Read the Case "Developing New Services at Ebay" in Chapter 15. Answer the following case questions:

1. Describe in detail what makes Ebay a service.

2. Based on the typologies of innovations, what makes Ebay an innovative service?

3. Explain the role played by Ebay's customers in its new service development.

Case study Developing new services at eBay This case study explores the remarkable success Austria, Belgium, Canada, France, Germany, of eBay and illustrates how its continual develop- Ireland, Italy, Korea, The Netherlands, New ment of new services has enabled it to remain the Zealand, Singapore, Spain, Sweden, Switzerland, world's leading auction site and deliver extraordiaiwan and the United Kingdom. In addition, eBay nary financial results for investors. The company's has a presence in Latin America and China through decision to make PayPal independent reinforces its investments in MercadoLibre.com and EachNet. this drive for growth. com respectively. eBay, Inc. is, possibly, the most successful Introduction web-based enterprise in existence. This California- Founded in September 1995, eBay is The World's based company is known universally and is synon- Online Marketplace for the sale of goods and ser- ymous with the auction model of online selling. vices by a diverse community of individuals and eBay was pivotal in helping to facilitate buying and small businesses. This eBay community includes selling between individuals and businesses. Eighty more than 100 million registered members from per cent of items sold are now at a fixed price and around the world. According to Media Metrix, peo- Amazon has become a fierce rival. The industry ple spend more time on eBay than any other online leader also created one of the first trusted online site, making it the most popular shopping destina- commercial communities, whereby the exchange tion on the internet. On an average day, there are between sellers and buyers is regulated by the millions of items listed on eBay. People come to evaluations and recommendations of each. eBay ebay to buy and sell items in thousands of catego- continues to dominate the auction industry and ries from collectibles like trading cards, antiques, remains on the leading edge in innovation in ser- dolls and housewares to practical items like used vices. It is now considering mobile payment ser- cars, clothing, books, CDs and electronics. Buyers vices and loans. have the option to purchase items in an auction- style format or items can be purchased at a fixed How eBay works price through a feature called Buy It Now. Figure 15.5 illustrates how eBay works. It is, essen- Currently, eBay has local sites that serve Australia, tially, the same as that of a physical auction. Prior tobidding or listing an item for sale, buyer and seller each other before agreeing to trade. This helps must register with eBay. All items listed by eBay can genuine traders to determine authentic traders be viewed by all, including non-registered users but, from rogue ones. New traders will have to estab to trade (i.e. buy or sell), you must register. Figure 15.5 lish themselves as genuine before others will trade shows the process for a typical trade: with them. This is possible by agreeing to pay for 1 Item is listed. goods prior to receiving them or, if one is a ven- 2 A seller's track record of selling is made available dor, forwarding goods prior to receiving the to all. money. Potential buyers can bid. The birth of eBay Sellers view buying track record of buyers. eBay notifies winning bidder and seller of winning eBay was born in September 1995. Its original name was AuctionWeb. The idea fell out of a dis- bid. 6 Payment is made and goods shipped. cussion between Pierre Omidyar, a 30-something French-born computer programmer, and his fian- 7 Buyers and sellers leave feedback on each other. cee, who was an avid Pez collector (sweet dis- eBay receives its income from charging sellers a pensers). With the help of his friend Jeff Skol, Final Value Fee which is a percentage of the win- Omidyar launched AuctionWeb; it was incorpo ning bid and postage. The first 20 listings each rated in 1996 and changed its name to eBay in month are free and 35p for each listing after that. 1997. The move into higher-value items, such as auto- After a year of trading, however, the start-up com- mobiles, has provided eBay with substantial addi- pany was struggling to develop quickly. Worryingly tional income. eBay charges a vendor for the founders, there were many competitors approximately $15, depending on vehicle value, to (including Yahoo's own online auction site) and the display a vehicle that may sell for several thousand technology and internet were developing and chang- pounds. eBay will then also take a small percent- ing rapidly. Omidyar and Skol needed significant age of this winning bid. amounts of money if they were to make eBay suc- The entire system is based upon trust and there cessful. In 1997, Omidyar drove to Silicon Valley's is, clearly, an opportunity for rogue traders to Sand Hill Road to seek venture capital funding for his operate and steal money from genuine traders. fledgling online flea market. Though it was growing at The use by eBay of the feedback system allows 40 per cent a month - without any marketing - and vendors and buyers to view the trading record of enjoyed 30 per cent margins, eBay also needed pro- 1 Lists item eBay trading community 2 Feedback on seller 4 Feedback >100 million registered 3 Bids on item on buyer users Seller 5 Notification Millions of simultaneous 5 Notification of winning buyer auctions of winning bid Buyer 6 Payment made 6 item shipped 7 Seller leaves feedback on buyer 7 Buyer leaves feedback on seller Figure 15.5 How eBay