eBay 1998 Annual Report Download - page 20

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Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
eBay is the world’ s largest and most popular person-to-person trading community on the Internet, based on the
number of items listed, number of users and minutes of usage per month. eBay pioneered online person-to-person
trading by developing a Web-based community in which buyers and sellers are brought together in an efficient and
entertaining auction format to buy and sell personal items such as antiques, coins, collectibles, computers,
memorabilia, stamps and toys. The eBay service permits sellers to list items for sale, buyers to bid on items of
interest and all eBay users to browse through listed items. The Company’ s 24-hour-a-day, seven-day-a-week service
is fully automated, topically arranged, intuitive and easy to use.
eBay was formed as a sole proprietorship in September 1995 and operated its online auction service under the
name of “Auction Web.” In order to build a critical mass of customers, the Company offered this service without
charge until February 1996. The Company was incorporated in May 1996, but had no employees other than the
founder until July 1996 and, at December 31, 1996, had only six employees. During its first two years, the Company
attracted buyers and sellers almost exclusively through word of mouth. In September 1997, the Company began to
target potential customers and to build and promote its brand through online banner ads and promotions and
advertisements in targeted publications. Also in September 1997, the Company renamed its auction service “eBay”
and launched a second generation of this service with a substantially redesigned user interface and a new robust,
scalable “backend” transaction processing architecture. The Company’ s total number of employees increased to 41
by December 31, 1997 and to 138 by December 31, 1998. From December 31, 1997 to December 31, 1998, the
number of registered eBay users grew from approximately 340,000 to over 2.1 million and the number of
simultaneous auctions being conducted through eBay increased from approximately 200,000 to over 1.0 million.
Total gross merchandise sales (the aggregate sales prices of all goods for which an auction was successfully
concluded) grew from approximately $100 million in 1997 to over $740 million in 1998.
Substantially all of the Company’ s revenues are derived from placement and success fees paid by sellers. The
Company does not charge fees to buyers and, to date, has chosen to sell almost no advertising on its website. Sellers
pay a nominal placement fee to list items for sale as follows:
• $0.25 for an auction with a minimum starting price of less than $10.00;
• $0.50 for a minimum starting price of $10.00 to $24.99;
• $1.00 for a minimum starting price of $25.00 to $49.99; and
• $2.00 for a minimum starting price of $50.00 or more.
By paying additional placement fees, sellers can have items featured in various ways. Sellers can highlight their
auctions by utilizing a bold font for the auction heading for an additional fee of $2.00. Sellers with a favorable
feedback rating can have their auctions featured as “Featured Auctions” for $99.95, which allows their items to be
rotated on the eBay home page, or as “Category Featured Auctions” for $14.95, which allows their items to be
featured within a particular eBay product category. Additionally, sellers can add seasonal “icons” (such as a
shamrock in connection with St. Patrick’ s Day) next to their listing for $1.00, include a photograph of their item in
the Gallery section for $0.25 or feature their item in the Gallery section for $19.95.
Sellers for whom a three-, five- or seven-day auction is successfully concluded (i.e., there is at least one bid
above the seller’ s specified minimum or reserve price, whichever is higher) also pay a success fee for each item sold
that is equal to:
• 5% of the first $25 of the purchase price;
• 2.5% of that portion of the purchase price from $25.01 to $1,000; and
• 1.25% of that portion of the purchase price over $1,000.