1. Using Porter's five-forces model, what does the competitive structure of the online retailing industry look like? What are the implications of this structure for the long-run profitability of eBay in the market?
2. What internal factors have and will support eBay's success?
3. To what extent is eBay's competitive advantage sustainable?
The case traces eBay's strategic changes since its inception in 1997 till the present.. eBay, in 2011, had 18,000employees and hosts an online auction and shopping website, which people all around the world visit to buy and sell goods and services. Initially, eBay's business model was based upon creating an easy-to-use online market platform that would allow buyers and sellers to meet and transact easily and inexpensively. By serving only as an online meeting place for buyers and sellers,eBay has avoided many of the costs of physical infrastructure that Amazon had to undertake. Despite the numerous advantages of eBay, Meg Whitman, CEO, recognized that the company's software platform had to minimize the risks for the consumer, keep pace with buyer and seller inquires, support a variety of goods and selling formats, and keep up with competitors. With expanded software capability, eBay also expanded the number of buyers and sellers by bringing infrequent sellers and customers into the merchandising fold. In many cases, it also helped develop unsophisticated sellers become more competent in selling. In 2010, eBay generated revenues $9.5 billion in revenue, up from $4.5 billion in 2005, but it generated only $3.5 billion in earnings compared to $2.1 billion in 2005an impressive figure that explains the company's stock market valuation of $46 billion in February 2007. However, eBay's growth seemed to be running out of steam, in spite of CEO Meg Whitman's optimism. Since 2007 eBay has experienced increasing competition and problems its stock price has fallen dramatically, so much so that in July 2011 its market valuation had dropped to $43 billion. Investors became worried that its business model would not be so profitable in the future because the online auction market was becoming mature and opportunities for growth were declining.
Over the years, eBay has benefited from its first-mover advantage, and Whitman's focus on revenue growth. To increase revenues, eBay repeatedly innovated and expanded the retail formats it offers, as well as expanded internationally. It also made some acquisitions, such as PayPal and Skype, that helped improve its service and internalize some of the margins from the online sales value chain. eBay also rivals Amazon's more traditional offerings, including consulting. For example, a new online retail consulting service called ProStores allows any potential sellers to utilize eBay's functional competencies in online retailing to create their own online storefront using eBay's software. ProStores offers sellers a fully-featured Web store that can be customized specifically for each online seller and will then be maintained and hosted by eBay. This is in direct competition to Amazon's service of a similar nature. eBay Express is eBay's fixed price store where a vast inventory of brand new, brand name, and hard-to-find products are offered at fixed prices by top eBay sellers.
But by 2006, eBay was clearly under pressure. Although the number of items listed on eBay's retail platforms was increasing (by 33% in 2005 and 45% in 2004) growth was also slowing. In fact, in eBay's U.S. retail segment, net transaction revenues increased only 31% in 2005 and 30% in 2004 compared to 43% in 2003. Meanwhile, gross merchandise volume increased 19% in 2005 and 27% in 2004, compared to 41% in 2003. eBay's revenue growth was slowing, and it seemed clear to investors that despite all its new strategies and entry into online payment and communications activities would not be able to sustain its future growth-and so justify its lofty stock price. eBay had increased its fees to sellers repeatedly, which opened a door to its competitors, it underestimated the potential revenues to be earned from Internet advertising for which Google had become leader, and global users were increasing at a decreasing rate. When the company's stock had dropped back to $26 by March 2008, Whitman decided to resign and a new CEO, John Donahoe, who had been president of eBay Marketplaces and its retail channels was named to succeed her. Donahoe announced that eBay's biggest problem was that it was lagging behind in its attempts to develop an advanced search engine that would let users find the products they want. Donahoe also announced that eBay would use its database to provide the most relevant search experiences, clarify fixed-price listings, investigate possible divestures create a new fee structure for sellers that would reduce the initial cost of listing an item, including the cost of putting photographs on the listing, and shifting the burden to an increased percentage of the final sale price. Realizing his changes had backfired, Donohue reversed course in 2009 and eliminated several of eBay's fee increases and revamped its feedback system so that buyers and sellers can now respond to one another's comments in a fairer way. These moves did smooth over the bad feeling between sellers and eBay, but the old "community relationship" it had enjoyed with sellers largely disappeared. Alternatively, Donahoe set course to focus on expanding and improving its retail channels and product search capabilities in order to increase revenues. With new classified sites, and "Daily Deals," a new home page design with more deals and personalization, acquisitions, creating better connection and offerings for PayPal, and the divesture of Skype were part of the strategy.
After all these strategic changes to its business model, by October 2010, Donahoe's turnaround plan for eBay was showing signs of success; 2009 revenues were $8.7 million or 14% higher than before Donahoe took over in 2008, and in 2010 revenues were $9.5 billion while profit had also increased fueled by the Skype sale, growth in PayPal and growth in revenues from increased sales from its online retail channels. With new strategies such as offering a merchant fulfillment service similar to Amazon on the horizon, playing catch-up might be challenging.
Will this work? In 2011, more and more of eBay's profits were coming from expanding its PayPal financial services and analysts worried that this was not a good strategy to increase the profitability of its business model.