eBay's Bid to Conquer All

Let's say you need to get your hands on a 53-passenger school bus with hydraulic brakes and a six-cylinder diesel engine. Or a 1998 Ford monster truck called Wizard that will let you "give rides all day, crush cars all night." Or four pawnshops--plus a half interest in three check-advance businesses--spread across western Kentucky. Where would you start to look?

There's only one place on earth: eBay.

If the name eBay conjures up Bongo the Monkey, Huggy the Bear and the rest of the Beanie Baby clan, you're about three years behind the times. Computer giant Sun Microsystems is listing up to 150 items a day on eBay, including e4500 servers that sell for as much as $15,000. eBay Motors, which launched last April, is the third biggest auto-sales site on the Internet. And eBay's new Business Exchange, which has listings for $6,000 backhoes and $25,000 lathes, has doubled its offerings in the past quarter.

The Internet collapse continues, and even substantial firms like Amazon and Yahoo are struggling to stay ahead of it. But eBay has never had it better. Revenues topped $430 million last year, up 92% over 1999. The auction king now has 22.5 million registered users, a number that grew at a 125% annualized rate last quarter. And it's on track to do more than $6 billion in gross merchandise sales this year.

With stats like that and the stock up 51% since Jan. 1, the New Economy pundits are scratching their heads. How is it that a flea-market auction site has become the most successful company in cyberspace? And when so many other dotcoms are crashing and burning, will this high-tech highflyer come down to earth anytime soon?

At the heart of eBay's good fortune is perhaps the most compelling business model on the Net. As an online middleman between buyers and sellers, eBay is building an empire that bricks and mortar could not have touched. "If Buy.com goes down, you can still go to Circuit City," says

Meg Whitman, the Harvard Business School-trained CEO of eBay. But if eBay crashes, there's nowhere else to go. And because eBay's job is connecting people--not selling them things--it isn't lumbered with a traditional retailing cost structure. No buying, warehousing or shipping. No taking returns or unloading overstock. "eBay is the only e-tailer that really fulfills the promise of the Web," says Faye Landes, an e-commerce analyst at Sanford C. Bernstein & Co. "And the key is its virtuality."

That virtuality translates into remarkable profit margins. eBay's gross margins last quarter were a stunning 82%. Amazon, which actually has to acquire goods and ship them out, has gross margins averaging 20%. And because so much of eBay's customer recruitment is viral--sellers attracting buyers to the site, and buyers attracting sellers--its customer-acquisition costs are just half of Amazon's.

eBay is also the Internet's clearest example of a company that has exploited its "first mover" advantage. The lore among Internet strategists was that whoever nabbed Web space early would have a commanding commercial lead. The failure of a long list of early-bird dotcoms, from CompuServe to eToys, has proved that wrong.