Fundamentals of Management 6th Edition by Ricky Griffin

Exercise 33

eBay Bids for Structured Change
In 1995, 28-year-old computer programmer Pierre Omidyar started up an online business to answer the kind of question that might interest both microeconomists and entrepreneurs: "He launched eBay," we're now told by the website of that very same online business, "to experiment with how equal access to information and opportunities would affect the efficiency of a marketplace." Enthusiastic response to preliminary efforts had convinced Omidyar that, somewhere, there was a buyer for every item which, somewhere, a seller might put up for sale. The next step in Omidyar's experiment consisted of a weekend spent writing software code that would support online auctions. He launched a website, called AuctionWatch, in 1995 and, two years later, changed the company's name to eBay.
Originally, Omidyar structured his company using the U form , or functional , design typical of small businesses. He set up the usual functional areas-operations, finance, legal, human resources, and so forth-and eventually gave each of them a company president. Omidyar, however, introduced a twist in the usual functional configuration: He integrated a perspective that emphasizes the importance of group and other interpersonal processes. Omidyar's personal values favored a company whose structure sidestepped Big Business altogether and permitted individuals, wherever they may be, to function as buyers and sellers. Today, people commonly refer to eBay something like "an online auction and shopping website," but Omidyar envisioned his site as much more than an auction space. He intended eBay to create an online community-something like a small town in cyberspace-and for that, he needed an organizational model that did away with bureaucracy and fostered democratic decision making, decentralization, open communication and interactions, and relationships of trust (after all, the whole business model depended upon two strangers trusting one another).
Omidyar stepped down as CEO in 1998, although he retained his position as chairman of the board. He was replaced by Meg Whitman, a former management consultant and a veteran of Old Economy firms such as Procter Gamble and Disney. In the same year, eBay went public, raising $60 million and committing itself to much greater pressure to realize its profit-making potential. As you probably know, eBay became wildly popular and grew rapidly. Under Whitman, revenues increased steadily, averaging 70 percent annual growth from 1998 to 2004, before year-over-year growth began to slow down to a sustainable level. Revenues for 1999 totaled $224.7 million, up a whopping 161 percent over 1998, and by 2009, revenues had grown to $7.7 billion.
Like many companies, however, eBay did not have a good year in 2008. In the fourth quarter, revenues dropped 6.6 percent from 2007-the first quarterly shrinkage in revenues in the company's history. (Profits were down 31 percent.) "Clearly," said new CEO John Donahoe, "we've been operating in an almost unprecedented external environment," but analysts have been quick to point out other, potentially longterm factors in eBay's sluggish performance. "Part of the problem," agreed CNNMoney 's Michael V. Copeland, "is [that] no one is spending money... at the moment, but compounding the issue for eBay is that a lot of people just aren't hassling with auctions anymore." A big reason for eBay's problems, he adds, "is that virtually no one cares about eBay's original business, the online auction."
Copeland goes on to argue that eBay's online business, its Marketplace unit, "is dragging down the rest of what are pretty solid businesses that eBay owns, chiefly online payments service PayPal and Internet calling company Skype." For the fourth quarter of 2008, revenue for Skype was up by 5 percent and 23 percent for PayPal. Through 2007, the core Marketplace unit, through which all the goods trading at eBay takes place, contributed about 70 percent of the company's revenues, but in March 2009, in announcing a three-year growth plan, eBay projected a much different distribution of its future income. Donahoe announced projected revenues of $10 billion to $12 billion by 2011. (That's up from 2008's $8.5 billion. If that increase doesn't seem like very much, remember that the company will probably have to make up more lost ground from 2009, for which analysts have projected another drop in revenue of 6 percent.) The company expects its future revenues to be distributed as follows:
• PayPal will generate between $4 billion and $5 billion, up from $2.4 billion in 2010.
• Skype will contribute $1 billion, up from roughly $500 million in 2010.
• Marketplace will ring up $5 billion to $7 billion, up slightly from $4.7 billion in 2010.
Not surprisingly, the meteoric rise in its financial fortunes that began in earnest with the 1998 initial public offering (IPO) has already had a profound impact on both the organizational structure and operations of eBay. One of its first major post-IPO moves was the acquisition, in April 1999, of Butterfield Butterfield, one of the world's largest and most prestigious auction houses. Butterfield was folded into eBay's auction operations and served to open up a new marketplace category for goods selling for $500 and up. A year later, eBay purchased Half.com, an online shopping site specializing in the sale of books and media products in a nonauction or "fixed-price" format. The purpose of the acquisition was to expand not only the parent company's inventory but its format options as well. The original plan to roll Half.com into eBay.com stalled in 2002, when users objected to the pace of the changes to Half.com, and today it's still an independent site. Both Butterfield's auction operations (which have been rolled into eBay.com) and Half.com's independent fixedprice operations are managed by a unit called eBay North America, whose president reports to a president of eBay Marketplaces (who in turn reports to the CEO).
