E-BIZ MODELS THAT WORK
by Ed Rampell
Arguably one of the greatest success stories of the 1990's, and commonly believed to be the most successful online e-commerce company to date, eBay CEO has the vision.
COME TOGETHER
In October 2002, eBay (www.ebay.com) announced completion of its acquisition of the online payment service PayPal (www.paypal.com), a transaction an eBay press release "valued at approximately $1.5 billion... eBay expects PayPal will incrementally contribute $60 to $64 million in net revenues in the fourth quarter of 2002."
"eBay and PayPal have complementary missions. We empower people to both buy and sell online," said Meg Whitman, President and CEO of eBay since 1998. "Together we can improve the user experience and make online trading more compelling. We can also capture greater value from the e-commerce opportunities occurring both on and off our site."
"eBay and PayPal have built vibrant user networks on the Internet," said Peter Thiel, Founder and CEO of PayPal. "The beauty of this deal is that it will allow us to offer our communities new tools and added flexibility to do more business. Integrating our services is a win-win situation for millions of current and future online consumers."
HISTORY: EBAY AND PAYPAL
The capitalist site exemplar was launched Labor Day, 1995. According to an eBay news release, simply put, its "mission is to help practically anyone trade practically anything on earth." "Pierre Omidyar was essentially looking for a way to use the Internet as a mechanism to establish an efficient marketplace," explains Kevin Pursglove, Senior Director of Communications for eBay, where he's worked since 1998. "Ways in which large groups of fragmented buyers and sellers could come together. That was the start of eBay... By 1999, David Thiel began looking at a method to make it easier for people using e-commerce sites like eBay, to facilitate payments between buyers and sellers, without having to go through the step of establishing a merchant account, which is what often happens in the offline world."
The intertwining of the two companies began well before the October 2002 acquisition. "With eBay growing so rapidly and becoming such a success over the past four or five years, PayPal made its service available to online users, including eBay users," points out Pursglove, a Californian who's worked in news, and as the San Jose mayor's press secretary. "It became a very popular tool, used by more and more eBay clients and customers. By the time early 2002 rolled around, we realized the payment function was a critical part of the overall transaction on eBay. And we began seriously considering the idea of acquiring the company, to make eBay users' buying and selling experiences easier and much more efficient," states Pursglove, who majored in political science at San Francisco State.
Previously, in the spring of 1999, about six months prior to PayPal's debut, San Jose, California-based eBay acquired BillPoint, which it then called the "best choice" in a press release. According to Pursglove, "There was a period of time there, when PayPal and BillPoint were probably the two most competitive payment services available for eBay users... Both were pretty user-friendly... The evidence was rather clear: More and more people were using PayPal, as time marched on. Clearly, PayPal was taking a very considerable lead in online payment services, as far as eBay was concerned... They were very aggressive in their marketing, because when they started they weren't a public company, and therefore able to take some risks in terms of marketing and promoting the company, such as free giveaways, and financial bonuses for signing new members. These were things eBay considered for BillPoint, but we simply couldn't do them, couldn't justify to our shareholders as a public company... PayPal clearly provided their clients with a service they considered very valuable."
Pursglove contends that even after the acquisition, PayPal will remain aggressive (as well as based in Mountain View, California). But he adds, "Clearly, with eBay owning PayPal now, we'll have to coordinate our marketing and promotional activities. But PayPal will stay at the cutting edge in those areas." The Senior Communications Director adds, "Probably in early 2003, BillPoint will be phased out."
However, this does not mean PayPal will have an eBay monopoly. "There are five or six payment services eBay users can select from... Users decide which payment service they want to use. And they can forego online payment services altogether, and continue using checks, money orders, or cashier checks. It's up to the users to decide how they want to consummate the transaction," Pursglove notes.
