What makes eBay unstoppable?

A visitor to eBay Inc.'s San Jose, Calif., headquarters one recent morning came upon an unusual scene. Some 20 men and women were milling around until suddenly a company official emerged and called for new employees to follow him for an orientation. The lobby emptied.

At a time when layoff announcements are numbingly routine, the scene in eBay's lobby is an oddity - not just in battered Silicon Valley, but across corporate America. EBay CEO Meg Whitman won't say how many people the online auctioneer is planning to add to its workforce of 2,400, but the group orientations are held weekly.

Virtually every technology and Internet company is either treading water or drowning, but Whitman's eBay is growing stronger and healthier every day. What started as a quaint auctioneer of useless collectibles has grown into a commerce powerhouse. In just six years, eBay has become arguably the only large, unquestionably successful consumer Internet survivor.

"EBay is what all of us wanted our Internet businesses to be," says Mark Goldstein, former CEO of BlueLight.com LLC, the online unit of discount retailing giant Kmart. Marvels Michael Dell, CEO of Dell Computer Corp., "It looks like a great business to me."

Such praise is certainly deserved, but it has helped to inflate eBay's stock price to Internet-bubble proportions. That means eBay will have to continue delivering a flawless performance and dizzying growth, while preserving its prized community spirit. The slightest falter could leave it in the same straits as its beaten-down Internet brethren. "This may be one of the biggest business opportunities we've seen in a long time," says Morgan Stanley Dean Witter & Co. analyst Mary Meeker. "To tap its opportunities, the eBay team has to continue to execute very well."

So far, it has. From the start eBay set out to build one of the few truly virtual businesses on the Internet. At relatively low cost, its site allowed buyers and sellers to do online what they couldn't do offline: Sell anything, anywhere. In the language of Silicon Valley geeks, the business model was scalable - it could grow unbounded with no need for eBay to add stores or warehouses. The more it grew, the more money eBay would collect.

But what's surprising is not that eBay was scalable, rather it's the extent to which eBay has scaled. Skeptics predicted early on that the company's growth would peter out once the collectibles market was tapped out - and the novelty of buying at auction wore off. Instead, the opposite has happened. Over the past year, eBay has successfully transformed itself into a platform for trading everything from chairs to computers to clothes. Businesses small and large discovered that eBay is a cheap and effective way to reach millions of customers. They have propelled the company into a formidable growth spurt, even as the overall growth of Internet commerce stalls.

Sun Microsystems Inc. and IBM Corp. now sell computers on eBay. J.C. Penney Co. Inc., which boasts a thriving online retail business of its own, has tested eBay as a virtual storefront. Regional consumer electronics chains are using eBay to battle the likes of Amazon.com Inc. and Best Buy Co. Inc. Every hour, 10 diamond rings, 120 PCs and 1,200 articles of clothing are sold on the site. And there seems to be no limit to what people will trade: The Minnesota house where Bob Dylan grew up sold recently for US$94,600, and a Beechcraft "Duke" twin engine airplane sold for $100,000.

It is part of eBay lore that the community of buyers and sellers is at the core of its success. "Our best ideas are the users' ideas," Whitman says. That was certainly true with cars. After the company noticed that users were listing cars in a "miscellaneous" section, it set up a category and, eventually, a separate site for cars. A Corvette is sold on eBay every three hours, and eBay buyers and sellers are on track to trade $1 billion in cars and car parts in 2001. Whitman, who recently bought a car - she won't say what kind - on eBay, boasts that her company has become the largest auto site on the Internet. "I think that was pretty surprising to us," says Whitman. "This was a Web site based on small shippable items. Cars are hardly small and hardly shippable."

Such success leaves eBay as the only Internet company to live up to its hype. On July 19, the company reported second-quarter profits of $24.6 million, more than triple those reported a year ago. While most companies were paring expectations, eBay raised its sales and profit outlook for the remainder of the year. Sales on Amazon, for instance, grew at a sluggish 16 percent for the same quarter, while overall e-commerce spending was up 15 percent, according to research firm BizRate. In contrast, gross merchandise sales, the total value of goods traded on eBay, surged 73 percent. At the current rate, nearly $9 billion in goods will be sold on eBay this year, about three times what Amazon expects in total sales. And because eBay doesn't own, store or ship the items its sellers trade, it enjoys hefty profit margins that are the envy of the industry.

EBay looks good not only when compared to the bludgeoned e-commerce sector but also when contrasted to the Internet industry as a whole. A year ago, the company was on the verge of being acquired by Yahoo, which was then worth $100 billion or so. The two companies' reversal of fortune was starkly apparent at last week's Industry Standard Internet Summit. Whitman was the only speaker whose presentation was interrupted by spontaneous and sustained applause from a crowd of Internet executives and investors with little reason to cheer these days. Following her speech, Whitman sat down to listen to Yahoo Inc.'s new CEO, Terry Semel, and its co-founder Jerry Yang. There was no cheering from the audience - just scattered remarks amid onlookers that Yahoo's management team seems to lack a clear vision of how to lead the company out of its hole.

