eBay 1999 Annual Report Download - page 16

the Windows NT operating system. The Company uses Resonate Inc.’s load balancing systems and its own
redundant servers to provide for fault tolerance. The Company has experienced periodic system interruptions,
which it believes will continue to occur from time to time. These outages have stemmed from a variety of causes,
including third-party hardware and software problems and human error. The volume of traffic on the Company’s
website and the number of items being listed by users has been increasing continually and exponentially,
requiring the Company to expand and upgrade its technology, transaction processing systems and network
infrastructure and add new engineering personnel. The process of upgrading and expansion is part of the routine
maintenance and revision of the site. Hardware and software changes associated with the continuous revision
have been capitalized in accordance with company policy and are included in computer equipment and software.
Due to the speed of change and continuous nature of site revision, internal expenses often are judged to have
useful lives of less than one year, or have been more appropriately classified as maintenance related costs. As
such, these costs are expensed as incurred. The Company may be unable to accurately project the rate or timing
of increases, if any, in the use of the eBay service or expand and upgrade its systems and infrastructure to
accommodate these increases in a timely manner. Any failure to expand or upgrade its systems at least as fast as
the growth in demand for capacity could cause the website to become unstable and possibly cease to operate for
periods of time. Unscheduled downtime could harm the Company’s business.
The Company uses internally developed systems to operate its service and for transaction processing,
including billing and collections processing. The Company must continually improve these systems to
accommodate the level of use of its website. In addition, the Company may add new features and functionality
to its services that would result in the need to develop or license additional technologies. The Company’s
inability to add additional software and hardware or to upgrade its technology, transaction processing systems or
network infrastructure to accommodate increased traffic or transaction volume could have adverse consequences.
These consequences include unanticipated system disruptions, slower response times, degradation in levels of
customer support, impaired quality of the users’ experience on its service and delays in reporting accurate
financial information. The Company’s failure to provide new features or functionality also could result in these
consequences. The Company may be unable to effectively upgrade and expand its systems in a timely manner or
integrate smoothly any newly developed or purchased technologies with its existing systems. These difficulties
could harm or limit its ability to expand its business. See ‘‘Risk Factors—The inability to expand our systems
may limit our growth’’ and ‘‘—System failures could harm our business.’’
The Company incurred $831,000, $4.6 million and $23.8 million in product development expenses in 1997,
1998 and 1999, respectively. The Company anticipates that it will continue to devote significant resources to
product development in the future as it adds new features and functionality to the eBay service. The Company
capitalizes hardware and software associated with added features or functionality in accordance with company
policy and includes such amounts in computer equipment and software. Internal expenses are often judged to
have useful lives of less than one year, or have been more appropriately classified as maintenance related costs.
As such, these costs are expensed as incurred. The market in which the Company competes is characterized by
rapidly changing technology, evolving industry standards, frequent new service and product announcements,
introductions and enhancements and changing customer demands. Accordingly, the Company’s future success
will depend on its ability to adapt to rapidly changing technologies, adapt its services evolving industry standards
and to continually improve the performance, features and reliability of its service in response to competitive
service and product offerings and evolving demands of the marketplace. The failure of the Company to adapt to
these changes would harm the Company’s business. In addition, the widespread adoption of new Internet,
networking or telecommunications technologies or other technological changes could require substantial
expenditures by the Company to modify or adapt the Company’s services or infrastructure. See ‘‘Risk Factors—
Our failure to manage growth could harm us;’’ ‘‘—We must keep pace with rapid technological change to remain
competitive’’ and ‘‘—We need to develop new services, features and functions in order to expand.’’
Competition
Online personal trading is a new, rapidly evolving and intensely competitive area. The Company expects
competition to intensify in the future as the barriers to entry are relatively low, and current and new competitors
can launch new sites at a nominal cost using commercially available software. Depending on the category of
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