The second suit was filed this year against a company called BiddersEdge.com. Basically, the company assembled a multi-auction comparison service that allowed users to skip eBay's site to do a search of available items. Visitors to the site could enter an item — say, a Jimi Hendrix autograph — and BiddersEdge would pull up listings from a variety of auction sites in a commingled fashion.
Bengier and CEO Whitman were not pleased. "Their revenue model was advertisements over what were, in effect, our listings," claims Bengier. In June, the U.S. District Court in San Jose granted an injunction in eBay's favor. Alleges Monahan: "They were free-riding, so we took them to court on a variety of legal theories, including robotic trespassing." The case is currently on appeal in the ninth circuit.
Beyond suing auction aggregators, eBay management strictly enforces the company's licensing agreement. Even smalltime operators sometimes feel the wrath of eBay. In October, the trading site reportedly pulled the plug on 127 auctions for BeesKnees, a home-based seller of collectible china. In a published report, an eBay spokeswoman claimed BeesKnees had linked its items to rival auction sites — a violation of eBay's policy.
In addition, eBay routinely intervenes to curb misuse of its brand name. Some ecommerce operators insert "eBay" into their own sites or their company names. Others knock off the catchy, multicolored look and feel of eBay's logo. Often, managers at the offending dotcoms remain blissfully unaware that they have infringed upon eBay's trademark or copyright. "In these cases, sending a 'cease and desist' letter or just having legal call directly does the trick," says Monahan.
When threats don't cow offenders, eBay ups the ante. "We follow through on every incursion, no matter how small or seemingly irrelevant," notes the company CFO. "We don't want a reputation as a paper tiger."
And Yet More Animals
If eBay's fierce defense of its turf has repelled poachers, Bengier's policing of the balance sheet has kept the vultures away. At the end of September, consolidated assets totaled $1.1 billion — and $766 million of that was in cash and other financial instruments. The company's gross profit margin is now almost 80 percent — miles ahead of other dotcoms. The gross margin at Amazon.com, for instance, is around 26 percent. "Gary is always focused on profitability and returns," says Noto of Goldman Sachs. "In the Internet world of riches and exuberance, he has a philosophy of making sure eBay is profitable, first and foremost."
The single-minded pursuit of black ink is leading Bengier and eBay to seek out new sources of revenue. The bulk of the company's revenue comes from straight fees. eBay charges a listing fee of from 25 cents to $2, based on the merchandise value, and an additional success fee of from 1.25 percent to 5 percent if an item is sold. Obviously, the more valuable the merchandise, the greater eBay's take.
Although personal buyers and sellers make up the majority of eBay users, small-business sales on the site are increasing substantially. The company estimates that 50,000 to 100,000 sole proprietors make their primary living hawking items on eBay. "Some of them had storefronts, some sold through small catalogs," says Jeffrey Jordan, eBay senior vice president and general manager (U.S.). "Others were just collectors who realized they had the makings of a nice small business."
Not surprisingly, the advent of these so-called "power sellers" has given rise to something of a cottage industry. In the past two years or so, a slew of vendors have begun selling auction organization and sales management software, as well as auction-oriented insurance and escrow services. Eager to grow the small-business segment, eBay management allows these vendors to advertise on the eBay site.
Fact is, transaction-related vendors are practically the only advertisers allowed on the home page. Remarkably, eBay does not run the typical banner ads that front so many portals, arguing that such come-ons are an intrusion upon the community's good graces. "For the time being, we believe advertising should be synergistic, focused around aiding the transactional process," explains Bengier. A clever strategy, May contends. "They're providing a service to their users and deriving an incremental flow of money at the same time," he says. "Instead of festooning their site with banner ads that most people ignore anyway, they're using advertising as an enhancement to their core selling proposition."
High Praise for Grisham
Ironically, that very proposition — Omidyar's original vision of a dynamic consumer-to-consumer auction — has seen a considerable reworking of late. Keen to expand its user base, eBay now operates a virtual trading floor, where small businesses can bid on new, used, and refurbished office equipment. Dubbed the Business Exchange, it's the company's first foray into the burgeoning B2B marketplace, estimated by IT research firm Gartner to reach nearly $4 trillion in sales by 2003.
Moreover, eBay has begun conducting fixed-price sales. In fact, a number of large companies now sell commodity items at fixed prices on eBay, using the site as a distribution channel. Sun Microsystems, for instance, uses eBay to sell its refurbished computers, some valued in excess of $100,000. At first blush, peddling an UltraSPARC IIi server on a site that also traffics in doilies would seem a stretch. But the numbers say otherwise. "Sun's internal statistics indicate that 45 percent of people buying their products on our site are new customers," Bengier points out. "That's clear proof that our channel is extending their market."
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