Why eBay? Well, after cashing out from the eShop sale, he had done some web consulting and freelance work and decided to do so under the rubric Echo Bay Technology Group, a name he simply liked. However, the domain EchoBay.com was taken, so he registered what he considered to be the closest approximation: eBay.com. Omidyar was already hosting an assortment of other properties on the domain, so AuctionWeb was born sandwiched between a handful of other sites, including one with links to recent Ebola outbreaks, an interest of Omidyar’s.
As far as Omidyar can recall, not a single visitor came to AuctionWeb on its first day online. In order to drum up interest, he posted a message about the site on the National Center for Supercomputing Applications website—the NCSA still being a heavily trafficked destination of the web at that point. The NCSA had a “What’s New” page, so Omidyar posted there, describing AuctionWeb as “The most fun buying and selling on the web.”2
Visitors to AuctionWeb began to trickle in. Thanks to one of Omidyar’s many early newsgroup postings, we can get an idea of some of the offbeat items that people were listing. On September 12, 1995, Omidyar made a post on the newsgroup misc.forsale.noncomputer, where he listed items on offer as well as their current bids. Among them: autographed Marky Mark underwear (current bid: $400), a used Toyota Tercel (current bid: $3,200) and a Mattel Nintendo Power Glove (current bid: $20).3
After the slow start, Omidyar himself was surprised by the way AuctionWeb began to take off. Within a month, there were entire Sun computer workstations listed for sale, and even a 35,000-square-foot warehouse in Idaho for which the bidding started at $325,000. By the end of the year, AuctionWeb would play host to more than 1,000 auctions and more than 10,000 individual bids.4 At this point, Omidyar was still running AuctionWeb as an after-work-hours experiment, for free. Both of those arrangements couldn’t last forever. Because of the increase in data he was using, his ISP contacted Omidyar in February of 1996 and told him they were jacking up his hosting fees to $250 a month, the rate for a commercial account. Omidyar objected that he wasn’t actually running a commercial enterprise, but the ISP didn’t believe him. So, it was at that point that Omidyar figured that if he was being treated as a commercial enterprise, he might as well just become a commercial enterprise. He made two big changes to AuctionWeb. First, he decided that buyers could continue to use the site for free; their only cost would be whatever they agreed to pay the seller for the item at auction. Second, he decreed that from then on out, sellers would have to fork over a percentage of the final sale price. That percentage was set at 5% of the sale price for items listed below $25 and 2.5% for items that sold for a price above $25. These changes were implemented based on no research or calculation whatsoever, merely Omidyar’s own instincts.
Omidyar had no idea if charging a fee would bring an end to his little experiment or not. Furthermore, he had no way of actually enforcing payment. He didn’t have a credit card merchant account or even a method for validating auction results. In keeping with his libertarian ethos, however, he refused to impose any governance or policing of his system. He simply relied on sellers to be honest.
It turned out that his faith in humanity was justified, because envelopes started showing up in his mailbox with checks inside them. By the end of that first month of February, when Omidyar tallied up the envelopes, he found that he had made more than the $250 he needed to cover his web hosting. And just like that, eBay became that rarest of things: the first-ever meaningfully profitable ecommerce company.
Soon AuctionWeb was more than just nominally profitable. Very quickly, it became meaningfully lucrative, especially for one man and his hobby. In March of 1996, revenues hit $1,000. In April, $2,500. And in May, $5,000. Revenues would double again in June, surpassing $10,000. Omidyar had a revelation. “I had a hobby that was making me more money than my day job,” he recalled. “So I decided that it was time to quit my day job.”5
A lot of AuctionWeb’s early user growth came from things like antiques and collectibles because, unwittingly, Omidyar was tapping into something the Internet had been very good at from its inception: providing a platform for niche interests. From the very first days newsgroups and email began, geeks had been trading and selling their rare Star Trek memorabilia and the like. If anything, AuctionWeb wasn’t bringing classifieds online so much as it was moving the ad hoc swap meets that already existed on the Usenet newsgroups and on early community websites into a centralized location.