worksfessional management. Competition was intense: Gross profit (Sbn) there were 150 other auction sites, many of them 6.8 free, unlike eBay's fee-based service. Omidyar had no PowerPoint presentation and no business plan and his company's computer server was down - 6.3 meaning there was no active website for him to showcase. This was not a good start for Omidyar but, 5.9 within four weeks, Benchmark, a venture capital firm, had agreed to invest $6.7 million, valuing eBay at 4.7 about $20 million. According to Benchmark, it seems Odimyar recognised that he needed help. In particu- lar, he required better qualified people to run the business. In addition to its investment, Benchmark 2006 2007 2008 2009 offered its services and its industry contacts. Figure 15.6 eBay profits Benchmark's investment generated a return of $4.5 billion, probably the greatest profit ever generated in enjoyed a sensational IPO. The shares began trading the venture capital industry. But the investment paid on Nasdaq on 24 September at $18. By the close of off for eBay, too. Indeed, it was Benchmark that trading, they had nearly trebled to $47. The cash helped recruit Ms Whitman as CEO and Mr Swette as raised was put to work immediately. Whilst eBay's chief operating officer. Whilst no one doubted that peers burned their start-up cash, eBay became a the business model developed (connecting individual phenomenon - a Silicon Valley company that has buyers and sellers online and taking a cut of the always made a profit and is the world's most suc- transaction) was excellent, it was the development of cessful internet group. Moreover, the profit potential this to a public offering that has enabled eBay to was huge; eBay had almost no cost of goods, no become the giant it is today. inventories, few marketing costs and no large capital The appointment of Ms Whitman as CEO is expenditure (see Figure 15.6). regarded, universally, as an outstanding move by eBay. She was able to develop eBay from one of the The business model many auction websites into the leading site. In those The business model developed by eBay is unique early days of 1997, the eBay site was in black and and has evolved over time as the business has white and the typeface was basic courier. The com- grown. The founders' intention was that eBay should pany was called eBay and the website was called be made up of a community and this vision has AuctionWeb, but both brands appeared on the site. helped shape the business. According to the chief The eBay web pages appeared amateurish com- operating officer, Brian Swette, the business has pared to what Whitman was used to at P&G, Disney grown by constantly responding to what the users and Hambro; many thought she would not join, but have wanted. It is the eBay community that has she did. After Omidyar explained eBay's impressive designed the business model. eBay supports the growth rate, margins and profitability, Whitman real- desire to respond to the user community by employ- ised the potential. Furthermore, when Omidyar ing approximately 5,000 people, about half of whom explained that people had met their best friends on are involved in customer support and about 20 per eBay, there was an emotional connection to the site cent of whom are in technology. eBay does not need and the eBay community. Whitman joined the com- to spend large sums of money trying to understand pany on 2 January 1998. The company had just 35 what its customers want because its customers con- employees, and she began filling senior management stantly request and suggest changes. For example, positions. She hired auditors and set up the selection over 100,000 messages from users are posted each process for investment banks to lead the offer. By week in which tips are shared and system glitches September 1998, she, Omidyar and Gary Bengier, highlighted. The technology systems that eBay has eBay's then chief financial officer, began three weeks introduced over time enables the company to trace of roadshows to investors. That autumn, eBay every move of every potential customer, this yieldsrich information that can be acted upon. In addition, Mobile/smart phones category managers for eBay play a crucial role in the Offering the ability for customers to use eBay on company's development. Unlike other positions, say the move and via wireless technology is a natural product managers in large firms, these roles involve development of the firm's technology. In most ways listening, adapting and enabling. It is the category the eBay product has the necessary components to managers' responsibility to develop tools to help be a success in wireless markets: it delivers highly users buy and sell more effectively. personalised content that is time-sensitive in nature. The development of new services International eBay shops Between 2000 and 2005, eBay expanded inter- In 2004, eBay began offering commercial sellers the nationally, and had country-specific sites in the UK, concept of a shop on the site, where they could direct Germany, Japan, Italy and Australia and, in 2005, consumers to view more of their merchandise. This purchased a majority stake in Korea's largest online has proved extremely popular for the large sellers. auction site. In 2008, the company had expanded worldwide, Dangers, threats and challenges had hundreds of millions of registered users, more Competition than 15,000 employees and revenues of almost Whilst eBay is the internet's most successful busi- $7.7 billion. ness, the internet is, nonetheless, currently domi- nated by the two biggest search engine companies: Online payment system: PayPal Yahoo and Google. Also, there is disenchantment In 2002, eBay purchased PayPal, the world's largest within certain