Silicon Insider: The eBay State

July 30, 2002 -- You may be surprised where eBay goes from here.

Lately, there's been a burst of coverage about America's favorite flea market. Newsweek, for example, had a cover story on the company. And there is a new book, The Perfect Store, by Adam Cohen of the New York Times, which has already received considerable attention for uncovering that eBay's founding story about Pez collecting is, in fact, a myth.

Why all of this sudden attention? One answer may be that eBay is among the few dot.com success stories — and the only one that has held onto most of its valuation through the crash. Another possibility is that discount deals are a popular subject during hard times — and eBay has become the nation's rummage sale.

But the most likely reason is that eBay's time is here. With millions of Americans doing tens of millions of transactions on eBay every month, the company has become a part of our culture.

Even more important, the intelligentsia has now adopted it, buying collectibles on the site with the same abandon as the folks in the fly-over states they hold in contempt … and we all know what happens then. Suddenly, this campy site for trailer park collectors of Hummel dolls suddenly becomes a refreshing new post-modern tool for purchasing old Citroen posters.

Less noticed in all of this hoopla were two important and telling events in the eBay story. Both happened the same weekend. First was a gathering in Southern California of eBay major sellers, the first of its kind. CEO Meg Whitman, among other eBay executives, was on hand for the kumbaya.

The second was the announcement by the company that it would soon begin offering insurance, at low rates, to company "power sellers," the elite among its legions of private sellers.

In those two announcements lies a glimpse of the eBay of 2010.

Following the Plan

Let me explain.

[Full Disclosure: As you may know from my past writings — and conflict of interest disclosures — I was involved in the founding of eBay. To be precise, I was among the first dozen shareholders, having been awarded them by the two founders — Pierre Omidyar and Jeff Skoll — for, among other things, helping them develop the company's long-term business strategy. As a side note, it was Mary Jo Song, the PR lady credited with inventing the Pez myth, who introduced me to the company].

I'd like to take credit for bringing a unique genius to the firm's founding. But the fact is, I wasn't even sure the business model — i.e., not holding the money like a traditional auction house — would even work. In fact, it was the key to eBay's success.

For that matter, when they changed the name to eBay, I thought that was pretty dumb too. So much for my judgment.

Nevertheless, just a couple months ago, Skoll and I found ourselves reminiscing about the early days — especially a pair of remarkable meetings at which he, Pierre and I, sat at the company's lone card table, writing on a whiteboard with a solitary felt pen.

Keep in mind that eBay at that moment had just five employees and a few thousand users. And yet, even now, despite fits and starts, the now billion-dollar company is still following the path we mapped out.

Once again, I don't claim any particular prescience, and I doubt Pierre or Jeff would either. It was simply a matter of first understanding what eBay really was, recognizing its historical precedents, and then logically extrapolating from the present into the future.

A Community of Individuals

So, what is eBay? The easy answer was that it is an auction house. But a better answer is that it is a new and unprecedentedly wide distribution system for privately held goods for sale.

But the best answer was that it is a community of individuals brought together by a common interest in buying and selling goods. And once you realize that, it becomes obvious that crucial to the company's long-term success is its ability to cultivate and nurture that community.

And that's exactly what eBay has done, first with its star system, then with power sellers, brand name tchotchkes and now, with its regional gatherings and its new health insurance program for those same power sellers.

Fostering this community has been crucial in helping eBay move in two tactical directions to defeat its two biggest competitors, Amazon and Yahoo. These are:

1) Add more users to reach some kind of critical mass where the auctions take on a social momentum of their own, and

2) Capture listings for ever-higher-priced goods.

Thanks in large part to its strong community loyalty — which the company has occasionally, and stupidly put at risk, with unilateral pronouncements — eBay has achieved both of these goals in its first six years. It is now a cultural phenomenon, with millions of avid users, and an all-but unassailable position in its market.

Building the Virtual City

But eBay can't stand pat. Companies of its size are rarely at risk from competitors in its own market. But they can be defeated by a new generation of competitors, armed with a new technology, appearing from out of nowhere in a lateral move.

Think of what desktop publishing did to the printing business, PCs to minicomputers, and integrated circuits to transistors. To continue its success for the next decade, eBay is going to have to move very fast to stake out the future.

To do that, the company now must move in four directions:

It must find new sources of items for sale. The company is already hard at work at this, acquiring auction houses, improving its support of B2B industrial equipment sales and lining up previously untapped caches of goods at places such as government agencies. The danger here is that if eBay cannot get enough new goods online fast enough, the site will begin to merely recycle America's attics … and customers will slowly lose interest.

It must implement new technologies. Despite its incredible success, the best days for eBay may be ahead, thanks to the arrival of broadband. That's because the greater the bandwidth, the more tools for the seller. Imagine looking at that used car and being able to crawl under it in real time, turn on the motor, test the windshield wipers, etc?

This might seem a no-brainer for eBay, but it's not. The problem is legacy — all those low-tech folks out there who love eBay but won't or can't implement the latest equipment to use it. Ebay is going to have to figure out a way to induce (discounts, free equipment, etc.) these users to make the leap from 56k to cable modem and beyond.

Further deepen the community. That's right: more gifts, awards, rallies, and insurance policies. And much more. This too sounds easy, but in practice it is a huge distraction from the company's main business. It means hiring all sorts of new customer service types, who burn money without an easily measurable payback.

Build the virtual city. This is what we saw that day on the whiteboard. The story of eBay recapitulates the history of the modern city The crossroads that becomes the marketplace; the agora around which is first built permanent stores, and then, ultimately, an entire town.

If you want to imagine the future of eBay, picture yourself walking down a perpetually rainy street and entering the Victorian storefront of an umbrella store. You step through the quaint doorway and find yourself in infinite store, selling millions of umbrellas, of every style, new and used. Now imagine a city with ten thousand such stores, each in its own environment, yet part of a larger town with its own stadiums and theaters and homes.

Is eBay Developing a Layer of Arrogance?

That's where eBay needs to go — and it needs to get there first.

Does Meg Whitman know all this? Of course she does. She is the most sensitive CEO I have ever met, and that is a perfect trait for dealing with millions of cranky, obsessive, and good-hearted eBayers. Skoll and Omidyar made a brilliant choice recruiting her.

But the real question is: Does the rest of eBay understand where the company is going? And there things don't look so good. Like many wildly successful companies before it — think Apple and Microsoft — it is beginning to develop in the middle ranks the arrogance that comes from too many wins.

That arrogance causes deafness. And if eBay ever stops listening to its community, it will wither and die. That too was written that day on the whiteboard.

Michael S. Malone, once called “the Boswell of Silicon Valley,” is editor-at-large of Forbes ASAP magazine. His work as the nation’s first daily high-tech reporter at the San Jose Mercury-News sparked the writing of his critically acclaimed The Big Score: The Billion Dollar Story of Silicon Valley, which went on to become a public TV series. He has written several other highly praised business books and a novel about Silicon Valley, where he was raised. For more, go to Forbes.com. And you can talk back to Silicon Insider via e-mail.