But AuctionWeb’s immediate success was also due to structural decisions that would enable the service to scale successfully. In short, Omidyar enabled AuctionWeb’s community to organize itself. Early on, Omidyar listed his personal email prominently on the website. When buyers and sellers had a question or a dispute, they came to him directly. But Omidyar knew he didn’t want to spend his time settling petty squabbles; his libertarian impulses told him that people should be able manage things for themselves. Oftentimes, when a buyer came to him with a complaint about a seller, he would simply forward the email along to the seller with a note that read, “You two work it out.”
Another way to help the system regulate itself was the Feedback Forum. This was a public online message board where users were encouraged to leave written feedback about other buyers or sellers, in addition to a numerical rating: plus one, minus one or neutral. Once a user’s rating on the feedback forum surpassed a negative four, they were banned from the site. This took the dispute resolution process out into the open and (just as important from Omidyar’s point of view) out of his email inbox. The Bulletin Board accomplished this as well. It was the place where users could ask questions: “How do I upload pictures?” or “What do you think is the proper minimum bid I should set for this item?” Fellow eBay users could chime in with their input. Very quickly, as often happens in online communities, a select group of users prominently stepped forward to become regular advice gurus and trusted “experts.” Omidyar had accidentally stumbled upon one of the longer-term factors in AuctionWeb’s eventual success. A focus on community, on empowering the users and allowing them to function autonomously would prove to be absolutely vital.
Even as he built it to self-regulate, AuctionWeb was growing so quickly that Omidyar couldn’t continue operating it as a one-man show. For one thing, he needed someone to open all the mail and deposit the checks and loose change that users were sending in. Chris Agarpao, a friend of a friend, was hired to come to Omidyar’s house twice a week to open the envelopes and make the deposits. But more than that, Omidyar needed help building AuctionWeb into something more sophisticated than a hobby/experiment operating out of his spare bedroom. He would remember later, “I had a vague idea of what I needed to do as an entrepreneur, but I knew I wasn’t going to be able to put together a business plan.” In short, despite the fact that he was a startup veteran, Omidyar needed a “business” guy, a true partner to help run the operation.
Jeff Skoll had founded two successful companies earlier in his career, and in 1996 he found himself in California, consulting at Knight Ridder, helping the newspaper chain develop an Internet strategy beyond its Mercury Center experiment. As part of his consultancy work, Skoll was monitoring the early web to watch for threats to his employer’s classified advertising cash cow. When he stumbled upon AuctionWeb, Skoll could see exactly the threat Knight Ridder was worried about. Instead of trying to help the newspapers beat back the disruption that he could see would soon come from the Internet, Skoll decided to join the disruptor, joining AuctionWeb in August of 1996.
Skoll pitched in at first by helping the company land space in an office park at 2005 Hamilton Avenue in Campbell, California. Skoll also convinced Omidyar to move AuctionWeb from the subdomain to the main ebay.com site. The Ebola site and the other subsites were removed. The service would eventually be known simply as eBay.
It was also Skoll who recruited Mary Lou Song to the company. Song, more than anyone else, would be instrumental in developing and cultivating the community that wo
uld be key to eBay’s success. Song was skeptical of eBay’s business model at first, and was perhaps even more dubious when she showed up for her first day of work in October of 1996. She was given a card table for a desk and a folding chair to sit on. Her office was between Omidyar’s—who was seemingly always busy crunching out code to keep the site from crashing—and Skoll’s, who was working on eBay’s nascent business plan. Outside her office was Chris Agarpao’s card table, where he was busy plowing through envelopes of checks from auctioneers.
Wary as she might have been, Song understood right away that eBay was a new type of business that had never existed before—indeed, could not have existed without the web. eBay was online commerce, but not in the way that Amazon was; it was a platform, but not like the operating system or the browser were. eBay was nothing more than a virtual marketplace, and by being virtual, it didn’t actually do anything other than facilitate the interactions between buyers and sellers. It didn’t store goods. It didn’t ship goods. It didn’t even guarantee the exchange of goods between buyers and sellers! The one truly tangible thing that eBay had was the goodwill of those buyers and sellers and the community they were creating—on their own—to make the buying and selling happen. eBay would be one of the first web companies to understand that all the value of its service came from the users and their community. eBay’s only asset, in fact, was its users, and therefore the only important thing for the company to do was to make sure the buyers and sellers were happy so that they would keep coming back.