parts of eBay's user community. This is online payment system, in an all-stock deal worth largely because eBay is moving away from its 'user about $1.5 billion. The deal was eBay's largest community' to keep its gross profit margins above 80 investment to date and it was recognition by eBay per cent. But heavier spending on marketing, include that Billpoint, its own payment system, had been ing the first TV campaigns in countries like the UK unsuccessful. Furthermore, about 60 per cent of and China, ate into operating profit margins, cutting Paypal's revenues were generated on ebay; hence them by one point to 30.4 per cent. Alibaba, the there was a natural association between the two Chinese ecommerce giant, also poses a considerable firms. The acquisition of PayPal allowed eBay to threat to eBay. Alibaba provides consumer-to-con- expand beyond its core auction services. eBay and sumer, business-to-consumer and business-to-busi- PayPal both prospered because their strategies cap- ness sales services via web portals. It also provides italised on the internet's strengths. eBay has electronic payment services, a shopping search employed the 'network effect', in which new custom- engine and data-centric cloud computing services. ers are added at almost zero marginal cost and to The group began in 1999 when Jack Ma founded the the benefit of other users. Together, eBay and website Alibaba.com, a business-to-business portal PayPal enhanced the internet's potential by reducing to connect Chinese manufacturers with overseas the number of steps for buyers. This should acceler- buyers. ate the number of transactions, thereby improving revenues (for an interesting story on what happened Fixed-price sales to the $1.5 billion, see Illustration 1.4). The move, in 2004, to sell an increasing number of When eBay acquired PayPal in 2002, one of the goods at fixed prices, rather than through auction, main risks facing PayPal was its dependence on was seen as controversial amongst some suppliers. eBay for 60 per cent of its revenues. Since this time, Many sellers welcome the changes because of the PayPal has grown rapidly in line with the wider online new buyers they attract to the site. Others, however, payment market. This turned out to be a shrewd believe corporations will get special treatment from investment by eBay, as we will see later in the case. eBay - and destroy its culture.Fraud Charity The continual coverage in the popular media of eBay allows sellers to donate a portion of their auction fraud on the internet in general and criminals using proceeds to a charity of the seller's choice. The pro- eBay to amass ill-gotten gains clearly does not help gramme is called eBay Giving Works in the USA, and eBay. But, there are so many millions of users who eBay for Charity in the UK. eBay provides a partial refund have very positive experiences of using the site that of seller fees for items sold through charity auctions. it seems unlikely that existing users will be put off using the online auction site. Should one of its com- eBay bans negative seller views petitors develop a more foolproof trading model, In 2008, eBay announced a major change to its busi- however, this would be a serious threat to the ness model. eBay said problems were occurring, and business. slowing down trade, when buyers left negative com- ments about sellers who then retaliated with their Maturing markets and slow growth own views. The decision, which will affect users After a run of more than 10 years as a public com- worldwide, has angered many sellers. Sellers feel it pany, during which it consistently turned in financial will leave them unprotected. They argue that by still results that made every other dotcom firm green allowing buyers to leave dissenting comments about with envy, more recently, margins have declined. sellers, eBay has skewed the whole trading process. Worse, the company's rock-solid profit margins However, eBay believes the change is necessary and showed uncharacteristic signs of erosion. eBay's is putting in additional tools to protect sellers and much-admired business model has enabled it to promote a fair marketplace: keep its gross profit margins above 60 per cent. Sellers can add buyer requirements to their list- eBay spent $100 million ($53 million, (77 million) in ings to prevent unwanted bidders. Sellers can 2005 expanding its presence in China in a race to block buyers with too many policy violations, dominate what is likely to become the world's biggest unpaid items or who are not registered with Internet market. PayPal. This can help dramatically reduce the In 2005, Visa, Microsoft and eBay announced a number of unpaid items. global service to combat identity theft on the intemet, Sellers can require buyers to pay right away. If you especially "phishing' incidents. Phishing refers to the use Buy It Now, sellers require buyers to pay you practice of emails being sent to users purporting to immediately using PayPal. be from institutions such as their bank and urging Sellers have an easy way to report problems with them to click on a web link to update their online buyers. Sellers can use the seller reporting hub to account information. report an unpaid item, feedback extortion, or any other problem with a buyer. Shill bidding Critics have claimed the practice of shill bidding is widespread on eBay. A shill is an associate of a person selling goods or services who pretends no association to the seller and assumes the air of an enthusiastic customer. The intention of the shill is to encourage other potential customers, unaware of the set-up, to purchase said goods or services. The word 'shill' is probably related to 'shillaber', a word of obscure early twentieth- Source: Blocmua/Shufflerslack.com century origin with the same meaning. eBay tried to reassure customers and stated that any such fraudulent bidding is strictly prohibited on their auction site.Growth via acquisition continues John Donahoe backed Abraham's idea and eBay Since its inception, eBay has used a strategy of launched the feed 2.0 in 2013. Since then, it has seen growth via acquisition and this strategy continues, as greater engagement amongst users who have feed, Table 15.7 shows. including increased visits to eBay.com, more clicks on its homepage and longer eBay sessions. Jack Abraham, founder of Milo, helps drive innovation and profits at eBay eBay to make PayPal independent During the third quarter of 2007, eBay lost money PayPal is now considerably bigger than eBay. PayPal for the first time as a public company. After years of is estimated to be valued at $45 billion, whilst eBay is astonishing growth, growth and profits were slow- valued at $30 billion. After the split, eBay has agreed ing. John Donahoe had been picked by Meg to route 80 per cent of its sales through PayPal for Whittam to be her replacement. But finding growth the next five years. This is similar to present transac- proved difficult. tions. Jack Abraham had built Milo (a specialist search With the growth in mobile payment, PayPal has an engine people could use at home to find out what opportunity to capture a large chunk of this market. products were in stock at local stores) and sold it to PayPal now provides its own electronic wallet, which eBay in 2010. Part of the sale involved Abraham lets users tap one button to check out on a website or working for eBay to integrate the Milo technology. It app. PayPal's recent acquisition of mobile payments powered a product called 'eBay Now', which ena- start-up Paydiant will help the company bring its wal- bled shoppers to use a phone to order a product let into physical stores. PayPal also provides the from a local store and get it delivered in under an infrastructure behind the scenes, powering transac- hour. The Milo team became known as the eBay tions within popular apps like Uber, Airbnb and Local team, with Abraham in charge. But, he had no Houzz. PayPal has the edge right now on the web as authority over eBay. com and the people who did had a first-person payment provider. Its challenge now is plenty of their own ideas. Abraham believed eBay to become dominant when it comes to in-store pay- should have a feed like the Facebook News Feed. It ments. As PayPal severs its ties with eBay, it may be could show updates from eBay sellers and product able to attack these challenges, step outside the categories. According to Abraham, eBay could turn shadows of apps and become a prominent payment the feed on without waiting for users to start follow- method for consumers. Independent from eBay, it ing anybody, since it already knew search and shop- may also be able to make a genuine move into ping histories, finance and offer loans, etc. Table 15.7 eBay acquisitions Year Firm acquired Business Country 2010 Milo Shopping engine Unites States 2011 alaMaula Online classifieds Argentina 2011 Zong Payments through mobile carrier billing United States 2011 The Gifts Project Group purchasing of gifts Israel 2011 Zvents Local events United States 2012 Supply Social shopping United States 2013 Decide.com Price-forecasting United States 2013 Braintree Payments United States 2013 Bureau of Trade Content/Commerce United States 2013 Shuti Rapid fulfilment service United Kingdom 2014 PhiSix Fashion Labs Virtual clothing United StatesConclusions Gross profit ($) Meg Whitman transformed eBay from a purely 13.4bn domestic group that held auctions in 300 categories into a global enterprise, operating in 18 countries 12.09bn and offering 16,000 categories. She expanded the range of goods sold from mainly collectibles - 10.7bn Beanie Babies dolls accounted for 8 per cent of 10. 1bn items sold at the time of the IPO - to include used cars, motorcycles, computers, time-share holiday homes and even golf tee-off times. A Gulfstream corporate jet has been sold on eBay for $4.9 million. The move away from auction and into mainstream 2012 2013 2014 2015 sales goes against the principles on which eBay was established. Figure 15.7 eBay profits The fraud issue remains a concern. The introduc- tion of deposit accounts would help overcome the eBay. It seems innovation and new services will form problem of bogus bidders. The deposit account a big part of this plan. would enable a percentage of the successful bid to PayPal's rapid growth suggests a bright future be automatically deducted or eBay could make an for the digital-payments company. eBay, mean- automatic deduction from users' credit cards. Whilst while, has considerable challenges ahead as it eBay can produce statistics showing how many auc- attempts to turn around its slow-growing online tions are successful, the numbers give no indication marketplace, now without PayPal helping to prop it of how many sellers actually get paid. up (see Figure 15.7). During her 10 years with the company, Whitman Sources: Moules, J. and Abrahams, P. (2002) Companies and oversaw expansion from 30 employees and $4 million Finance, the Americas: eBay set to buy Paypal for $1.37bn, FT. in annual revenue to more than 15,000 employees com, 9 July: Nuttall, C. (2005) Visa, Microsoft, eBay combat and $8 billion in annual revenue when she stepped "phishing". FT.com, 14 February: eBay chief takes the rough with the smooth, Financial Times, 18 April BBC (2008) BBC News. down in 2008. Since 2015, Devin Wenig has taken co.uk/eBay to ban negative seller views, 5 February, The eBay charge of the task of continuing to drive growth at bidscam, www.thetimesonline.co.uk