He adds that although PayPal is now part of eBay's corporate family, it will continue to do non-eBay billing transactions for other firms. "The opportunity for revenue generated outside of eBay is very real, and we'll encourage PayPal to pusue that goal," states Pursglove. "Users who come to eBay's site will continue to see PayPal's brand, with which many users have become familiar ... PayPal will also remain a company with an independent management team that reports directly to the eBay management team. Day-to-day decisions will be made by PayPal."
EBAY'S E-BUSINESS MODEL
The Internet marketplace and auction site eBay can be viewed as Adam Smith online, laissez faire capitalism manifested through e-commerce. eBay is a publicly traded company (NASDAQ symbol: EBAY), and is therefore owned by its shareholders. The firm's IPO debuted in 1998. eBay boasts e-sellers of about 12 million items in 27 countries, with e-buyers in 200 countries and territories, transacting $40 million a day in e-sales. 160 million items were listed for e-sale in a recent quarter. Products are e-sold through auction or fixed price formats. The firm's October 3, 2002 press release states: "eBay now expects net revenues in 2003 will be between $1.77 billion and $1.83 billion." A July 2002 eBay press release announced "stronger than expected... results for the quarter ended June 30, 2002. Consolidated net revenues for Q2-02 are approximately $266 million, GAAP net income totaled $54.3 million or $0.19 per diluted share, with a gross margin of 83% and pro forma operating margin of 30%... pro forma earnings per share was $0.19." The firm claims "the eBay community includes 49.7 million registered users, and is the most popular shopping site on the Internet." What's arguably the world's most ambitious marketplace works in the following way:
"The buyer pays the seller, and at the end of a month, or a billing cycle, the seller then pays fees to eBay," says Pursglove. "It's all based upon the number of items sellers listed, and the number of items sold during that billing cycle. It's all computerized, we know when the transactions have been concluded, and we know what the final price is. Every seller opens an eBay seller account to initiate conduct of business. All that information is tracked, and at the end of the month, they are billed like any other business would bill its customers... Whether the users' decided to use a 'buy it now' feature, which means they can buy it instantaneously, or go through the entire bidding process, which can run anywhere from three to ten days, there's still a record of the final transaction. That seller has the responsibility to pay a fee based upon the final bid... Buyers can essentially stay on eBay for free... They pay the final bid price on the item, and any shipping and insurance costs."
Pursglove disclosed: "Sellers pay a fee to list an item, and that listing fee is set, regardless of the item's selling price. The listing fee ranges from 30 cents to $3.30. There are additional fees a seller can select if they want to have primary placement on the site, ranging from a few dollars, up to $99... If items sell for under $25, the seller's fee is 5.25%. If an item sells between $25-$1,000... add 2.25%., and an additional 1.5% for amounts over $1,000. You'd take those three sums and add them together for the final fee."
eBay not only survived the dot-bomb debacle that obliterated many e-commerce sites, but continued to thrive. "Starting in 1995, Pierre Omidyar was always very much concerned with making sure this company could be profitable," explains Pursglove. "Because he believed the only way the site could improve and build upon itself was to have money to invest in the product itself. So, from the very beginning, he always believed the company needed to be profitable. While many other online business in that period were looking primarily for advertising as a revenue source, Pierre believed at the time it'd be best if eBay based its business model upon a transactional revenue model. That's obviously proven to be a very accurate and perceptive business model."
Pursglove maintains, "based upon our insurance investigations... fraud is less than one one hundredth of 1% of all items listed on eBay." Offenders are banned from eBay, and the PR man advocates a buyer beware safe shopping education, such as reading e-sellers' feedback ratings and comments.
PAYPAL'S E-BUSINESS MODEL
PayPal also eventually went public, and is traded on the Street. "PayPal makes it easier for private parties and small businesses to conduct transactions on Internet sites, such as eBay," Pursglove says. "This is done by using credit cards, and electronic checks - essentially allowing people to use their debit cards and checking accounts to conduct transactions on the site. Because of advancements in technology, these transactions can be concluded in moments or hours, rather than having to wait days for a paper check or money order sent through the mail." According to an eBay press release, "60% of PayPal's business takes place on eBay."
