Just days after delivering second-quarter profits that were triple those of last year and sales growth of 84 percent, eBay chief executive Meg Whitman sat down last week to discuss her thriving company with Industry Standard Editor in Chief Jonathan Weber and senior writer Miguel Helft. Below is an edited transcript of that conversation:
The Industry Standard: Over the past few years, eBay has made a remarkable transformation from a collectibles auction site to a market for what you call "practicals," items people can use rather than just collect. What has surprised you the most about this transformation?
Whitman: I think the really interesting thing about eBay is how the platform has become so extensible – not only into "practicals," but computers and autos, as well as geographically [and] in pricing formats. When we took the company public in September of 1998, it was largely a collectibles Web site based here in the United States in an auction format. We've really migrated the platform to a whole other level of dimension.
Q: Of all the things that worked, which one surprised you the most?
A: I would actually say autos. Based on first-quarter results, which we released, our users will trade about $1 billion worth of used cars and parts on eBay in 2001. I think that was pretty surprising to us [because] this was a Web site based on small shippable items. Cars are hardly small and hardly shippable, and the fact that eBay was able to create a market where people wanted to buy and sell cars was surprising to us.
With 20/20 hindsight, it's not that surprising because it was an inefficient market that didn't have a lot of trust and didn't have a lot of transparency. It does on eBay. So it's an efficient, trusting, transparent market. In some ways it's not that different from our original markets. But [it] seemed very different at the time.
Q: Right now, things are going fabulously for you at eBay. What could derail that?
A: There are two things I focus on. One is maintaining the small-town feel on a global scale – growing big and at the same time staying small. I think that's important for two constituencies. First and foremost is the user base. Second is the employees.
We have to continue to be nimble. We have to be able to make decisions quickly. We have to be able to implement quickly. For the users, it needs to feel like their eBay. That's a real challenge.
Secondarily is simply growing management and infrastructure to be a global company that does three or four times as much volume as we do today.
Q: You say collectibles are the heart and soul of eBay, yet it seems as if the long-term plan almost requires a significant shift in that thinking.
A: Collectibles may not be the largest portion of gross merchandise sales, but I think it will still be the essence of the community. People connect over a shared area of interest. Most of our buyers and sellers on eBay who now buy computers or cars or whatever have also bought something in the collectibles category.
In fact, I bought a car on eBay over the weekend, and it was fascinating the interaction that I had with the guy who sold me the car. We were going to have my son and my husband go out and pick up the car, and then we decided that was actually not a very good idea. Because who wanted to spend 20 hours driving the car back from Denver? So we called the guy, and he said: "No problem. Just send me the check. And we've got a three-car garage; we'll keep it here for you until you have someone come pick it up." That was a real community interaction there. It was a delightfully personal interaction about buying a car.
Q: Have you seen a change in the past year in the usage and growth of people coming to the Net?
A: What's sort of interesting about the whole public-relations disaster that is the Net, in some ways, is that the fundamentals are really good. Look at growth, look at how much time people spend on the Net, and look at the variety of things that they are doing. It's all really good. So I am actually encouraged by the fundamentals that underlie usage growth on the Net. Now, I will say that broadband will help a lot. EBay users who have broadband connections spend something like 72 percent more time than eBay users who are on dialup connections.
Q: There seems to be a disconnect between the guidance that eBay is providing Wall Street and Wall Street's reaction to it. A lot of analysts believe that in the long term you can achieve operating margins better than the 30 percent to 35 percent that you predict. Are they wrong?
A: Our view is that the sort of long-term operating margins in the business are 30 percent to 35 percent because we anticipate that we will always be a growth company. In 2005, if we are delivering 30 percent to 35 percent operating margins, we're still going to be investing in new businesses that will continue the growth of eBay. So it might be a little bit of a disconnect between whether eBay is still a growth company in 2005, or is it in a steady state and then operating margins should rise. And I still think that we are correct in this assessment. But you're right, Wall Street would like to see more and maybe believe that there is more in the operating model.
Q: If you look at successful software businesses, they have high margins and still manage to grow at a brisk rate. Why couldn't eBay achieve similar results?
A: Well, I think the dynamics that we understand today of the cost structure says that we're going to have to continue to invest in product development, we're going to have to continue to invest in sales and marketing, and we're going to have to continue to invest in the infrastructure that runs the company. Our assessment of those dynamics is that this is basically a 30 percent to 35 percent operating-margin business.
The other thing you have to remember is this is a whole new concept. No one's ever built a marketplace for individuals and small businesses to trade in the way we have. I think there's no real land-based analog. There's no paradigm for what we are building here, so that is our best estimate – building from a bottoms up what we think it will cost us to deliver that level of revenue.
Q: What has it been like for you to be not just a survivor, but a thriving business while most other Internet companies struggle?
A: I'm proud of how we've executed. I think we have managed the company well, and I think we have been thoughtful in the strategic decisions that we have taken. But I have also been in business now for almost 25 years, and I know that companies have ups and downs. I know that you never know where the next challenge is coming from. So I like the organization to be on the balls of its feet and really understand that if we do a good job of servicing our users then we will be successful.
But if we forget for a moment that it is the users who list a million items a day on eBay; it is the users who fulfill the packages, who pack up the material and send it out; it's the users who answer the majority of customer-support e-mail; the users who do all the merchandising and figure out what goods to bring to the site – if we forget that for a nanosecond, that will be problematic for us. So I'm really trying to have the company not rest on its laurels. I think it's really important that people don't get too self-satisfied.
