Transcript of eBay Podcast by Michael Rappa

Hello.  This is Professor Michael Rappa from North Carolina State University in Raleigh, North Carolina, and I’m here to speak with you today about my course, Managing the Digital Enterprise. 

Begun in 1995, today eBay has become a global powerhouse of online marketplaces, acting as a broker to facilitate transactions between buyers and sellers across a wide range of goods and services. What began as an auction site for collectibles has really turned into just a wide spectrum of possibility across virtually every product category one could imagine.

Today, in fact, one of the largest categories in terms of the volumes of sales on eBay is within the eBay Motors group, that is, the buying and selling of automobiles.

So certainly it’s not just collectibles anymore, and anyone who takes some time to travel around the eBay web site will realize very quickly the breadth of commerce which occurs over that site. And certainly it continues to spread to virtually every corner of the marketplace.

In 2004, eBay recorded some 1.4 billion listings of products by individuals and stores over its site.  So you get a sense of just how vast this marketplace is.  And although we think of eBay as the preeminent auction site on the web, it’s important to recognize that eBay has branched out, that it offers many listings at a fixed price.

It has extended its reach into payment processing with the acquisition of PayPal, more recently into person-to-person communications with the acquisition of Skype, and a number of other investments that it’s made, for example, its 25 percent ownership of craigslist in the world of classifieds.

So eBay is a powerhouse.  It’s extending its reach across, using the leverage of its marketplace to extend itself and to build on that core of its business, and undoubtedly to try to make it more profitable into the future.

Today I want to just talk about a couple of facets of the eBay business model which I think are important to consider.  And the first has to do with the idea that it’s the eBay community that drives this whole engine.

If you spend a little time, go to news.google.com and look up Meg Whitman and any of her recent speeches. If you go to eBay’s web site and read through its annual report and any of its disclosures you’ll see again and again this focus on the eBay community.

Now, I don’t know if eBay was the first business to do this, but in the pre-eBay world, businesses really thought about their customers as – or clients, if you will – but mostly customers in terms of those individuals who bought their products and services.

And this notion of a community, your customers forming a community, is not singular to eBay, but I think it’s part of a modern phenomena that we see growing on the web of which eBay is really a prime example.

So why is it that eBay focuses so keenly on this notion of a community of customers?  Who are eBay’s customers? Well, when we look at it, of course, it’s both the buyers and sellers. That is, to go back to our business models conversation, eBay acts as a broker, bringing buyers and sellers together and taking a listing fee on products listed over its site and a commission on things sold.

And so both the buyer and seller are a very important part of making the whole process work.  And yes, they’re customers. They pay eBay fees in terms of their transactions over web sites.

But this notion of community, I think, is an interesting one which points to the notion that for the model to work, this vast collection of people who make the marketplace valuable have to participate in a way where they recognize a kind of shared interest in the success of the marketplace. 

And so what do I mean by that?  It’s very important that both buyers and sellers take a vested interest in the overall soundness of eBay as a transactions broker.  Buyers and sellers have to, in other words, have trust in each other that things are going to go well in this transaction.

eBay as a broker is more or less a kind of distant third party in what goes on.  It plays a very limited role in ensuring that buyer and seller come away satisfied.  It simply brings the buyer and seller together and enables the transaction to occur.

Of course, through its acquisition of PayPal, it might facilitate the transaction in a very tangible way by enabling the transfer of funds. But, unlike a retailer, eBay’s ability to guarantee satisfaction is somewhat more limited in the sense that it’s not really selling anything to anyone in this process, or buying anything from anyone.

That’s really the business of the buyer and seller.  And so for all of this to work, individuals who are at a distance and largely anonymous to each other really need to trust one another in order to enable the whole process to work.

And it’s because of this, then, I think, that eBay really seeks to promote the notion of community, that people are members of a community and that there are certain values and standards that as a member people buy into and act accordingly in terms of being a fair player in terms of whether they’re a buyer or a seller to a transaction.

