It seemed like a boffo idea to the brass at the Internet auction site eBay:
By referring losing bidders to similar auctions by other eBay sellers, they’d
keep bidders coming back. Within minutes of the program’s debut in early June,
though, all hell broke loose.

Hundreds of angry sellers jammed eBay’s online discussion boards, furious
that their bidders were being siphoned away. One veteran seller of stamps and
postcards, Bob Miller, auctioned a rare eBay jacket as an excuse to post a long
screed slamming “eBay’s new policy of screwing the folks who built
them.”

Even among the 7 million ongoing auctions, this one quickly caught the
attention of CEO Margaret Whitman and founder Pierre Omidyar. Within a week,
they met with Miller in eBay’s suburban Salt Lake City office near Miller’s
home. As they listened for 45 minutes, Whitman took four pages of notes. Two
days later, they promised to switch course.

E-mails would first recommend the same seller’s other auctions, or the
seller could simply opt out. “No other large corporation listens nearly as
well as they do,” says Miller, who’s now happily running several thousand
auctions on eBay.

Meet the People’s Company. Like a democracy, it can be a noisy and unruly
place, where citizens sometimes think the folks in charge are numbskulls. But
the people’s passion prevails at eBay because the people are firmly in charge.
Its customers–the 38 million buyers and sellers who trade on its site–wield
the kind of influence over the online auction site that most consumers and
businesses could never dream of exerting on conventional companies.

Oh, sure, eBay has a delicious business model that doesn’t require carrying
any inventory. And, yes, it’s growing like a weed and minting juicy profits
because bargain hunters, in good times and bad, flock to the auction site. But
the real secret of eBay’s unlikely success is this: It’s a master at
harnessing the awesome power of the Net–not just to let its customers sound
off directly in the ears of the big brass, but to track their every movement so
new products and services are tailored to just what customers want.

One month in late 1998, for instance, eBay managers noticed an uptick in
listings in various miscellaneous categories, such as die-cast cars–suddenly
people were selling real cars. Now, eBay’s the country’s biggest car dealer,
with $1 billion in sales of cars and car parts this year. In January, shortly
after an eBay seller suggested speeding up auctions for impatient bidders, eBay
debuted a ‘buy it now’ feature that lets bidders end an auction at a set
price. Now, 40% of listings use it, attracting more mainstream buyers and
helping close auctions nearly a day faster on average than a year ago.

All in one
In essence, customers are eBay’s de facto product-development team, sales
and marketing force, merchandising department, and security detail–all rolled
into one. It’s not just that they have catapulted eBay, in just three short
years, from a funky little online garage sale full of attic trash into a global
marketplace for almost anything, from a $1 baseball card to a $4.9 million
Gulfstream jet. eBay’s customers also take it upon themselves to tell the
world about eBay through word of mouth. They crowd eBay’s online discussion
boards, posting 100,000 messages a week to share tips, point out glitches, and
lobby for changes. eBay’s customers even police the site by rating each other,
keeping fraud minimal. By using the Net to tap into the talent and imagination
of its customers, eBay has multiplied the brainpower of its executives by
millions.

The success of this let-’em-loose-and-listen strategy holds some potent
lessons for Corporate America. By staying in close touch with customers, eBay
can reinvent itself every day, since it knows precisely what its clientele
wants. The trick is to keep up with what buyers and sellers want. “We start
from the principle that if there’s noise, you better listen,” says COO
Brian Swette.

And, because it set a firm corporate goal from the start–to create
“global economic democracy”–it has managed to maintain focus even
while growing at a crazy clip. First-time eBay buyers are often shocked at the
intensely personal service they get from eBay merchants, from handwritten
thank-you notes to free shipping. It’s an example of how building a strong
brand depends more on understanding that each and every transaction can create a
personal, one-on-one relationship that will endure. Says eBay board member
Howard Schultz, CEO of Starbucks: “The imprinting of the eBay brand was not
based on 30-second ads, but the relationship with the users.”

That’s why neither September 11 nor the recession has put a pall on eBay’s
prospects. Despite losing about $5 million in revenues from a drop in activity
following the terror attacks, eBay beat third-quarter estimates. Sales rose 71%,
to $194.4 million, surpassing expectations by 3%. It earned an $18 million
profit, 15% above analysts’ forecasts. eBay even raised its fourth-quarter
sales forecast by 5%, to $200 million or more. Analysts now expect 2001 sales to
jump at least 70%, to $736 million. Next year looks just as promising. Analysts
figure sales will rise 40%, to $1 billion, and profit will be up 56%, to $150
million. Rivals are in awe: “These guys have done a killer job,”
admits Amazon.com CFO Warren Jenson.

Smarts, moxie
Now, eBay appears poised to buck the seemingly gloomy holiday season for
almost every retailer, online and off. That’s largely thanks to the smarts and
the moxie of its customers, who–unlike big retailers–can switch gears
instantly on what they sell or buy and at what price. As the economy worsens,
more and more corporations, from IBM to Walt Disney to Sears Roebuck, are
turning to eBay as a place to unload mounting inventory. “The mix of
products on the site changes by the minute as our highly entrepreneurial
community of users adapts their own buying and selling strategies to trends in
the economy,” says Whitman.

