eBay’s Chaos Theory

The Heir Apparent As president of eBay Marketplaces, John Donahoe is charged with reinvigorating the core business. “Our number-one strategic priority,” he says, “is improving the buyer experience—making it fun again.”

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It was early in 2006, and Matt Carey, the new CTO of eBay, was attending his first focus group about the online shopping site. It was a memorable experience, to say the least. "It's hard to use," complained a longtime customer. She had been collecting antique glass on eBay for years. But lately, the treasure hunt was more frustrating than fun. "I get lost," she said. "I can't get back to my search results. I have to go all the way out and start over."

"This is not good," Carey thought to himself. This particular buyer was, as he puts it, a "dyed-in-the-wool, right-down-the-center customer." What she was describing is known by the pejorative "pogo sticking." To Carey, who had just moved to eBay after 20 years at Wal-Mart, it was the equivalent of "having customers not able to shop in your store because they can't find the aisles."

It is not news that eBay has lost the magic that made it an Internet darling a few years back. After peaking at $59 a share in late 2004, the company's stock plunged to $23 two years later. CEO Meg Whitman may boast about the company's latest stats--record number of users, revenue, and items listed for sale--but the fact is that the rate of growth at the company is slowing. EBay has tried to jolt itself by investing as much as $4 billion in Skype (which has yet to pay off) and $1.5 billion in PayPal (which has been far more successful). Yet 70% of revenue still comes from the core marketplace business. And as Carey recognized, the weakness there has become impossible to ignore.

How troubling is the slowdown? Despite the double-digit increase in listings and gross merchandise sales that the company reported last year, both of these key indicators have steadily decelerated over the past three years. In 2006, gross merchandise sales grew by less than 20%, the smallest rate ever. More troubling still, the number of active users--those who bid, bought, or listed at least once in the previous year--rose by only 14%, the slowest rate since 2001.

EBay is responding with a whole new strategic gamble--one some company insiders say is its most ambitious ever. The mastermind is John Donahoe, 47, whom Whitman brought aboard three years ago and installed as president of eBay Marketplaces (and as her heir apparent). His bold stroke--what he calls "our number-one strategic priority"--is recasting the site to focus primarily on buyers, not sellers.

As obvious as this realignment might seem, it is a sea change for an outfit that long regarded sellers as its main customers; some 1.4 million vendors rely on the operation for their primary or secondary income.

Donahoe's key partner is Carey, 42, who is charged with making the buying experience efficient and fun again. Improving one of the Web's most heavily trafficked sites without disturbing its global--and vocal--sellers' network and its millions of loyal buyers is a challenge that Carey compares to a "four-wall expansion" at Wal-Mart: turning a standard store into a supercenter without disrupting day-to-day operations.

The good news is there are signs of progress. Wall Street has noticed--the stock has gone up by about $10 a share since its low a year ago. Still, shares remain about 40% below their high, and the ultimate outcome of this effort to revive eBay's growth is in doubt.

"This is definitely an inflection point," says Robert Peck, an analyst with Bear Stearns. As Jeff King, eBay's senior director of product search (what eBay calls "finding"), puts it: "This is our biggest bet."

Twelve years after a pony-tailed programmer named Pierre Omidyar built an unfussy auction Web site one Labor Day weekend, it's easy to forget how swiftly and thoroughly eBay changed the online-shopping game. Within four years, customers had listed 130 million items and sold nearly $3 billion worth, giving rise to a new type of entrepreneur, the at-home eBay retailer. The site's charm lay in the fact that the merchandise was utterly unpredictable, and in the way that auctions introduced an element of competition. The initial hodgepodge of obscure collectibles and discontinued items at bargain prices was joined by hard-to-find new products and pricey cars and jewelry. Part flea market, part Mall of America--eBay chalked up $52.5 billion in total sales last year, more than the sales of Amazon, Apple, and Nike combined. There's still nothing else like it in size and breadth.