Off the Block: eBay's Post-Auction Future

Aug. 22, 2008 — -- I vividly remember, a dozen years ago, standing in the parking lot of an anonymous San Jose (I thought it was Campbell at the time), Calif., office complex.

I was walking back to my car after a meeting at a tiny, but fast growing, online auction company I was advising … when I ran into the founder and CEO coming the other direction.

"Hey, Mike," he said, pulling out a manila folder, "check this out. Our design firm has come up with a new look for us."

Pierre Omidyar pulled out a sheet … and at that moment, I was one of the first people to see what is now one of the world's most famous corporate logos: the colorful, overlapping lowercase letters that spell out: eBay.

Though I was struck by the cheerfulness of the logo -- and quickly said so to Pierre -- I was also concerned. The latter I was a little more diplomatic in expressing. I asked Pierre if he was certain that he wanted the logo to be so childlike. Wasn't he worried that customers wouldn't take the company seriously? Not a bit, Omidyar replied, showing why he is now a multibillionaire and I am a humble columnist.

But a bigger concern of mine was the time itself. I had briefly known the company as AuctionWeb and hadn't really concerned myself when the name had morphed to eBay, figuring it didn't really matter what the company called itself if it wasn't successful.

But now eBay was growing like a rocket and becoming not just a national, but an international, phenomenon. Did Pierre really want to stick with what seemed like such a local, even provincial, name? With a new logo now in development, it seemed to me that this was the last moment for the company to settle on a more expansive name. Perhaps, I suggested, as we stood there in the parking lot, the company might want to finalize on a name that once again included the word "auction" in it.

Pierre shrugged. No, he said, everybody's pretty used to the eBay name now, so we probably ought to just stick with it.

I got a lot of things wrong in my dealings with Pierre (and Jeff Skoll) during those early days at eBay. Sure, eBay has become a household name in the last decade, but you can argue that it was the sheer success of the company that popularized the name, not vice versa. And so, I've always secretly thought that I was right regarding the company name…

Until this week. That's when I finally realized that I was wrong on this one too, and that Pierre was more prescient than even he knew at the time.

That's because Tuesday night, eBay, the world's biggest and most famous auction company, took the first step to becoming an auction company no more.

For such a momentous move, the announcement was decidedly low key: Tuesday evening, eBay quietly announced that it was instituting special fees for fixed-price listings in its "media" category (books, music, DVDs and movies, and video games). Henceforth, it would charge just 15 cents per listing, and extend the standard duration of that listing from seven days to 30 days. The company also announced that during a special promotion to drive holiday sales, beginning Sept. 16, that same fee would be cut to just 5 cents.

There were other changes as well, all designed to propel the long-term shift of eBay from offering primarily auctions to that of selling fixed-price "Buy it Now" goods. As many analysts noted, this change of trajectory would seem to be pointing eBay toward a direct collision with Amazon.com … and setting up the next great high tech business duel for the end of the decade.

I think that's probably correct, and I also believe that both companies have such distinct competitive advantages that the final result is not pre-ordained. Amazon may have the superior distribution channel between manufacturers and consumers, but eBay has both the stronger culture and the flexibility to mix and match new and used goods, big manufacturers and tiny resellers.

What I find more interesting at the moment, especially given my long history with the company, is why eBay would make such a brazen move now. It is, after all, synonymous with online auction, having conducted literally millions of them in the last dozen years. And you can't say the business hasn't been lucrative: EBay is one of the great success stories of e-commerce, currently with $8 billion in sales and employing 15,000 people, not to mention several million more individual sellers. The company has also served as the platform for the creation of thousands of small businesses, which have made eBay their primary sales channel.

So why turn its back on the auction business now?

If you look closely at eBay's business and its financials, the reason becomes clear: For all of the attention they receive, auctions are now a minority business for eBay, and even those that still occur offer little profit for the company.

How can this be? There are several explanations. One is success: EBay has done such a brilliant job of clearing out the world's attics and garages that the days of valuable caches of unknown goods are over. By the same token, both buyers and sellers have gotten much better at pricing most items, so the era of bargains is largely over.

At the same time, the novelty has worn off the idea of auctions and bidding -- now the process seems to most buyers and sellers as both tiring and time-consuming. Finally, other online retailers have gotten so good at offering extensive catalogs and good service, that any non-monetary advantages enjoyed by eBay in years past have also largely disappeared.

It's not surprising, then, that a quick tour of eBay these days yields a surprising number of Buy it Now offerings already -- a type of transaction that may not be as fun (or frustrating) as auction bidding, but allows for a quicker "churn" of sales items, multiple sales and easier access to the kinds of sales inventories currently going to sites like Overstock.com.

But if eBay isn't making profits on its auctions and fixed-price listings are the company's future, where are the company's current profits coming from?

The answer to that is the real story, hidden within the eBay announcement this week. When you study the company's financials, you suddenly appreciate that eBay is no longer an auction company, or even a retailer… but a bank. PayPal, eBay's subsidiary payment processing operation, turns out to be the company's big cash cow.

And so, the most important part of Tuesday's announcement was not what everybody noticed -- the shift to fixed pricing -- but what appeared to be an afterthought: eBay's announcement that it was eliminating payment via checks and money orders and shifting all electronic transactions through PayPal.

This announcement, little more than a footnote, is the real story about eBay this week. Amazon aside, this is eBay's actual new business strategy. And as Pierre Omidyar understood far better than me that day in the parking lot, eBay is a very flexible and adaptive company name. It even holds up well against, say, VISA and MasterCard …

TAD'S TAB: "Today Is the Day" is a delightfully strange Web comic, told in 93 photographs, about a foam rubber person. It's a complex story about disintegration and rebirth, yet uses less than a dozen words. Oddly compelling, it is definitely something to see. Check it out at http://istheday.blogspot.com/

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.