Investors bid up eBay past $100

A survivor of the dot.com meltdown shows solid strategy can make the internet lucrative
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The Independent Online

Everyone has a favourite story about eBay, the online auction site. The man who tried to sell his own kidney for charity. The Florida teenager who offered her virginity to the highest bidder. The political satirist who put the whole nation of Iraq up for sale on the eve of the recent war.

My own favourite concerns eBay's response to a user who wanted to sell his soul. The company concluded that either the soul should be considered a body part, in which case it was off-limits according to eBay rules, or else it should not, in which case its existence was questionable and the sale open to accusations of fraud. Either way, there could be no deal - a decision that resolved hundreds of years of philosophical speculation about the body-soul conundrum at a single stroke.

The less well-known story about eBay - one that, in its way, is the most remarkable of all - is its stratospheric business success, which continued uninterrupted before, during and after the great dot-com meltdown. Its steadily rising share price barely stopped for breath during the tech sector blood-letting of 2000-01. Last week, it broke the $100 barrier for the first time, and this week it hit a new 52-week high of $103.48.

By now eBay has just shy of 69 million registered users across the world, including 2 million in the UK. Its revenues for the first quarter of this year were up 94 per cent on 2002 to $476.5m (£287m), for a net profit of $104.2m. The company expects to clear sales of more than $2bn for the calendar year.

So what's the secret? Becoming a cultural icon, the recurrent subject of news stories and urban legends, certainly doesn't do any harm. Like Hoover and Sellotape, eBay has become much more than a business name - it has entered the common lexicon.

What really distinguishes the company from most dot-com ventures, though, is that it was built on a solid business basis. Turning the internet into a giant marketplace for new, used, rare and quirky goods was a brilliantly simple concept, creating conditions of maximum consumer knowledge and maximum interaction of supply and demand that would have warmed even Adam Smith's chilly heart.

The only thing needed to make it work was the participation of people - lots and lots of people. The dot-com boom provided the initial impetus, and sheer momentum did the rest. When times were good, people turned to eBay because it was a cutting-edge way of doing business transactions of all kinds. When times turned tougher, eBay became the obvious place to hunt for bargains on everything from digital cameras to rare silverware, and an only slightly less obvious place to raise money by selling old possessions. It also became a job-creation scheme - an estimated 10,000 people make their living selling and auctioning off items on eBay. A neighbour of mine, an actor and drama coach, makes a tidy living on the side selling Afghan carpets through eBay. For some products - especially celebrity-related fetish items such as a half-eaten sandwich of Justin Timberlake's - it is arguably the only feasible outlet around. Not everyone has been surprised by eBay's uninterrupted success. The San Francisco economist Kent Sims observed recently there never really was a dot-com meltdown; it was only the unviable, overhyped companies that bit the dust. The survivors - Google, Yahoo!, Amazon.com, Charles Schwab's online banking empire or Barry Diller's USA Interactive, which encompasses home shopping, travel, online concert booking and mortgage lending - may have varying degrees of success, but the business model is most definitely there. Nobody is offering to deliver free pizza, or pay twentysomethings to surf the Web all day in the hope of attracting advertising revenue.

Ebay has a few other prerequisites for success: a genuinely global product, a track record of smart, confidence-boosting business decisions, and - de rigueur in the annals of American capitalism - a compelling founding myth. The whole thing was the brainchild of Pierre Omidyar, a French graduate student who designed a basic website from his Silicon Valley bedroom and offered a broken laser printer for sale back in 1995. Someone bid $15 for it, and a new business - initially called AuctionWeb - was born.

From the start, Mr Omidyar was convinced that the key to eBay's success was people's willingness to trust each other. By now, the company offers all sorts of safeguards, including customer feedback on sellers' track records and a secure credit-card payment system called PayPal, acquired last year. But Mr Omidyar has always seen the eBay ethos as something deeper.

"In the midst of such fearful and uncertain times, eBay continues to flourish because 69 million people trust a complete stranger with every transaction," he said recently. "To me, it's proof that goodwill exists in all of us, and that connecting over a shared interest is more powerful than focusing on our differences." Analysts have some questions about eBay's future. With market capitalisation roughly 16 times greater than sales, many are beginning to wonder if the shares aren't overvalued, an impression bolstered by the fact that Meg Whitman, the company's chief executive, sold $104m in personal stock holdings last year. The share price has been fuelled largely by the growth rate, and there have to be questions how long that can keep up.

Already, eBay has encountered a few road blocks. Yesterday, it conceded that it will have to charge VAT in European Union countries, which may have some dampening effect on sales. Last week, it lost a court case concerning the patent on its fixed-price business, which accounts for about one-third of the total. Although appeals are still pending, eBay may end up having to pay royalties to a small Virginia-based outfit called MercExchange, which claims to have come up with an online sales system several months before eBay started using something very similar.

For now, though, the company is riding high. Fred Hickey, editor of the newsletter High-Tech Strategist, said: "I tip my hat to them - there aren't a lot of ways to make money on the internet. But will they be able to keep finding new areas like international sales to keep up their growth rate and justify their market cap?" That is indeed the question.

WEB SURVIVORS HOW THEY BEAT THE DOT.BOMB

Tech stocks have been bouncing back so strongly that some analysts wonder if we're not seeing the beginning of another bubble. Others suggest the dot-com shake-out has merely established a new aristocracy of online companies.

These include USA Interactive, Barry Diller's holding company whose subsidiaries include Expedia, the online travel agency, Hotels.com, an accommodation booking service, Match. com, for online dating, and the concert booking service Ticketmaster. USAI's revenue - more than $5bn (£3bn) over the past year - is the highest in the online sector, although its market capitalisation remains relatively low.

Of the various portals that came and went in the late 1990s, Yahoo! remains the most enduring, even if stiff competition from the Google search engine has caused it to wobble. An intelligently crafted balance between free basic access and paid premium services has ensured a steady rise in revenues and net profit ($46.7m in the first three months of 2003, up from $10.5m).

In retailing, Amazon.com remains the signature name, with an ever-expanding interest in household goods, clothes and electronics as well as its core business of books and music. Revenues continue to soar, but making a profit remains elusive. In the first quarter, it had a net loss of $10.1m.

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