Song carved out her own role as eBay’s community liaison/manager. She always referred to users as “the community,” not as customers. She reached out to the de facto user-leaders who had risen organically on the bulletin boards and hired them to formally take over the task they were already performing gratis: policing the auctions and handling customer service. She also enhanced and expanded the existing community guidelines and processes for which Omidyar had laid the foundation. And it was Song who helped build out the user-reputation systems that were becoming so important for eBay’s buyers and sellers. It was these systems that would soon become eBay’s most valuable feature.
A new user to eBay might (rightly) be wary about buying something online, sight unseen, from a complete stranger who was hiding behind a username. If you were a buyer, how could you be sure the seller would actually send the item you paid for? Conversely, how could a seller be sure a buyer would pay up? Buyer- and seller-reputation ratings helped assuage these fears. The higher-rated a seller was, the more trustworthy they must be, right? And the mechanism functioned the same way in reverse: sellers wouldn’t sell to users who, the ratings revealed, made a habit of stiffing other auctioneers. Thanks to Song’s tinkering, the feedback scores eventually manifested themselves as actual numbers that got attached to a user and their auctions on the site. So, if someone was considering bidding on an auction from someone with a +48 rating, they could reasonably assume that seller had completed 48 successful auctions with satisfied buyers. Plus, buyers and sellers alike knew that if they had a bad auction experience, there was recourse: you could give the offending user a bad rating and thereby damage their reputation on the market. Everyone on eBay had real incentive to give constructive feedback. Things like fraud and serious disputes, while never 100% absent, were kept to a manageable minority of auctions.
This is a key evolution. In so many ways, over the last twenty years, the web and the Internet have slowly trained all of us to get comfortable interacting with crowds and, often, crowds of strangers. eBay was one of the first websites to show that a largely anonymous community, carefully constrained by a few guidelines and regulations, but invested in a system of online reputation, could actually work. Today, this key ingredient of ratings and reputation continues on sites like Yelp and Reddit—and especially on sites like Uber and Airbnb. It’s hard to imagine that the current sharing economy could even exist without the reputation template that eBay pioneered.
When Mary Lou Song joined the company in the fall of 1996, eBay hosted only about 28,000 auctions a month.6 After what was known within the company as the great eBay flood, in January 1997, eBay would host 200,000 auctions in that month alone.7 As they got deeper into the first quarter of the year, eBay’s brain trust realized that the site was on pace to take in $4.3 million for hosting all these new sales. AuctionWeb/eBay had made just $350,000 in all of 1996. They were on track for an astounding annual growth rate of 1,200%.8
There were several factors leading to this explosion in growth. For one thing, eBay noticed the power of Januarys: they came after the holiday season. That meant millions of people with millions of unwanted gifts. eBay to the rescue. But the site was also benefiting from the phenomenon Omidyar had discovered earlier: the Internet as a place where people of like interests, no matter how obscure or remote, could congregate. Suddenly, eBay was a central place where all these disparate communities of interest could find each other when they wanted to perform the fundamental acts of hobbyists everywhere: trading and collecting. Baseball cards. Barbie dolls. Postage stamps. Buffalo nickels. Quilts. Antiques of all stripes. Anything collectible. eBay became, overnight, the world’s greatest flea market/garage sale/bazaar. In AuctionWeb’s earliest months, the majority of the listings were for computer items and electronics. But at the beginning of 1997, antiques and collectibles suddenly rose to become 80% of eBay’s offerings.9 eBay would also piggyback on many of the hottest fads in collectibles, of which there were quite a few in the late 1990s. Furbies. Tickle Me Elmos. Tamagotchi. But the greatest of these was the Beanie Baby craze of roughly 1996 to 1999, exactly mirroring the rise of eBay.