In the nearly ten years since the Half.com acquisition, eBay has purchased several other online-auction companies, most of them overseas start-ups that have been used to gain entry in foreign markets. Today, there's a unit called Marketplace Operations, whose president oversees operations at all the company's global sites (meaning North America as well as Europe and the Asia-Pacific region). This president is one of three respective presidents in charge of eBay's three divisional units, all of whom report directly to CEO Donahoe. The other two divisional units, interestingly enough, are PayPal and Skype, both of which have been built around the acquisition of independent firms and both of which focus on activities outside eBay's core Marketplace activities.
eBay purchased PayPal, an ecommerce payments system, for $1.5 billion in 2002. Essentially, PayPal is a system that allows payments and money transfers to be made through the Internet, and eBay has developed it into the number-one payments system for e-commerce in general (only direct credit-card transactions transfer more money). Skype was added to the eBay portfolio of businesses in 2005, at a cost of $2.6 billion. It was originally developed as a VoIP ( Voice-over-Internet-Protocol ) service-a transmission technology for sending voice communications over networks like the Internet-but eBay wants to turn it into a communications hub over which its buyers and sellers can transact business by voice. As we've already seen, both PayPal and Skype have emerged as important revenue generators and figure prominently in eBay's plans for the future.
Needless to say, eBay has undergone a good deal of organizational change in its brief ten-plus years of existence. Back in 2004, when she could still refer to eBay as a "unique blend of commerce and community," former CEO Whitman (who stepped down in March 2008) admitted that perhaps the pace of change at the company was a little too brisk for some members of the community. "The community right now," she said, "has seen a lot of change. We probably need to slow down that pace just a tad. It's hard for folks to adapt to so much change." Nevertheless, investor pressure to sustain profit levels, coupled with increased competition from sources such as Amazon.com, Google, and Yahoo!, continued to force change, much of it in the form of rules and regulations instituted to deal with ever-increasing numbers of buyers and sellers.
Recent changes, coupled with certain details of the announced three-year plan, suggest that the company also wants to alter its strategic focus. In January 2008, for example, a month after Amazon.com surpassed it in total U.S. traffic for the first time ever, eBay announced a change in its fee structure. Fees for listing items were slashed by up to 50 percent, but commissions for items that do sell went up. Increases in commissions for low-end items-especially goods selling for less than $25-were particularly steep at 67 percent. Some eBay sellers were understandably unhappy about the change in fee structure. "It looks like what they're trying to do with the fees," surmised one user, "is make it more difficult and expensive to sell low-end items." Many observers agreed with this assessment, adding that eBay was shifting its emphasis to higher-priced items, especially used, off-season, end-of-life-cycle, and open-box products supplied by business sellers.
In a similar move, eBay stipulated that, beginning in March 2008, all sellers who had received less than 100 percent in feedback ratings would be required to use PayPal for all transactions. This requirement followed several stipulations regarding PayPal that had already been put in place the previous year. As of January 2007, for instance, all transactions in certain categories, including "Computer Software," "Consumer Electronics MP3 Players," and "Mobile Home Phones," had to be made through PayPal. Other categories were added in August, such as "Video Games" and "Health Beauty." Such changes are clearly intended to leverage the revenue potential of PayPal, which, in March 2009, CEO Donahoe referred to as a "second core business" for eBay.
So far, the strategic effort to synergize its Marketplace and PayPal operations has been less than wholly successful. Beginning in June 2008, for example, eBay required that all transactions involving Australian buyers and sellers use PayPal as the only payment option (in addition to cash on delivery). Within a month, however, the company was forced to rescind the policy when the Australian government, acting upon a groundswell of complaints from users and petitions from bankers, informed eBay that its policy would have "an anticompetitive effect" on online commerce. eBay had promoted PayPal as a means for improving security in online transactions, but the Australian government was also unconvinced by this argument, finding "no evidence to suggest that the relative frequency of online fraud for PayPal online transactions is any less than found in general online transactions." The Australian Competition and Consumer Commission also noted that its PayPal-only plan would allow eBay to raise its fees by 45.7 percent. At this juncture, the result of the plan seems to be a few thousand annoyed users in Australia and a few thousand more in the United States, where users aren't convinced by the company's assurances that it's not planning a similar policy for its largest marketplace.
What changes in its external environment are likely to affect the online-auction industry in the next few years? What impact might these changes have on the organizational structure of eBay and its main competitors?