And as eBay is quick to point out in its own disclosures, its own success is largely dependent upon the success of its community of registered users, their ability to successfully buy and sell products.

And so making that community function in a healthy way, getting people to abide by a set of rules, to play fairly on a level playing field, these are very critical aspects for eBay to be successful.  If people were distrustful of one another, if they fraudulently took advantage of each other, the whole model would break down.

Now, when eBay started and it had a relatively small group of collectors, enthusiasts along various kinds of collectible items, this was perhaps a fairly easy community to cultivate and to sort of keep and sustain in terms of a kind of fair trading.

One needs to recognize that eBay today, some 10 years later, has now 168 million registered users around the world.

Clearly the vast size of this community, even if you only counted the 68 million active users on the eBay web site, still, this is a vast group of people, and if even only just 1 percent of that community acted in a disinterested way in terms of playing fair, or certainly if they acted in a fraudulent way, this would be seriously debilitating to the success of the eBay marketplace. 

And so it’s interesting to think about how can a single company like eBay manage this vast marketplace and keep its membership more or less understanding kind of a shared interest in keeping that marketplace a healthy, fair, equitable environment for people to trade goods and services, and to do this without its own police force, without its own real ability to pursue litigation against anyone and everyone who commits a fraud on its web site.

How can it really protect its users other than really instilling a set of norms that lead to fair behavior among each other? And that in itself is just a very interesting facet of eBay and how it accomplishes this and how it will continue to be able to accomplish it as it continues to expand its membership to yet more and more new users. 

The really difficult thing about this is it really doesn’t take many people in the scheme of things to sour the overall environment for the many otherwise honest players in the marketplace.  Just the threat of some kind of fraudulent behavior, however minimal, can cause, I think, serious repercussions.

And so you can be certain that eBay does everything it can to kind of monitor the environment and to look for opportunistic behavior, perhaps fraudulent behavior. It probably does everything it can to work with local law enforcement in situations where there is systematic and large-scale fraud.

But when we talk about down at the individual level, down at individual transactions in any given day or week or month, even though it’s a relatively small percentage of transactions which may end up going sour, one has to sort of look at the overall impact, the cumulative impact, of fraudulent behavior on people’s desire or willingness to enter into future transactions.

And, to be sure, eBay is very quick to point out that it’s only a very, very tiny fraction of all transactions which enter into some kind of significant dispute or allegations of fraud or clear fraudulent behavior.

But even if that’s a small number, and it’s probably reasonable to assume that fraud is an underreported problem, still, it’s a thing that needs to be dealt with, and eBay does some very clear things in terms of trying to help people overcome their inhibitions and enter into transactions with what would otherwise be strangers to them.

And that’s sort of the second part of this conversation, which really has to do with how do we get or facilitate the trustworthiness or at least the acceptance of trustworthiness of other individuals and overcome any inhibitions to enter into transactions, and transactions which can be sometimes significant in terms of their value.

So anyone who’s been on eBay or has used eBay as a marketplace knows that a central feature of the transaction process is the feedback mechanism by which buyers and sellers rate each other’s behavior as part of a transaction.

And these feedback ratings, and, again, we’ve seen feedback processes that now exist across all kinds of web sites, but in the case of eBay, the user feedback element is really a very significant part of how buyers and sellers evaluate the relative degree of riskiness of entering into a transaction with the other party.

And so how it works is with each transaction both the buyer and seller are given an opportunity to rate the other party’s performance in that transaction through a simple rating mechanism.

And eBay collects this data together and then provides a kind of quantitative summary for each member of the community that gives other users a sense of their overall reliability, a sense of their reputation as a trader, by looking at the number of transactions they’ve entered into over a period of time from the most recent onward and looking at the ratings of whether those transactions met with the satisfaction of the other party or not, including some commenting and the like.

And so now any prospective trader who is going to enter into a buying or selling relationship with another party can pull up their evaluation feedback and decide to what extent that they feel comfortable doing business with this other party.

