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Weekly Column

The EBay Way: How Auction Sites Like EBay Turn Retail Economics on Its Ear for the Betterment of Just About Everybody

Status: [CLOSED]
By Robert X. Cringely
bob@cringely.com

The stock market is down, down, down, investor confidence in big business is shot, conflicts of interest or just plain incompetence are becoming increasingly obvious in some of our most trusted business institutions, even the U.S. President has a taint of corporate scandal, and the once-recovering economy again seems to be faltering. What's to be done about it?

And eBay shall set you free.

This week I was doing what all the other pundits, TV stars, and cyber sex symbols wished they could be doing — laundry. I was in the laundry room at the Holiday Inn in Lido Beach, Florida. Let the other celebrities visit Florida in the Winter, hah! I'll come in July! And in the sweltering laundry room of the Holiday Inn, I met the archetype for the REAL new economy, who happened to be a dental technician and 33 year-old mother of five from Utah.

Remember the New Economy? We were going to buy everything online, sell everything online, communicate online, negotiate online, and every aspect of our business and private lives were going to somehow be sucked through an Internet filter. Only it didn't happen that way, did it? There was that awkward part about businesses having to eventually make money, and the other part about how Slushees tasted so much better at 7-11 rather than coming down your phone line. We're all still online, of course, but what we are mainly doing is still e-mail and looking at dirty pictures.

But then there is eBay. According to my laundry friend, the dental technician from Utah, her husband stays home, takes care of their five kids (ages five to 12) and sells things on eBay, bringing home almost half the family income. His specialty is restaurant equipment, especially commercial refrigerators and freezers, that be buys locally on Fridays and sells nationally on eBay the rest of the week. The fact that this guy can sit next to his cable modem in his boxer shorts and make half a living buying and selling freezers is a bloody miracle. Forget about day trading, this guy in Utah is the real money machine, and the fact that there are a couple million other people just like him is what makes eBay a financial engine of far more importance than most people realize.

Let's put eBay in perspective. In terms of sales, the company is comparable in size to Amazon.com. But Amazon's sales are primarily composed of goods while eBay's sales are composed almost entirely of commissions — commissions that average around five percent of the value of goods bought and sold. So while Amazon and eBay are both around a billion in sales, eBay actually represents more than $20 billion in economic activity. That makes eBay the third largest U.S. retailer after Wal-Mart and Sears, and three times the size of AOL, the other Internet merchandizing powerhouse. It took Wal-Mart almost 30 years to have the economic impact eBay has reached in five years. And profits? eBay makes more profit than all the rest of the retail Internet businesses COMBINED. It is a money machine. In retail economic terms, eBay IS the Internet.

Now all this is interesting in a Wall Street Journal kind of way, but it misses the social significance of eBay, which has three important aspects. First there is the fact that eBay is counter-cyclical, or maybe it is non-cyclical, which is even better. By this I mean that when the economy goes DOWN, eBay sales go UP. The only other businesses that follow this same pattern are movies and book publishing, which both do very well during a depression, thank you. But those are industries of escape, and while there is an entertainment aspect to eBay, it is not solely used for this purpose. A lot of the things people buy and sell on eBay they actually need, like commercial freezers. And while eBay goes UP when the economy goes DOWN, there is no evidence to suggest that trend will reverse when the economy recovers; eBay will keep going up until all the possible buyers and sellers are participating, which by my crude estimate is half of American households (50 million buyers and sellers or about one third of U.S. Internet users) and five to 10 times eBay's current size. With eBay currently about one seventh the size of Wal-Mart in terms of economic impact, this estimate suggests they'll reach parity, probably within another decade.

The second important social aspect of eBay is just who is doing all that buying and selling. It can be just about anybody, of course, but our freezer salesman from Utah is a guy who, for reasons I won't go into, probably wouldn't be economically productive at all if it weren't for eBay. This is true for many eBay professionals, who are generally new businesspeople doing new business. Hey this isn't Wal-Mart coming to town and killing the storekeepers on Main Street, nor is it Amazon.com killing the local book store. This is brand new economic activity evenly distributed in terms of geography and demography. And in that way, eBay means real economic growth.

One aspect of eBay I especially love is its inherent resistance to regulation and taxation. This is the Shadow Economy made visible, though not containable.

The third important social aspect of eBay is its self-regulation, something that is accomplished entirely through users giving feedback to each other and to the community, thereby building commercial reputations. An eBay seller doesn't have any identity to speak of beyond his list of goods for sale and the seller's documented feedback. EBay is a village, and in a village, reputation is everything. For just this reason, an active eBay seller can't afford to build a bad reputation by providing poor customer service. All the evils of Enron, Worldcom, Merrill-Lynch, and Arthur Andersen wouldn't fly if the rest of the commercial marketplace had such a formal feedback mechanism.

Maybe it should. Take a note, George W.

To many people, eBay is just this place where you can buy or sell collectibles, but it is much more than that. It is a place for recovering the value of goods that might otherwise be unrecoverable. I bought a new $300 battery for my Sony Vaio notebook computer 10 days before the computer was stolen. Now I have a brand new battery, still in the original box, but no Vaio. Through eBay I can recover most of that value. And my friend Jim Neader from Statesville, North Carolina, can recover the value of an attic filled with never-opened Happy Meal promotions from 25 years of being a McDonald's owner-operator. Without eBay or an eBay equivalent, such value recovery would be very difficult.

Here is an even better example. I live out in the wilds of Sonoma County, California, on unused agricultural land I share with innumerable deer and their ticks. There are so many deer, in fact, that the very concept of productive agriculture is laughable: the deer eat everything. But they don't like lavender, which grows quite well at the winery down the road. I could easily put in a drip irrigation system and have a couple acres of lavender — enough to qualify as one of America's larger lavender growers — but then what would I do with it? I could try to play on the global lavender market, if there even is one. I could find a lavender wholesaler to buy my crop, though I am not even sure one exists. But frankly I have no idea how I would do either of those things even if I had the time, and there are few local resources to help me. Or I could take almost all of the effort and risk out of marketing my crop by simply throwing it up on eBay. Like a million other people, I could create a business out of almost nothing, letting the market find me. Suddenly, I'm a farmer.

And there is a technological secret to eBay, too. It isn't to be found in HTML or Javascript or Flash animations, but in the auction site's scalability. The idea behind almost every Internet retail business plan (and I have read hundreds) is to use technology to gain economies of scale. "We'll serve a million users with a staff of five!" the plans all claim. And if the product can be delivered over the wire in the form of electrons, this claim can sometimes be realized. But usually there aren't a million users for the product or service, yet the business plan nearly always requires building a commerce engine from scratch. EBay scalability stretches in two dimensions, bringing in both more consumers and more suppliers. At some point, the marginal costs really do drop to almost nothing, which they might do at another e-retailer if it could grow to $20 billion, though I doubt that will ever happen.

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