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OD Application: The Performance Gap at eBay eBay has become the marketplace of the world and, in the process, it has become the world's largest recycling center. Its business of auctions and sales of merchandise exists solely on the Internet. Its business formula is to provide a worldwide mar- ket and collect a tax on transactions as they occur. Although eBay's sales are only a fraction of Wal-Mart's, eBay has no stores and warehouses. It does not take physical or legal possession of merchandise, so there is no inventory. eBay's revenue comes from listing fees and advertising. It also earns revenue from PayPal, the banking system it runs for its customers and other Internet- based merchants. From the beginning, when eBay was founded in 1995, its business model was to bring together under one roof an array of goods that would attract buyers. To that end, eBay has be- come the world's largest online marketplace that averages around 81 million visitors a month with approximately $60 mil- lion annual sales of merchandise. This success has almost worked too well. "eBay's abundance [of merchandise) was one of its attractions," said CEO John Donahoe, a former Bain & Co. consultant. "But if you type in 'BlackBerry' and you get 23,000 search results, it's not that helpful." The company already collected data about transactions so that by understanding the data, it could decide where to spend money, where employees are needed, and which projects are working and failing. But it did not know what customers were doing before they clicked the "Place Bid" or "Buy It Now" icons. So that eBay could provide a better shopping experience for its buyers, it needed to unravel all the mouse clicks to discover ex- actly what customers were doing, "If you start with the lowest level of detail, you can answer any question about the business." says chief information officer Matt Carey. He calls it a "culture of analytics" and says, "I want to eliminate feelings and get down to true math." To get this data, his team developed a new search engine so that browsing and sales are enhanced. Every mouse click is tracked to discover what leads shoppers to bid or buy. Beginning around 2006, eBay and other Internet auction sites noticed a disturbing trend. As Internet commerce matured, people were less willing to spend days monitoring their bids to try and get a good deal. Furthermore, they frequently found that at the last moment someone else had come in and topped the highest bid with no chance of a counter bid. The practice of placing a bid at the last moment, called "sniping," had become more common because of automated software programs like "Bidnapper" and "Powersnipe." With Google and other search engines, buyers could find quickly almost anything and at the lowest price. The prospect of saving a few bucks by waiting days on auction results with no assurance of getting the item was mitigated by the convenience of buying things quickly at a set price. The data that eBay tracked showed that its traditional strategy of online auctions had become obsolete. Fixed-priced sales were accounting for about half of all transactions. Auction sales made up less than a third of sales compared to 75 percent two years prior. Confronted with a significant decline in revenue and based on an analysis of the data, eBay decided to change its strategy by moving to fixed-price items. But instead of going up against Amazon, eBay decided to concentrate on making it eas- ier for customers to find things like collectables, overstocked items, and last year's models. "The business has continued to fall short of our expecta- tions and customers' expectations," said CEO Donahoe. "That's not acceptable. The eBay you knew is not the eBay of today or the eBay of the future." In a critique of eBay's mistakes, he said, "We were the biggest and the best. And when you're the biggest and the best, there's a strong tendency to try to preserve that eBay has a storied past. But frankly, it's a past we've held onto too much." Questions 1. What was the performance gap at eBay? 2. What are some advantages and disadvantages of gather- ing large quantities of data? 3. Visit the eBay Web site at www.ebay.com/ to further your understanding of its business model