As one might expect, people who have accumulated a lot of positive feedback on their transactions within the system are going to be looked at more favorably when it comes time with others engaging in transactions.

And so if you’re a seller this most certainly translates into a potential premium that you might receive in terms of the number of bidders bidding on your product and hopefully yielding a higher price, and a much more likelihood that people are going to trust that their interaction with you is going to go well.

And so that has direct financial impact on your ability to be a successful trader in the eBay marketplace.

So the eBay feedback system and this whole issue of being able to create a reputation as a positive, fair party within the marketplace really becomes a central issue in monitoring the feedback system, making the feedback system more effective, making sure that it isn’t played with in some fraudulent way to bolster the reputation of an otherwise disreputable individual.

All of these things are a major concern of eBay and a constant focus to provide its membership with the best information it has on its respective members, and hopefully, again, coming back to this central aspect of what eBay is, is being a broker, that creates a fair and level playing field for its membership.

The importance of a trader’s reputation also means that there are, on the one hand, tremendous pressures to act fairly and perform well.

But it also means that there is a tremendous focus on obtaining positive reviews, or I should say avoiding negative reviews.  And sometimes this leads to opportunistic behavior that there may be a tendency to avoid giving negative feedback even where it’s warranted because of the likelihood of a kind of retaliatory negative feedback.

And so I don’t want to leave you with the impression, and certainly anyone who’s used the eBay system knows that although the reputational system is absolutely essential in the formulation of trust between two parties, that it’s not the end all in terms of a perfect system that is completely reliable or not without its limitations in terms of what goes on and how it’s practically used. 

So the importance of this is to recognize that even though their reputation system is important, it’s central to the process, that that’s only a part, really, of getting people to behave well.

This broader notion of getting people to understand that they’re playing a role in a larger community and that they have a set of shared values and that there’s acceptable behavior and unacceptable behavior, that there’s rewards to being a member, a fair playing member of the community, I think this has a much greater role to play in terms of simply from a practical point of view, helping the system work.

So getting people to understand, just like any other community that they may participate in, whether it’s defined by geography, like their neighborhood, or by their religion or the people in their church, or by their employer or the company they work for or the university where they go to school, this notion that you’re part of a community, that you have shared interests, shared values, and certain norms of behavior that define what is acceptable that go well beyond the notion of what’s legal or not legal, that these are the things that really control people’s behavior.

And for eBay to be successful, they really must instill in its ever-growing membership their sense of participating in a larger community and the importance of adopting or internalizing the values of that community.

When it all works, it’s hard not to like eBay, and it’s hard not to like eBay from a business perspective in terms of its ability to be profitable.

It’s perhaps the best known of the early web-based ecommerce sites that was profitable right from the beginning, just as a contrast to, for example, somebody like Amazon.com, which had to invest and invest and invest and took much, much longer to turn profitable.

eBay’s role as a broker is really quite appealing, because it really leverages the Internet in terms of what the Internet does best, that is, bringing large numbers of people together relatively easily and relatively inexpensively by doing it virtually. 

That broker model is just a very appealing one, and when we look at their business and recognize that eBay doesn’t take possession of any goods, it doesn’t get in the middle of the transactions in any significant way beyond facilitating their occurrence, that it collects a fairly nice transaction fee, the current transaction revenue rate on each transaction is about 3.6 percent, it has, relatively speaking, low overcost when you compare it to somebody like an Amazon.com, which has warehouses and huge inventories and large numbers of people packing and shipping items, eBay is a relatively elegant and far less complex from a business logistics point of view business to operate, and their transaction processing expense rate is about 1.3 percent or so. 

And so when we look at eBay, it’s a nice, profitable machine that offers both buyers and sellers some attractive opportunities. The buyers, any person in the market to buy something that goes to eBay, sees a wide selection of items, from used to new, in some instances, with a fairly wide distribution of price, typically.

