Task: How eBay Revolutionized the Auction Business
In the 1990s, many entrepreneurs attempted to use new information technologies and particularly the Internet to provide new or improved services to customers. Their goal was to use the potential of the new technology to find ways to obtain a competitive advantage over existing firms in a particular industry environment. Nowhere has this been more evident than in the auction industry.
Traditionally, auctions have been places where buyers and sellers meet face-to-face to determine the fair market value of a product. Auction houses range from the most prestigious ones, like Sotheby's and Christies, which sell fine art and antiques, to small local auction companies that sell the contents of someone's house.
In the early 1990s, Pierre Omidyar had an idea for a new kind of auction company, an online auction company, which he believed would revolutionize the selling of all kinds of products-not just fine arts and antiques but any kind of collectibles, from cars to Beanie Babies-by bringing buyers and sellers together by using the Internet. He left his job at Microsoft and began to write the software that would provide the platform for an online auction service. The result was eBay, which was launched on Labor Day in 1995.
On the eBay web site, sellers describe their product electronically, post a photograph, and set an initial price, which buyers can then bid up: the highest bidder wins. eBay charges a modest fee to list the product plus a low percentage of the final sales price. Sellers have the advantage that their product appears before buyers in every part of the United States and abroad-anywhere where someone as a computer and can log on to eBay's online auction site. Buyers enjoy access to a huge array of merchandise that can be quickly scanned by using the appropriate keywords on eBay's search engine. eBay thus provides a low-cost forum in which buyers and sellers can meet to buy and sell products. It makes it money from the sheer volume of products that it sells. Every day, millions of items are listed, so that even with low fees, it generates high profits.
As you can imagine, eBay's low-cost approach has generated many imitators; after all, it is relatively easy to write a software program and develop an online auction site. However, eBay's early start has also given it another major competitive advantage: being the first in the online auction business, it has attracted a loyal audience of buyers and sellers who will not switch to other online auction companies, even when they provide the service for free. For example, by 1999, Yahoo and MSN, and hundreds of small, specialized companies had developed their own online auction businesses and decided to charge users nothing for their services. However, many of these, including Yahoo's auction site, have not attracted many buyers and sellers. The reason is that sellers know that eBay's site attracts many more buyers than does Yahoo's so that they are likely to obtain the highest price, and eBay buyers know that they will find the greatest selection on eBay and so focus their search there. Thus, eBay has not only developed a low-cost competency; it also has developed a substantial reputation that has given it a differentiation advantage as well.
Other online companies are not content to give away the lucrative online auction market to eBay, however, and are searching for ways to fight back. In June 1999, bookseller Amazon.com announced that it was forming an alliance with Sotheby's to create an upmarket online auction service, and other companies are also searching for partners. In October 1999, Yahoo, Amazon.com, and other announced that they were banding together to combine their auction businesses to offer a credible alternative to eBay.
After this announcement, eBay's price, which has soared several thousand percent because investors thought that its strategy had given it a sustainable competitive advantage over its rivals, fell back. Through his innovative use of new information technology, Omidyar has brought increased value for millions of buyers and sellers and in the meantime has created over a billion dollars of value for himself in his eBay stock. The question now is whether eBay can maintain the value it has created.
Case Discussion Questions:
Problem 1. Describe the nature of competition and the industry environment of the online auction industry.
Problem 2. Go to eBay's web site, and analyze the strategies it has been pursuing to protect its competitive position (for example, different kinds of auction sites and services).