EBay's success relies heavily on two factors: It's been a profit machine from day one, and Whitman has kept her focus as she's invested steadily in the company's growth. In the past year, eBay has branched out from its sometimes cumbersome auction format. First, it acquired Half.com, a site where sellers list new and used items for a fixed price. Half.com has been an unqualified success, and eBay recently expanded it from its core of books and CDs to include computers, consumer electronics, sporting goods and other items.

On its auction site, eBay added a feature called "Buy It Now," which lets users acquire an item immediately, bypassing the lengthy auction process. Nearly 35 percent of all items listed on eBay now offer that option, speeding up the rate of trading on the site. And just a month ago, the company set up a program that allows businesses to set up storefronts on the site. Without a shred of promotion, the pilot program has attracted 18,000 businesses, well ahead of eBay's projection of 2,000.

EBay's international investments are paying off, too. The company recently acquired iBazar, a pioneering European trading site. Meanwhile its older German, Canadian and U.K. operations have grown briskly. EBay is now the No. 1 auction site in all of its 18 international markets except for Japan, where Yahoo has a sizable lead. "The magnitude of the challenge is large, but we have not, by any stretch of the imagination, given up on the [Japanese] market," Whitman says.

Buy It Now and Half.com represent 11 percent of eBay's revenues, and international operations account for 14 percent. Over time, Whitman expects that U.S. auctions, international sales and fixed-priced sales will each account for a third of eBay's business. But eBay has also racked up healthy revenues from side businesses, including its Billpoint payment system and services such as shipping and escrow. And its advertising business is perhaps the biggest surprise. EBay places ads on a small percentage of its pages through an alliance with AOL Time Warner. Yet advertising accounts for 10 percent of revenues, or about $18 million in the most recent quarter. That means eBay earns more in advertising than all but the biggest ad-supported Web sites. CBS Marketwatch.com, for instance, had $4.9 million in advertising revenue for the same period.

Success has put eBay in an unusual bind. The company now finds itself downplaying its potential to a Wall Street audience that dismisses that caution as conservative. Last September, Whitman promised that eBay would generate $3 billion in revenues with operating margins of 30 percent to 35 percent - roughly $1 billion in operating profits - by 2005. While the ambitious targets raised some eyebrows, most analysts now agree that eBay will meet those goals ahead of schedule. And many expect more. In particular, they believe profit margins can be even greater.

"I think the investment community is recognizing that this is a business that could drive significant returns over and above the targets they set," says Lauren Cooks Levitan, an analyst with Robertson Stephens.

In fact, many believe that eBay will become a profit-making juggernaut much like Microsoft in the 1990s. "Microsoft rode the wave of personal computing," says Anthony Noto, of Goldman Sachs. "EBay is going to ride the wave of commerce."

Whitman and her team are doing what they can to temper those expectations, in no small part to give themselves some wiggle room. "I respond with real firmness," says CFO Rajiv Dutta. EBay, he says, is still a young company that will require heavy investments to continue driving growth. Balancing that growth potential with shorter-term profits will remain a delicate task. "It would be very wrong for us to make this into a very big cash cow," Dutta cautions. "Could we make it? Absolutely. Would it benefit shareholders? Absolutely not."

But Wall Street's not listening. The company trades at 151 times expected 2001 earnings - compared to 35 times for AOL Time Warner and 41 times for Schwab. And consider the following: EBay's market value of more than $16 billion tops those of the remaining 25 publicly traded e-commerce companies combined. While many of the survivors are hanging on for dear life, the list also includes the likes of Amazon, Expedia, Homestore, Priceline.com and Travelocity.com. "The company is great," says Michael Legg, an analyst with Jeffries & Co. "The stock is expensive."

With no real competition on the horizon, Whitman sees her biggest challenge elsewhere: keeping eBay nimble and maintaining the community spirit even as it expands. There are already signs that some sellers have grown disheartened because of increased pressure from bigger businesses hawking similar wares on eBay. Maintaining what Whitman calls a "small-town feel on a global scale" may indeed be the company's greatest task.

Whitman takes pains to distinguish her company from run-of-the-mill retailers, but she has managed to achieve what online merchants have only dreamed of: EBay has come closest to being the Wal-Mart of the Internet. "EBay has always been the value-price channel," says Munjal Shah, president and CEO of Andale, a company that makes software to automate sales on eBay. "Now it is the value-price channel where you can find anything."

That's what makes it so Wal-Mart-like: EBay has already shown it can thrive when a slowing economy turns shoppers into bargain-hunters. But being like Wal-Mart also carries a drawback: It doesn't feel much like a small town. Then again, if eBay can mint profits a la Wal-Mart, community may not matter that much after all.

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