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