eBay 2002 Annual Report Download - page 16

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simultaneously to enter secret passphrases. This procedure is designed to protect us from the unauthorized
use of PayPal's infrastructure components. Finally, we store all PayPal data we deem private or sensitive
only in encrypted form in our PayPal database. PayPal decrypts data only on an as-needed basis, using a
specially designated component of our PayPal system that requires authentication before fulÑlling a
decryption request.
Competition
We encounter vigorous competition in our business from numerous sources. Our users can buy and
sell similar items through a variety of competing channels, including online and oÉine retailers,
distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies,
virtually all online and oÉine commerce participants (consumer-to-consumer, business-to-consumer and
business-to-business) and online and oÉine shopping channels and networks. For our PayPal service, our
users may choose to pay through a variety of competing channels, including other online payment services,
payment methods (e.g. cash, money order), and traditional online or oÉine merchant accounts. As our
product oÅering continues to broaden into new categories of items, we expect our competition to continue
to broaden to include other online and oÉine channels for those new oÅerings. We also compete on the
basis of price, product selection, and services, which are derived from our abundant and diverse user
community and the quality of the eBay user experience. To compete eÅectively, we may need to expend
signiÑcant resources in technology and marketing. These eÅorts may be expensive and could reduce our
margins and have a material adverse eÅect on our business, Ñnancial position, operating results, cash Öows
and reduce the value of our stock. We believe that we will be able to maintain proÑtability by preserving
and expanding the abundance and diversity of our user community and enhancing our user experience, but
there can be no assurance that we will be able to continue to manage our operating expenses to mitigate a
decline in net income. For more information regarding these risks, see ""Risk Factors That May AÅect
Results of Operations and Financial Condition Ì Our industry is intensely competitive.''
Seasonality
Our results of operations historically have been seasonal in nature because many of our users reduce
their activities on our websites during the holidays, such as during the Thanksgiving (in the U.S.) and
Christmas periods, and with the onset of good weather during the summer months. We have historically
experienced our strongest quarters of online growth in our Ñrst and fourth Ñscal quarters. PayPal has
shown similar seasonality, except that its strongest quarter of online growth has historically been the fourth
quarter.
Intellectual Property
We regard the protection of our trademarks, copyrights, patents, domain names, trade dress and trade
secrets as critical to our success. We have entered into conÑdentiality and invention assignment agreements
with our employees and contractors, and nondisclosure agreements with parties with whom we conduct
business in order to limit access to and disclosure of our proprietary information.
We aggressively protect our intellectual property rights by relying on a combination of trademark,
copyright, patent, trade dress and trade secret laws and through the domain name dispute resolution
system. As a result, we actively pursue the registration of our trademarks, copyrights, patents and domain
names in the U.S. and major countries internationally. Furthermore, we must also protect our trademarks,
patents and domain names in an increasing number of jurisdictions, a process that is expensive, may
require litigation, and may not be successful in every location. We have registered or applied for our
""eBay'' trademark in the U.S. and over 50 non-U.S. jurisdictions and have in place an active program to
continue securing the ""eBay'' and ""PayPal'' domain names in major non-U.S. jurisdictions. We have Ñled
to protect our rights to the ""eBay'' and ""PayPal'' names in certain new top level domains such as "".biz''
"".info'' and ''.us'' that have recently become operational. Our inability to secure our trademarks or domain
names could adversely aÅect us in any jurisdiction in which we are not able to register.
14