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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From the beginning, the strategy was to amass an unrivaled array of goods that would attract buyers. It worked well. In fact, as Donahoe now admits, it worked too well. The site became bloated and unwieldy. At any given point, it features about 100 million items for sale, with nearly 7 million new listings every day. "EBay's abundance was one of its attractions," Donahoe says. "But if you type in 'BlackBerry' and get 23,000 search results, it's not that helpful." (His offhand math is not far off the mark: A search in September produced 3,911 phones and PDAs, and 17,771 accessories.)

Donahoe is sitting in the employee cafeteria at eBay North, one of two corporate campuses in the San Jose area, in early September. It's just after 8 a.m. The campus is coming to life, the parking lot starting to fill. Donahoe is already in midday form after his 6 a.m. Pilates class in the company gym. In a sense, he's trying to do for eBay Marketplaces what Pilates does for his lanky 6-foot-5 frame: improve its flexibility. "This is not a one-time project," he says of the drive to revamp the buyer experience. "We'll make big changes over the next couple of years and keep iterating and innovating."

Whitman and Donahoe worked together in the 1980s in the San Francisco office of Bain & Co.; Donahoe stayed and eventually became Bain's worldwide managing director. In many ways, he says, eBay has been going through a natural evolution, from a wildly successful startup to a public company with global reach to, well, a maturing business. "Early on it created a market," he says. "Now we have competition on all sides."

Today, the company's homegrown vendors can sell through their own Web sites, as well as channels such as Amazon.com and Overstock.com. Shoppers have even more online options. A bargain is only a Google search away, and brick-and-mortar retailers have worked hard to upgrade the shopping experience on their sites with virtual assistants, gift registries, product videos, customer reviews, and liberal return policies.

Once an e-commerce innovator, eBay fell behind. "We were shackled by our own success," says Eric Billingsley, who runs the engineering side of the finding operation. "When the company was growing 80% or 120% year over year, the mind-set was, 'If it's not broken, don't fix it.'?"

"The buying experience hasn't changed dramatically since 1999, compared with the rest of the Internet," says Scot Wingo, president and CEO of ChannelAdvisor, which makes software to automate everything from auctions to shipping for sellers on eBay and other sites. "The highway is now crowded, and others are going faster."

Historically, eBay made sellers the priority for a very good reason: They generate revenue. Sellers are the ones who pay eBay fees for listing an item, posting a photo, even processing a payment through PayPal, which eBay bought in 2002. But Donahoe realized that eBay had to stimulate shopping, and to do that, the company needed technology designed around the buyers' needs. In late 2005, Donahoe began looking to hire a new CTO. Given the site's size and complexity, there weren't many candidates with the appropriate experience.

Then he met Matt Carey. Carey didn't know much about eBay--in fact, he had never used the site--but he had helped build and oversee the technical infrastructure behind the world's largest retailer, one of the most data-centric businesses on the planet. In two decades at Wal-Mart, he had experienced firsthand both unprecedented growth and the challenges of maturation. A half-hour into the interview, Donahoe excused himself and called a colleague: "We have to have this guy."

Carey inherited a catastrophe. Shortly after he arrived in San Jose in December 2005, the site's core listings, largely auctions, and those for its 600,000 individual stores were combined for the first time--a blunder no one now takes credit for. Previously when you typed in, say, "Sony PlayStation," the search engine combed through only the core listings. To see the other merchandise, you had to surf over to the eBay Stores site and do a separate search or browse the stores. The goal of combining the entries was to show a broader mix of inventory on a single search; the effect was to give more exposure to the store products. The new setup was rolled out with no customer testing.

Within weeks, nearly every measure of eBay's business was down. Bids. Return visits. The conversion rate, or percentage of listings sold. Average sales price.

In hindsight, it's hard to understand why no one at eBay foresaw what would happen. Because eBay charges less for store listings than core auction listings, once they all appeared in a single search, many sellers shifted their inventory to save on fees. Suddenly, store merchandise, which tends to be pricier, was crowding out the auctions--and the bargains. Auctions bottomed out at just 17% of total listings, yet they still accounted for 91% of sales.