Silicon Insider: How Google and eBay Act Like Nations

These Companies Have Such Immense Power That They Now Take on Governmental Roles

OPINION By MICHAEL S. MALONE

Feb. 29, 2008 —

Great truths can sometimes be found in unlikely juxtapositions.

For example, take two very different news stories that came out of Silicon Valley this week. One is of considerable public interest, the other: one of those infrastructure announcements that most readers typically ignore. But together, they have interesting things to say about the changing role of companies vis a vis their customers, the public and the government.

The first — and more-reported story — was the eight-day boycott against eBay organized by some of the company's own "power sellers." The boycott, which began on Feb. 18, was in protest of fee increases and rule changes that eBay announced in January.

On Wednesday of this week, eBay spokesman Usher Lieberman proudly announced that based upon traffic numbers, "We definitely, numerically, didn't feel an impact from the strike" — then he added, as an apparent sop to the boycotters, "but we certainly heard from our sellers and are listening to them."

But apparently listening was the only thing eBay was doing: Lieberman closed by saying that the company had no plans to abandon any of its new price/rule changes.

On paper, at least, the eBay boycott appears to have failed — at least in the numbers that the company was willing to release. The company said that it only releases traffic data in quarterly SEC filings for its shareholders. eBay would only say that there had been no appreciable change. Meanwhile, Dealscart.com, an independent service that tracks eBay, said that the company's listings on Monday, about 10.5 million, was roughly equal to that of a month and a year before.

eBay's at War

But those placid figures hide a much more complicated story. On Feb. 13, less than a week before the boycott was to begin, eBay announced a special two-part promotion that both cut listings to just 20 cents each (down from as much as $5) and modified the pricing plan for sellers of such high-volume items as DVDs and books.

In other words, eBay took the extraordinary step of going to war against its own — depending upon how you characterize them — customers/partners/employees. That raises unanswered questions of whether Monday's traffic numbers actually meant that the boycott had no effect, or whether any damage it did do to the company was camouflaged by the residual effects of the big promotion. Nor did eBay release revenue numbers during the boycott, which were likely heavily affected by the replacement of boycotting high-ticket items with low-priced junk.

Either way, as Mark Schwanhausser of the San Jose Mercury-News wrote, the real impact of the boycotters most likely took place "in the court of public opinion with their angry postings and YouTube videos."

Storm and Stress

And "angry" is the word. Threads popped up everywhere, angrily filled with putative eBay Power Sellers who announced that "I find eBay's comments repulsive" or "eBay does not give a rat's patooey about their sellers, only their bottom line" and inevitably announcing plans to leave the site in lieu of some smaller online auction competitor.

Whether they actually would make such an extreme move remains to be seen. But certainly, there are more opportunities for such departures now than a few years ago. The online auction industry, which began with a number of such sites, then underwent a shakeout in which eBay emerged with a near-monopoly, has now again — in the manner of every tech industry – fractured into dozens of niche and vertical competitors. And you can bet those "other" online auction houses — at least the smart ones — are offering their own special promotions to capture those disgruntled eBay power sellers.

Against all of this sturm und drang at eBay, the news story coming out of Google — no, not the falling stock price (called that one, didn't I?) — is comparatively prosaic and boring. The company announced Wednesday that it was leading a consortium, called Unity, of six companies (most you haven't heard of) that would spend $300 million to install a 7.68 terabit/sec fiber optic cable across the Pacific floor from California to Japan. This cable is expected to be initially operational by 2010.

Changing Landscape

Besides a few snarky comments in the blogosphere, equating the Unity cable with some of Google's dumber recent initiatives (energy, anyone?), the story was mostly ignored. Infrastructure is never as sexy as a good boycott.

So, what do I think these stories have in common? They beautifully capture just how the nature of companies has changed in the 21st century. Both eBay and Google are unlike any companies of 30 years ago, even global companies of that era such as General Motors and IBM.

For one thing, their reach is astounding — the two companies literally touch, over the course of a year (in Google's case, in a matter of days) more than a billion people around the world.

Moreover, these companies (and their peers, most notably the great social networking sites) actively enlist these multitudes of customers in the creation and management of the service itself. As such, they increasingly behave more like nations than companies, engaged in a social contract with their "citizens" and regularly dealing with matters that are akin to questions of sovereignty usually reserved for countries.

For example, what is eBay's PayPal but a kind of ersatz currency for the eBay nation? And when Google caved to China on censorship, it wasn't seen as just a business decision, but a violation of an unwritten Google Bill of Rights.

In this new corporate reality, business decisions can no longer be made simply for business reasons. Rather, the companies of this world must first understand who they really are, and then make decisions based as much upon cultural impact as the financial balance sheet.

In this case, for all of my concerns about its other recent moves, Google, I think, has done this right. Though he has seemed a bit distracted lately, CEO Eric Schmidt has always understood that Google isn't really about search, but — as the rest of the media world eventually discovered to its dismay — about advertising.

Beyond the Internet

But what most people still don't appreciate — and Schmidt understands completely — is that Google is also not about the Internet, but about cheap memory and cheap broadband. As long as he can keep the incremental cost of more memory and more bandwidth essentially zero, Schmidt is free to empower his very bright people to come up with any interesting new application they can think of — and that's been the key to Google's success.

Schmidt did that with memory by abandoning expensive and touchy servers and having Google build its own cheap, almost throwaway servers from off-the-shelf parts. By comparison, bandwidth has been, until now, cheap and plentiful. But demand is starting to catch up with supply. And this new cable to Japan is Google's insurance policy that it will have its own cheap bandwidth for years to come. And — at $300 million — it's a bargain.

By comparison, eBay seems confused as to its real business. It seems trapped in its original paradigm of being a cross between an auction house and a gigantic global flea market. But it is neither. Rather, eBay is a utility, whose business is to simply and accelerate the movement of goods from points of supply to points of demand.

In this new definition, eBay has three primary tasks: to maximize the number of items on its site at any one time; to speed and simplify presentations, transactions and deliveries; and support and empower its key "employees," its power sellers.

Right now, eBay is doing only the second moderately well, is starting to slip at the first and is a disaster at the third.

Stuck in the Past

Because it doesn't see itself as a utility, eBay doesn't see what its sellers do: that as the site has gotten bigger and volume grown, and because of Moore's Law, the cost per transaction is supposed to get cheaper, not more expensive. eBay can justify these new rates all that it wants to, the reality is that it violates the expectations of its leading "citizens." And that's why they are talking mutiny.

It's a new world of business out there. Google is preparing for it. eBay is still lost in the past.

This is the opinion of the columnist, and in no way reflects the opinion of ABC News.

Michael S. Malone is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News, as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNEWS.com Silicon Insider columnist since 2000.