management information systems
Chapter 3: Achieving Competitive Advantage with Information Systems 111
BUSINESS PROBLEM-SOLVING CASE
EBay Fine-Tunes Its Strategy
Since its inception, eBay has been synonymous with Internet auctions. The company has been the first and by far the most successful Internet auction business, mush- rooming into a gigantic electronic marketplace hosting 25 million sellers all over the world. Founded in 1995 by Pierre Omidyar and originally known as AuctionWeb, eBay has come a long way from its first sale, a broken laser pointer. The company now sells a staggeringly diverse array of goods and is one of the world’s most easily recognizable and well-known Web sites.
In 1998, eBay had revenues of $4.8 million in the United States. A decade later in 2008, eBay’s market- places generated over $8.5 billion in revenue worldwide from selling $60 billion in merchandise. Hundreds of thousands of people support themselves by selling on eBay and many millions more use eBay to supplement their income. During the 2008 holiday season, eBay was the most visited site on the Web, with 85.4 million active visitors.
But while impressive at first glance, eBay’s numbers have been slowing down for years. In the very same quarter in which eBay logged 85.4 million visitors, the company’s revenue shrank for the first time in the com- pany’s history. The biggest cause for eBay’s weakening outlook is the same area of the company that propelled it to stardom: its online auction business.
Consumers have indicated a strong preference for fixed-price bulk retailers, like Amazon, which has sus- tained steady growth despite the economic downturn. For many buyers, the novelty of online auctions has worn off, and these buyers have returned to the easier and simpler method of buying fixed-price goods. Search engines and comparison-shopping sites have also taken away some of eBay’s auction business by making items easier to find on other Web sites.
Although the company was slow to diagnose this trend, eBay’s leadership has begun taking the necessary steps to meet the shift in demand by consumers from auctions to fixed-price goods. The company unveiled a three-year revival plan in which the overall goal was to create a comprehensive array of marketplaces concen- trated in one central online location. Bidding on auc- tions, clicking on ads, scanning classifieds, and making outright purchases will all be possible from the flagship eBay site and its affiliates.
CEO John Donahoe wants to focus eBay’s business on the “secondary market,” which includes overstock and out-of-season items as well as the used and antique items that eBay has been known for. He wants the eBay buying
experience to emulate that of a low-price bulk retailer such as Costco, where “the inventory is somewhat fluid, but everything they’ve got is a great deal.”
To that end, Donahoe is trying to move eBay away from auctions and toward fixed-price listings. Although this move has appealed to investors, it angered many of the smaller sellers of unique goods that have come to symbolize the company’s success. Some longtime sellers chose to move their business elsewhere.
EBay has traditionally derived the bulk of its revenue from fees and commissions associated with its sales transactions. A portion of eBay’s revenue comes from direct advertising on the site, and some comes from end- to-end service providers such as PayPal, which increase the ease and speed of eBay transactions. The site imposes several types of fees on sellers, including post- ing fees for listing items as well as a collection fee on sold items. Traditionally, eBay was seen as a favorable proposition for smaller sellers to find markets for rare goods, or goods that are otherwise difficult to value.
In order to provide more incentive for bulk sellers of fixed-price goods to post their items on the site, eBay significantly adjusted its fee structure as part of its revival plan. The company reduced posting fees for adding an item online and increased the collection fee for sold items. For example, the fee to list a $25 auction item dropped to $1.00 from $1.20, but eBay’s sales commission on the same item rose from 5.75 percent to 8.75 percent. In August 2008, eBay lowered its listing fees for all sellers offering fixed-priced items under its “Buy It Now” format.
For bulk sellers, this was a boon. Prior to the change, posting large quantities of items was an expensive under- taking, since only a fraction of those posted items actually sold. Paying these posting fees represented the majority of bulk sellers’ se expenditures. But for smaller sellers of unique, expensive items, increasing collection fee percentages meant that they would make signifi- cantly less per sale.
EBay also adjusted its search ordering system so that highly rated merchants appear first and receive more exposure. Previously, the first items to be displayed were those for which an auction was about to end. EBay’s new search system uses a complicated formula that takes into account an item’s price and how well that item’s seller ranks in customer satisfaction.
At first glance, this adjustment doesn’t benefit any particular group of sellers more than the rest. But eBay also rolled out a rating system that made acquiring a high rating a much more time-consuming undertaking,
Part I: Information Systems in the Digital Age
favoring larger sellers with the time and energy to build a favorable rating. The company also removed the ability of sellers to assign negative ratings to buyers, a feature which many sellers felt protected them against late or non-payment on the part of buyers. The company’s rea- soning for this change was to stop sellers from rating buyers poorly as revenge for poor customer satisfaction ratings. Smaller sellers were incensed, claiming that the company was unnecessarily mistreating the group that spurred them to market dominance.
