy. Here are excerpts. (The full interview on video is also available.)
Q: You worked for a variety of traditional companies--Procter & Gamble, Stride Rite, Hasbro. What tempted you to an Internet company like eBay?
A: When I first got a call from the headhunter to come to eBay (EBAY), I said: "Absolutely not. I'm not thinking about living 3,000 miles across the country, uprooting my neurosurgeon husband, and taking my two boys out of school to go to the West Coast for this no-name Internet company." So I said no.
To the credit of the headhunter, he called me back about three weeks later and he said: "eBay is perfect for you and you are perfect for eBay. I beg you to get on an airplane to go meet the founder, Pierre Omidyar." And really, to avoid making the headhunter mad, because I thought I might need him later, I decided to get on a plane.
And I will never forget, I got on eBay the night before I went for the interview, because I thought it would be nice if I'd actually been to the Web site before I interviewed. It was called Auction Web, it was in black and white, and there were three components to the site. The first component was the auction business, the second was Pierre's fiancee's Web page, and the third was the Ebola virus page--because Pierre was really interested in the Ebola virus. And I said: "I cannot believe I am getting on a plane to go talk about a black-and-white Web site called Auction Web that has equal billing with the fiancee's Web page and the Ebola virus page." But I had already committed, so I got on the plane.
Q: What changed your mind?
A: eBay had two main things that really spoke to me. It enabled individuals to do things that they could not have done without the Web. The second thing was what Pierre said: "People have met their best friends on eBay. What this has enabled is truly online community." I recognized the land-based equivalent, which is that whatever your interest is--whether it's bowling or dance--you tend to like people who like the same things you do. And so I saw it had the makings of a great brand.
Q: Can you elaborate on why eBay's business model has been successful?
A: It was a business model and a concept uniquely suited to the Web and took advantage of the characteristics of the Web. The second thing is that it really is the first community commerce model.
People ask me, how is managing in the New Economy different from managing in the Old Economy? Actually, it's a lot the same. It's about the financial discipline of the bottom line, understanding your customers, segmenting your customers by their needs, and building a world-class management team.
Q: Even so, the stock has declined by 70%. Why?
A: The last two years in our economy will not be repeated again in our lifetime. This was an extraordinary event funded by very significant access to capital, and a lot of the economic reality of running businesses was suspended. So the pendulum swung all the way to the right. Now the pendulum is swinging all the way to the left. I think it will ultimately come back to the middle.
We have fared better than just about everyone on the Net. So we're not too worried about that. The ethos of the company is: "You know what we can control? We can control the results." And as long as we continue to put the results on the board, I think the market cap will take care of itself.
Q: Even after this decline in eBay stock, the p-e ratio is still something near 100. How do we even think about valuing a company whose stock has declined by 70% and yet still has a 100 p-e?
A: I think the investors that own eBay understand the promise of what has been created here. We have truly created a global-trading platform where practically anyone can sell practically anything. It might be the only entirely new concept that's been born out of the Web. This can be a very big, very profitable model. Our gross margins are in the mid-80s. Our operating margins reached 20% in the fourth quarter of last year. We said for a long time that our long-term business model has 30% to 35% operating margins. And our estimate of the market that we can address is $1.7 trillion on a global basis. Investors who are paying that kind of premium think that what eBay does today is a mere fraction of the size that this company will be in 10 years.
Q: How has the depressed stock price affected employee retention and morale?
A: There's no question that people are disappointed that a lot of their initial stock grants are under water. But we tried to hire people because they believed in what the company was doing. We were looking for what we call missionaries, as opposed to mercenaries. In Silicon Valley, a lot of companies were founded by mercenaries, and they were not built to last. They were built to flip. We have, from the beginning, tried to build eBay into a company that is made to last.
Q: How has the mood changed in Silicon Valley?
A: There's been a pretty big sea change in Silicon Valley. When I arrived from Boston, I felt a bit of a stranger in a strange land. I was stunned by what I thought was irrational exuberance. There is quite a bit more sobriety today. I think it's a really good thing because it had completely gotten out of control in many ways.
Q: How much longer do you think this cycle has to run until the pendulum gets back to somewhere in the middle?
A: I think somewhere between 18 and 30 months. A lot of the pundits are saying you're going to see a recovery in the second half of this year, both in terms of the economy as a whole and perhaps stock market valuations. It's not completely clear to me that that's the case. If you look at biotech in the '80s and at PCs in the mid- to late '80s--when you have this kind of rush to one side of the boat--it does take a little bit of time to right itself. I think we are in the midst of a recession that is deeper than I think many people have actually acknowledged.
Q: You mean a tech recession or a general recession?
A: A general recession. The pendulum and the recession happen to be coinciding.
Q: What does that portend for Nasdaq?
A: Nasdaq is going to drift at roughly this level for quite some period of time.
Q: Will the downturn affect eBay?
A: It depends on how deep the recession is. If it is a dip and a soft landing, in many ways, we benefit. eBay offers products that represent a real value. So, if you want a DVD player in this economic environment, you might be happy to have last year's DVD player at 50% off retail. And we see people finding things in their garage that can raise thousands of dollars in cash. So we're seeing a pickup in sellers.
Q: What is it you worry about most?
A: I worry about the ability to grow a company at the rate that we have been growing on a global basis. When I joined the company in January, 1998, we had just finished a year where we did $4.5 million in sales. There were 20 people in the company in a small office in Silicon Valley. Today, we have almost 2000 individuals, we've just finished a year where we did about $430 million in sales, and the sun now never sets on eBay's offices. Just growing at 50% a year, with offices all over the world, is a huge challenge. How do you keep core values? How do you train people? How do you make sure that you don't repeat mistakes? Also, we're building a site to handle $30 billion of gross merchandise sales in 25 countries, 16 languages, 24-7.
Q: What is your prognosis for Amazon?
A: I think Amazon is a great consumer concept. It has an unbelievable user interface. It's easy, it's friendly. Their customer support is terrific. And they really set the standard in many ways for buying on the Net. I think the difficulty is the back end--inventory, warehouses, fulfillment, returns, obsolescence. I think they're a smart group of managers, and I think they will get there because they have built a tremendous consumer franchise. But I think a lot of blocking and tackling, heavy lifting--Old Economy skills--are going to be required to ultimately make money there.
Q: If eBay had not been a success, would you still be working in the Internet industry today?
A: I think so. The Internet is here to stay. It really is one of those revolutionary technologies that has the ability to change so much of how we live, how we communicate, how we plan, how we get information, how we buy things. It's fair to say that I was really bitten by the Internet bug.