For all its nonstop success, though, eBay faces a lot of challenges. Its $60
stock price represents a nosebleed 2002 price-to-earnings ratio of 82, more than
double Microsoft’s premium ratio of 31. The tiniest slip–or even, say, a few
more anthrax-laden packages–could whack billions off its value overnight and
limit the expansion opportunities that have in turn buoyed the stock.

Indeed, eBay is increasingly a victim of its own success. As Whitman moves to
make eBay more of a clean, well-lighted place that attracts greater numbers of
mainstream merchants and shoppers, she has riled existing customers who don’t
want more rules–or more rivals. These moves also pit eBay much more directly
against bigger and more consumer-savvy behemoths. AOL Time Warner, Microsoft,
Amazon, and Yahoo! are all trying to create online malls where people can buy
just about anything from anyone.

Stringent rules
But as eBay grew from a small town into a city, urban problems erupted, such
as contraband goods. Since early 1998, eBay has used more stringent rules to
crack down on crime, and banned sales of firearms. Indeed, eBay has increasingly
realized that, like government in a democracy, it can’t leave absolutely
everything to the people.

eBay’s key public-works project: its computer network. Until last year, it
was plagued with outages–including one in June, 1999, when eBay was completely
shut down for 22 hours thanks to software problems and no backup systems. Former
Gateway CIO Maynard Webb, who joined as president of eBay’s technology unit,
has upgraded systems so eBay’s site is down less than 42 minutes a month
despite much higher traffic. Credit that partly to Whitman, who dived into the
technology despite her lack of experience in it. Still, eBay’s customers had a
big part, too. Shortly after Webb joined, he recalls, eBay’s discussion boards
twice lit up with user complaints about site glitches. His techies claimed
nothing was amiss–and both times were proved wrong.

As befits a corporate democracy, eBay’s biggest challenges are political.
Features good for buyers, such as those e-mail auction referrals, can hurt
sellers. Lately, sellers are especially peeved at eBay’s promotion of large
commercial companies such as Disney, which rates a special area in the Disneyana
category. The general consensus of veteran sellers is that they’ve forsaken
the people who built them in favor of corporate sellers. eBay argues that
commercial sellers lend credibility to their categories, drawing more buyers to
all the sellers–a point many merchants concede.

Yet there are those who think eBay isn’t listening as well as it once did
to its core individual and small-business merchants. “They’ve gotten too
big for their britches,” fumes Ron Saxton, a seller of die-cast cars. eBay
didn’t consult its customers when it launched its Auction for America campaign
a week after the September 11 attacks, aiming to raise $100 million in 100 days
for victims. And eBay’s insistence that sellers use its billing system, rather
than let them accept checks or use a more popular rival system called PayPal,
rubbed many the wrong way. That may partly explain why the charity drive has
raised less than $6 million halfway through–despite donations such as Jay Leno’s
celebrity-signed Harley-Davidson motorcycle, which sold for $360,200.

It’s no surprise, then, that as eBay grew beyond its ability to address
individual user concerns, Whitman has pushed it to devise a constant stream of
new ways to tap the expertise of its customers en masse. Naturally, eBay
harnesses the special qualities of the Internet to gather intelligence much
deeper than most brick-and-mortar businesses can obtain. For instance, before
eBay revamped its bread-and-butter collectibles categories earlier this year to
make products easier to find, it first e-mailed 1.2 million customers asking
them to check out the proposed structure. Of the 10,000 who responded, 95% of
them had suggestions, and many were used.

New territory
Most intriguing, customers have been pushing eBay to move its e-commerce
system outside the borders of its own Web site. Ritz Interactive, the online
unit of Ritz Camera, for instance, is using the technology to run eBay auctions
on its own site. Says Ritz CEO Fred Lerner: “eBay has very aggressive plans
to create an e-commerce platform.” Indeed, eBay is encouraging others to
build software applications based on eBay technology–much as Microsoft does
with its Windows OS. A flourishing ecosystem of companies could enrich eBay’s
marketplace by providing support services such as listing tools, escrow, and
bill payment. Essentially, says a SG Cowen Securities analyst, eBay aims to
become the operating system for e-commerce.

It’s exciting new territory–and dangerous, too. For starters, a raft of
rivals from Yahoo and AOL to Microsoft and Amazon aim to be the biggest places
for e-commerce, too, and some are making fast progress. But there’s a bigger
question: Can eBay’s values survive such grand ambitions? After all, trying to
be the Microsoft of e-commerce doesn’t sound, well, very eBaysian–which may
be why Whitman frowns and demurs when people describe eBay’s goal in such
stark terms.

For his part, eBay founder Omidyar frets that the growing participation of
large commercial sellers could dilute eBay’s unique culture. “If we lose
that, we’ve pretty much lost everything,” he says. eBay’s people power
made building a business a breeze compared with everything conventional
companies must do. Keeping in touch with all those millions of customers from
here on out won’t be so easy.

By Robert D Hof in BusinessWeek. Copyright 2002 by The McGraw-Hill Companies, Inc