Meg Whitman's Bid for Growth

The CEO of cyber-auctioneer eBay talks about how she plans to keep it on track to hit some tough targets

Online auctioneer eBay is a lot like that autumn perennial, the homecoming queen: Maintaining its popularity is its main preoccupation. The minute buyers and sellers find an alternative auction site in cyberspace where it's easier and cheaper to do business, eBay (EBAY ) could lose its crown as the world's top auction site. That leaves CEO Margaret Whitman trying to keep eBay glowing in the eyes of admirers by smoothing transactions for customers -- while keeping operating costs down and expanding into new markets.

eBay remains popular, no doubt about it. The site has some 50 million registered users and is the top online-auction destination in 9 out of 10 of the countries in which it operates full-fledged sites. Last summer, eBay agreed to buy PayPal, the leading online bill-payment service, and introduced some new ways to buy and sell products without going through an auction process.

In July, eBay announced better-than-expected earnings for the second quarter and raised its earnings outlook for the third quarter. Yet its share price fell some 7% on the news, with investors seeing the stock already priced at a high premium.

eBay is now trading around $57, down 14% in a tough year, but the S&P 500-stock index is down almost twice that, at 26%. And even homecoming queens aren't everybody's favorite: In late February, Whitman pulled the plug on eBay Japan, where it was a distant second to Yahoo! in the online-auction biz.

BusinessWeek Online's Amy Tsao recently spoke with Whitman about eBay's continuing evolution and how she plans to meet lofty growth goals. Following are edited excerpts from their conversation:

Q: eBay stock took a bruising even after you announced increased guidance for the third quarter. Do you think Wall Street's expectations are reasonable?


The stock always takes a little dive after we announce earnings. It's kind of a pattern -- I don't know why. We've been really straightforward with Wall Street about what we're trying to accomplish. We've talked about the $3 billion revenue goals, [with] long-term operating margin being between 30% and 35%. We achieved those operating margins several years in advance.

We've been straight with Wall Street about what we think we can do. The best thing we can do is say: "Here's what we think we can do, here's what we've done." And they decide whether they think that's in line with their expectations or not.

Q: What are the biggest risks to meeting your 2005 target of $3 billion in revenues [vs. $1.1 billion in projected revenues for 2002]?


I think it's a lot more certain today than it was when we first announced the goal in September, 2000. We feel very confident that we can get there based on our existing categories and the existing countries in which we play. The risks are basic execution risks: Can we attract management talent, can we build the back-end infrastructure to triple the size of the company in three more years? The answer to that is yes.

Q: How important is increasing the number of fixed-price transactions?


We think fixed price is important to eBay because it gives sellers and buyers more options. In the second quarter, about 19% of sales were settled through fixed price, and largely that was Buy It Now [an option for immediate, fixed-price purchase].

In March of this year in Europe and in July in the U.S., we introduced a pure fixed-price listing where no auction is attached to the listing. That's just getting under way. If you scroll forward, perhaps fixed price in all of its forms could be up to a third of our total gross merchandise sales [GMS] in the next couple of years.

Q: Do you see your brand shifting closer to Amazon (AMZN ) as you move more toward fixed-price transactions?


When I say fixed price, people automatically think Amazon. I think it's important to recognize that the kinds of goods our sellers sell on eBay will remain roughly the same, and fixed price is another option. The kinds of goods that sell on eBay are on both ends of the product life cycle. The unique and new and hard-to-find, like Sony PlayStation, XBoxes, Furbees, or Beanie babies, when they were hot. And the other end of the product cycle: used, vintage, overstocked, refurbished, returned kinds of items.

[Those extremes] are where the vast majority of eBay sales occur. I don't think that's likely to change given the fixed-price format. We'll still have small and medium-size businesses that sell using [both formats]. Amazon's primary business is brand new, in-season, manufacture-suggested price. That would be a minority of our business.

Q: Do you see larger sellers outnumbering small-business sellers doing more transactions eventually? What are the consequences of more big sellers being in the eBay marketplace?


eBay has created an incredibly efficient distribution channel, which continues to grow and evolve. This marketplace is attracting sellers of all sizes across many categories of goods. More well known, national brands selling on eBay represents a significant opportunity but presently account for just 5% of GMS, mostly in computers and liquidated goods.

An established, reputable retailer or distributor can bring added credibility to a category and encourage the growth of that category. In the long term, we expect these larger sellers to represent no more than 10% or 11% of GMS. The heart and soul of eBay's selling community remains individual sellers and small to medium-size businesses.

Q: You've been known to do an quick about-face if a decision turns out to be a mistake. Do you find that harder to do as the company gets bigger?


Not really. There's two kinds of mistakes you can make. One is with the product and how it impacts the community of users. And we're even more careful today when we introduce a new feature or functionality to thoroughly vet it with users. That isn't to say we don't get negative feedback. You know the old saying: It's impossible to please all of the people all of the time.

That said, we have quite good intelligence when we launch a feature as to what the reaction will be. But to the extent we make a product mistake, we're very quick to change that. We'll get the feedback, and we're happy to make changes to any products mistakes we make.

We're doing something entirely new, so there's no land-based analog to compare. When I was at Hasbro, we said: What's Mattel doing? When I was at Disney, what's Warner Brothers doing? We don't have that luxury here. When you're pioneering, you will make mistakes. If we don't, then maybe we're not innovating as much as we should.

Other mistakes are not community-oriented, but business-oriented -- like Butterfields [eBay bought the traditional auction house, formerly known as Butterfield & Butterfield, in 1999 for $260 million in stock]. At the time it seemed like exactly the right thing to do. Three years later, we realized it wasn't important to the strategy. So, we basically decided to exit.

Q: What about Japan? What went wrong there?


We didn't have the first-mover advantage in Japan. Yahoo Japan launched its auction product six to eight months before us. It was able to leverage its incredibly strong position with its portal. With 20-20 hindsight, I don't think we executed as well as we might have. In terms of the management team and support to them in the U.S., we were a much less experienced company in early 2000 than we are today. Probably the biggest factor is that we were late to the market.

Q: How and when might you reenter that market?


In terms of coming back to Japan, longer-term it's an important market. If there's an opportunity to go back in a situation where we think we can win, we would be open to doing that. Now, we have higher and better use for the money we were spending in Japan in [other markets], so we decided to redeploy those funds. It depends on who emerges in that marketplace. But I can't speculate. Before we come back, we would have to see our way clear to being a very strong leader in that market.

Edited by Douglas Harbrecht

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