Beanie Babies were stuffed animals developed by an independent toy manufacturer from suburban Chicago, Ty Inc. From initial animals like Flash the Dolphin, Patti the Platypus and others, Ty gradually ramped up its lineup of characters to encourage a habit of collectibility. But Ty also introduced a brilliant complication: artificial scarcity. Beanie Baby characters were not distributed to retailers equally. Part of the fun of Beanie Baby collecting was hunting down obscure characters in order to complete your collection. When, in 1996, Ty began “retiring” individual Beanie Baby models, this set off a collecting frenzy. Once, say, Buzz the Bee was sold out, the only way collectors would be able to obtain discontinued Buzz was on the secondary market—just the sort of market eBay provided.
In April of 1997, listings of Beanie Babies surged to 2,500 separate auctions, and eBay assigned them their own category. When rare and discontinued Beanie Babies suddenly started going for hundreds, even thousands, of dollars at auction, eBay reaped the attendant press attention thanks to its position at ground zero of the craze. Within a month, that single Beanie Baby category was responsible for 6.6% of the entire site’s sales volume.10 eBay was not exactly the company that Beanie Babies built, but Beanie Babies certainly brought eBay to the world’s attention.
eBay was perfect for collectibles. By creating a centralized clearinghouse of hard-to-find items, it could eliminate many market inefficiencies that had existed for years. There are plenty of articles from the late nineties about hordes of eBay-ers descending upon flea markets and antiques shops around the country, scooping up virtually everything on hand in hopes of turning around and fetching higher prices on eBay. An antiques store in Maine put an old-fashioned calculator it had lying around up on eBay for $100. Once calculator enthusiasts discovered the listing, they bid the price up to $6,500. The store didn’t know what it had on its hands until they put it on eBay, where the perfect buyer could discover it.11
This very rapidly led to the phenomenon of people building true small businesses on top of eBay’s marketplace platform. Most small sellers on eBay were what they’d always been: hobbyists and part-timers who sold spare items for a little supplemental income. But in due course, perhaps tens of thousands of people came to make their entire living on eBay, some creating businesses large enough to employ dozens of people and gross into the millions of dollars. eBay was crea
ting not just the world’s largest virtual marketplace, but also the first marketplace that could rival the real world. Just as the Internet allowed people to connect to the entire world, eBay allowed a person to sell to the entire world from their tiny little corner of it.
And eBay embraced its image as the hobbyists’ mecca. Many people are familiar with eBay’s founding myth: how Pierre Omidyar created the site so his fiancée could expand her Pez dispenser collection. But like many company creation stories, the Pez story is a fiction. The Pez story was created by Mary Lou Song to get reporters interested in covering eBay’s role in the collectibles phenomenon. As she put it later, “Nobody wants to hear about a thirty-year-old genius who wanted to create a perfect market. They want to hear he did it for his fiancée.”12
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BEFORE LONG, EBAY’S VERY SUCCESS—user and auction numbers were sometimes doubling from one month to the next—became a serious problem. Omidyar’s original code, which had been strung together as an experiment, proved too weak to handle the growing user base. “It was like holding back a hurricane,” Song said of the surge in users over the course of 1997–98.13
Knowing that they needed the resources to stay on top of growth, Omidyar and Skoll decided the time had come to raise some capital. They hadn’t needed to do so before, because ever since that first month Omidyar had introduced auction fees, the site had been profitably self-sustaining. Jeff Skoll returned to his newspaper industry contacts and received interest from his old associates at Knight Ridder, as well as at Times Mirror. But both companies were put off by the valuation Skoll put on eBay: $40 million. Forty million might not seem insane to modern eyes—especially for a company growing by double-digit percentage points each month and with gross margins above 80%,14 but as Mark Del Vecchio, a Times Mirror executive, recalled later, his bosses simply couldn’t wrap their mind around the very concept of what eBay was. “They kept saying, ‘They don’t own anything,’ ” said Del Vecchio. “ ‘They don’t have any buildings, they don’t have any trucks.’ ” So, both companies passed.
How the Internet Happened Page 13