Not long ago, eBay’s growth strategy focused on expansion in geography and scope and on continuing innovation to enhance the variety and appeal of products on its sites. EBay has always been active in developing and acquiring new products and services that encompass all the activities people perform on the Internet. Earlier this decade, the company fashioned a diversified portfo- lio of companies with a hand in each of the Internet’s big cash pots: shopping, communicating, search, and enter- tainment. They are now realizing that some of these acquisitions were not good fits with their core business.
PayPal, whose service enables the exchange of money between individuals over the Internet, brings additional transaction-based fee revenue, and has been a significant bright spot for eBay’s future prospects. EBay is banking on PayPal becoming the standard payment method for online transactions. The service already receives 40 per- cent of its business from payment transactions that are not associated with eBay. Management is using PayPal, a high-growth area, to help refocus the business and jump-start stagnant growth.
In 2005, eBay acquired Shopping.com, an online shopping comparison site, and Skype Technologies, which provides a service for free or low-cost voice calls over the Internet. Markets that eBay traditionally had trouble penetrating, such as real estate, travel, new-car sales, and expensive collectibles, require more commu- nication among buyers and sellers than eBay currently offers, and Skype provides voice communication ser- vices to help.
But in 2009, eBay announced its plans to unload Skype, admitting its mistake in acquiring the company. EBay assumed that buyers and sellers would use Skype to com- municate about transactions, but the feature never caught on as expected. Skype cost eBay $2.6 billion, and eBay stands to recoup only a portion of that initial sum. Investors had urged the company to rid itself of Skype and channel the funds they receive into new growth initiatives.
Despite its mistake in acquiring Skype, eBay is still trying to expand the business via acquisitions. The com- pany also acquired the ticket-reselling Web site StubHub, bought a 25 percent stake in classified ad site Craigslist, and purchased Kurant (now ProStores), whose technology helps users set up online stores. Some analysts report that while many of eBay’s individual acquisitions appear to have been successful, they haven’t created the synergy that was intended, and diversifica- tion has detracted from eBay’s core business, auctions.
But that might be what eBay has intended all along. Mom and pop dealers have objected vociferously to most of eBay’s recent changes. Donahoe regularly appears on lists of “disliked CEOs,” and sellers have voiced their discontent via online forums and share- holder meetings. But Donahoe and the rest of eBay’s management maintains that hosting fixed-price sales by reliable retailers makes shopping more customer- friendly and predictable. Will cultivating large sellers dilute eBay’s brand and reputation as a dynamic flea market? Or will it steer eBay toward the fastest part of e-commerce growth?
Reports from 2009 appear promising. Despite the unfavorable economic climate, eBay’s stock has rallied from lows early in the year, gaining 71%. However, eBay’s site traffic is continuing to slowly erode as consumers gravitate towards Amazon and other similar sites. EBay still has a way to go to recoup its dot-com boom glory days. Can the Web’s most prominent online auction site change course so dramatically from the formula that made it successful?
Sources: “Is John Donahoe Finally Turning eBay Around?” Kevin Kelleher, www.gigaom.com, June 14, 2009; “ Peter Burrows, “EBay Outlines Three-Year Revival Plan,” Business Week, March 12, 2009; Geoffrey A. Fowler, “Auctions Fade in eBay’s Bid for Growth,” The Wall Street Journal, May 26, 2009, “EBay Retreats in Web Retailing,” The Wall Street Journal, March 12, 2009, and “EBay to Unload Skype in IPO, Citing Poor Fit,” The Wall Street Journal, April 15, 2009; Geoffrey A. Fowler and Evan Ramstad, “EBay Looks Abroad for Growth,” The Wall Street Journal, April 15, 2009; and Brad Stone, “EBay’s New Leader Moves Swiftly on a Revamping,” The New York Times, January 24, 2008.
Case Study Questions
1. Apply the value chain and competitive forces model
2. What is eBay’s business model and business strat-
egy? How successful has it been?
3. What are the problems that eBay is currently facing? How is eBay trying to solve these problems?
4.Are these good solutions? Why or why not? Are
there any other solutions that eBay should consider?
5. What people, organization, and technology factors play a role in eBay’s response to its problems?
6. Will eBay be successful in the long run? Why or why