There’s a value there for the buyers, there’s convenience for the buyer, and one’s hard put to argue but there might be a certain amount of entertainment, particularly when one looks at the auction process as a kind of gambling process, if you will, that somebody sees, a buyer sees something that they want and they start a bidding process.

There’s a certain amount of entertainment involved in wanting to win that process.  And maybe that was more exciting in the earlier years, but nonetheless there is a kind of interest there in people who like to bid and win.

On the seller’s side, of course, they have access to broad markets with relatively efficient marketing and distribution costs. They’re able to maximize their prices, so you have a situation where, at least in an auction format, the seller’s walking way, so long as there are a multitude of buyers, the seller can feel that they’re getting the best price they possibly can for the item that they’re selling.

And for some, some businesses which were geographically bound in the past, moving to eBay offers up an opportunity to reach a much wider consumer audience and hopefully an opportunity to increase their sales.

And so we see all sorts of businesses moving and migrating themselves into eBay’s online marketplace as a means of expanding their business to reach new customers and to explore different ways of pricing their product and moving their product than what they might have been doing traditionally. 

So when we look at eBay, I think it’s important to remind ourselves to break away from maybe that early impression of eBay as being a kind of interesting, eclectic person-to-person auction web site for the collectibles and the various oddities that people would otherwise sell at their garage sales.

The eBay of today is really something that is orders of magnitude in difference in terms of the wide variety of products that are provided. The fact that many, many, many businesses are engaged in eBay selling business to consumers, so it’s not just consumer-to-consumer auctions by any means.

That when we look at some of the largest product categories now in terms of the volume of gross merchandise sold, we see the top three being, for example, automobiles, the eBay Motors site, clothing and accessories, and then you start to see things like consumer electronics and computers or books or movies and music.

So the eBay today really is just a very powerful online marketplace that is fully engaging a wide spectrum of businesses, that’s engaging millions of consumers and is providing a potential environment that really supplants our traditional notions of where buyers and sellers get together.

And clearly eBay is a force to be reckoned with in terms of when we think about the major players on the Internet and where they’re heading and the kind of convergence of interests that are occurring in terms of the competitive landscape between eBay and Amazon, to take two examples, but you can throw in Yahoo and Google as well, and a few others, who are kind of beginning to realize that there is a kind of convergence and battleground by which they’re going to begin to continue to intensify in their competition with one another.

So, for example, just as eBay migrated beyond auctions to fixed price selling, you have Amazon moving away from purely retail to acting as a broker by enabling sellers and buyers to get together on used items.

You have eBay moving from beyond auctions into classifieds with its acquisition of 25 percent of craigslist, and at the same time you have Google making all sorts of sort of rumblings into more commerce in terms of potential for classifieds listing. 

So we’re going to see all of these organizations come together in a kind of competitive brawl, and it will be interesting to speculate in terms of what’s at the core of each of these businesses and what brought them to where they are today, and whether anything about where they come from in terms of what built their businesses is going to give them more or less leverage in competing with one another.

Obviously, many people are focusing a lot on Google nowadays.  It’s certainly gathered a lot of people’s attention in terms of its creativity and its aggressiveness.  And some of the oldstays like eBay and Amazon, who’ve been around for a decade now, are not to be counted out in all of this.  I should add Yahoo as well cannot be counted out.  And they are certainly working from a lot of strength, and it’s really up to them to creatively think about how to leverage those strengths to remain a competitive force in the future of online commerce.

This is Professor Michael Rappa, until next time, wishing you all the best with your studies.

(Music)

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Unedited transcript of audio podcast produced on October 31, 2005.

Audio source file: https://digitalenterprise.org/podcasts/ebay.mp3

Michael Rappa is the Alan T. Dickson Distinguished University Professor of Technology Management at North Carolina State University.

For more information, please visit: digitalenterprise.org

Copyright 2006 Michael Rappa. All rights reserved. Please do not reproduced, distribute or quote without written permission of the author.