eBay's business model has always been deceptively simple: low overhead, narrow focus, top-to-bottom accountability, and most of all, paying attention to its customers. In other words, conservatism. Radical.
Publisher: Little, Brown, & Co.
Price: $25.95 (US)
Author: Adam Cohen
US publication date: 2002-06
-- onservative government is an organized hypocrisy."
Benjamin Disraeli (1845)
"Conservative" is a word in sore need of an intervention, having wandered far afield from its traditional meaning and fallen in with a bad crowd. After all, a "conservative" is one who conserves, and yet in the modern political arena the burden of conserving things -- the environment, civil liberties -- has become the bailiwick of liberals. Even if we stretch the word to encompass its connotations of frugality, adherence to time-proven ideas, and a maintenance of the status quo, one is hard-pressed to ascertain how a man who blithely calls for exorbitant spending on unspecified defense goals, proposes the creation of a new national deficit in the midst of an economic recession, and advocates turning huge chunks of the Constitution ass-over-teakettle can call himself a "conservative" even if he is the President.
The murky nature of "conservatism" is even more apparent in the wake of the current crisis of confidence shaking up the stock market as multibillion-dollar corporations like Enron and WorldCom fall to earth. Despite close, even intimate, ties to prominent conservatives in government, it is precisely the failure of these companies to adhere to the principles of conservatism that brought them down. Call me kooky, but profligate spending, adventurous (to put it mildly) accounting practices, and the casual tossing of customers, employees, and shareholders to the wolves just don't seem like the sort of things true "conservatives" should do.
For these reasons and more, it would behoove anyone considering taking the plunge into the entrepreneurial shark tank to read Adam Cohen's The Perfect Store: Inside eBay, a close look at the history of the wildly successful Internet auction site. Cohen, a reporter for Time and The New York Times, was given unlimited access to eBay's operations for months and his field report is often fascinating and thoroughly educational. From its origins as one man's off-hours hobby to its glory as one of the few companies not only to survive the dot-com crash but actually thrive, eBay's business model has always been deceptively simple: low overhead, narrow focus, top-to-bottom accountability, and most of all, paying attention to its customers. In other words, conservatism. Radical.
The story of eBay reads like something by Horatio Alger -- single individual starts out with nothing but a good idea and becomes a success through hard work and perseverence -- but freakishly good timing plays a part in the tale as well. In the mid-1990's Pierre Omidyar, a Mac platform programmer, saw great potential in the nascent Internet but had no real ideas for the elusive "killer app" on which he could capitalize. Teaching himself web page-building in his spare time, Omidyar created a few pages on his personal account, including one devoted to the Ebola virus and one that sought to streamline auctions of used computer hardware that were a regular feature of the usenet groups he frequented. This latter page, which he called AuctionWatch, began to garner traffic and a surprised Omidyar found this part of his hobby occupying more and more of his time as he mediated disputes and answered email questions from his visitors. Finally he threw up his hands and began listing email addresses, telling his customers to work things out amongst themselves. Traffic on the page became so heavy that Omidyar's ISP upgraded his service and charged him a business rate of $250 per month. Rather than fold up his tent, as was his initial urge, Omidyar experimented with charging a per-auction user fee of a few cents. Within a month, enough nickels and dimes came to his mailbox to cover his Internet bill with a small profit, making his site one of the only dot-coms ever to turn a profit from the get-go. The "killer app" had materialized.
Omidyar, something of a back-porch philosopher, speculated that the auction was the perfect microeconomic model. Rather than the artificial and highly flawed process of fixed-price selling, auction selling implicitly determined the worth of an item by the demand of its consumer, thus insuring that anything sold would sell at its true value. And because an online auction meant virtually no overhead -- no storage of goods and a bare minimum of manpower -- the miniscule user fees Omidyar charged were, in sufficient quantity, enough to turn a hefty profit margin: an unheard-of 80 percent for most of eBay's existence, in fact. Within months, Omidyar had quit his day job, taken on a partner, dropped the Ebola page, and launched the venture that would allow him to retire at 32, a billionaire.
EBay was not the first auction site on the web and has never been the only one, yet its success has yet to be matched by its rivals. Given the incredible simplicity of its operation -- really, what is it beyond simply a conduit for sellers to post pictures and text and for users to type and click? -- one would think the online auction biz would be one crowded horse race, and yet the secret of eBay's success lay in two vital intangibles. First was Omidyar's ruling admonition to "spend the company's money as if it were your own." While other dot-coms were overextending themselves by purchasing the trappings of anticipated success, eBay's employees (including Omidyar, CFO Jeff Skoll, and CEO Meg Whitman) sat in equally apportioned cubicles behind office-supply desks they assembled themselves, keeping costs down while maintaining an egalitarian atmosphere even as the enterprise grew and the office began crawling with Stanford MBA grads.
The second and most important factor in eBay's rise was a constant, even obsessive, focus on feedback from its customers. Most e-commerce companies tend to discourage interaction with their respective customer bases, regarding them as little more than "eyeballs with wallets," but Omidyar, Skoll, and Whitman rightly viewed eBay's customers as a community of sellers and buyers and made customer loyalty their top priority. They paid close attention to discussions and concerns raised on the site's message boards, noting that the company's biggest entrepreneurial missteps tended to be those undertaken without running the ideas by the peanut gallery first. Evidence of the wisdom of this policy may be seen in every instance, including an organized mass defection by disgruntled users, where eBay traders attempted to take their business to other auction sites and found themselves in a shallow market with fewer opportunities and an impersonal atmosphere that sent them scurrying back to eBay.
Appropriately, therefore, Cohen devotes a great deal of ink to the customers themselves, interweaving their stories with eBay's. He introduces us to the message boards' first celebrity, Uncle Griff, who created the online persona of a cheerful cross-dressing maniac who kept his mother tied up in the closet while dispensing invaluble tips on streamlining the auction process to other users. We meet the college student who auctioned off every one of his possessions (even his birthday) and then traveled around the country visiting his stuff, and a woman who is passionately devoted to the concept of eBay but has declared a private war on the company over its increasingly corporate nature. Cohen also relates the stories of people who used eBay as a basis for starting their own businesses, such as the woman who made a fortune selling packing supplies and the man who developed the online payment system PayPal, as well as academics who branched into "eBay Studies" with such topics as Internet addiction syndrome and new economic paradigms of supply and demand.
The rise of the Internet has been called one of the ten most significant technological advances of the last century, if not the most significant. It has affected the way we do business and educate our children, influenced our very language, and provoked a profound change in the nature of human interaction. Even though the sociology has changed, however, we often lose sight of the fact that at the end of every connection sits a person who is still guided by the same old principles of economics and psychology. For entrepreneurs and others who hunger to make their fortunes online the seductive power of techno-dazzle can be overwhelming, but as the success of eBay has demonstrated, it's not the software that counts, it's the interface. Frugality, focus, and customer service still win the day. Much as it pains me as a member of the Liberal Media Conspiracy to Distort Facts and Bring Down America to say it, it pays to be conservative.