Pursglove goes on to say, "Approximately, 55%-60% of all transactions occurring on eBay now may use a payment service such as PayPal... When we started BillPoint back in 1999, it was primarily to accelerate what we called 'the end-to-end transaction' - the closing of the deal, and the ability of the seller to send the merchandise to the seller. At that time, close to 90% of the transactions on e-Bay were consummated by a personal check, money order, or a cashier's check, which did indeed require oftentimes the buyer to go down to a post office... and then ship it via mail. And then the seller to receive that check and wait for it to clear, which could be another two or three day period. Often, the end-to-end process took five to ten days. The concept of having an online payment service like BillPoint was to reduce that time delay period, so sellers could list more merchandise and increase their selling velocity on eBay... The idea that an online payment service is available makes it much more conducive for small and medium sized merchants to come to eBay, because it's just a more efficient way to consummate transactions."
Credit card verification is an important part of PayPal's operation. "They work with banking and other financial institutions to make sure information provided is accurate," says the Senior Communications Director.
Pursglove states that like eBay, PayPal has a transactional revenue model. "It charges a separate fee to the seller after the transaction is completed... eBay and PayPal have not been hit heavily by the drop-off in online advertising revenue in the last 18 months, because both companies simply don't rely on [it] as a primary source of revenue." Although the sites have banner ads, et al, the Senior Communications Director describes their e-advertising as "minimal."
E-BAN: EBAY DON'T GOT GAME
Prior to the acquisition, PayPal "made it possible for many of their customers to engage in online gambling activities, and they became a payment service or arm of online gambling sites and casinos, and things of that nature," states Pursglove. However, despite its free trade ambiance, the site is not without prohibitions.
The July 28, 2002 press release announcing eBay's intention to acquire PayPal declared: "In view of the uncertain regulatory environment surrounding online gaming, eBay plans to phase out PayPal's gaming business... Gaming providers who use PayPal will have ample opportunity to find alternative payment solutions."
Pursglove adds, "That was a decision made while we were talking with the company, and we came to the conclusion that due to the uncertainty of the regulatory and governmental environment, it'd be best over the long term, simply to tackle the issue now and discontinue the service."
eBay has other taboos. According to Pursglove: "As the site has grown... we simply realized we had to be more judicious at making sure we could keep illegal and questionable items off the site. In conjunction with the discussions with eBay users and law enforcement authorities, we developed a list of merchandise that cannot be listed on the site. They range from many alcohol, animal, and wildlife products to fireworks, firearms, and eyeglass prescriptions... eBay acquired a company in Germany, and built sites in Italy and France. We were aware of laws and concerns there about the buying and selling of Nazi-related merchandise. We made the decision then not to allow that merchandise on those sites... and as we moved into more countries, we came up with a uniform set of guidelines which severely restricts the ability to buy and sell Nazi-related merchandise... [Overall, eBay's verboten items are] a small percentage when you consider we've got 18,000 categories."
EBAY, PAYPAL, ADULT ENTERTAINMENT
eBay's bans, however, don't include most legal adult products, although they're relegated to a regulated adults-only area of the site, requiring age verification. "It is available at eBay... [although] it's caused a great deal of debate among our users," Pursglove relates. "Some believe they're selling works of art they consider to be antiques, collectibles that have nudity and genitalia, and believe they should have a right to sell it at the broad eBay site. We came to the conclusion this belongs in the adult category. Collections of old magazines, Playboy or Hustler, can also be found at that area... Clothing worn by celebrities has become a large collectible group over the years, so eBay allows that merchandise to be listed... Merchandise worn by an adult star may be relegated to the adult category... We also restrict merchandise we consider to be hardcore or XXX to the adult area."
These items include videos and sex toys, although Pursglove doesn't know of cybersex services available through eBay. The PR man adds that PayPal's services would "more than likely" by available to adult Internet firms. And...Why not? After all, along with eBay, e-adult is among the Web's most lucrative online activities.
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