Find this article at: http://www.business2.com/content/magazine/indepth/2000/07/25/15103
Amazon vs. eBay
The Venture Capital Wars
From the August 08, 2000 issueA good business will attract good competitors. This eBay’s executives knew in the abstract, but like the abstract concept of war, the theory necessarily bore a limited relationship to the thing itself. Yahoo!, a well-financed foe, had dug in, seemingly ready to fight indefinitely with free listings. As eBay’s own listings climbed ever higher, reaching 700,000 in September 1998 at the time of its IPO, so too did Yahoo!’s, staying fairly consistently at about 10 percent of eBay’s. Yahoo!’s progress was not sufficient to close the gap, but it was not insignificant either. By early December 1998, Yahoo! reached 100,000 listings; by early March 1999, 150,000.
That was when rumors that Amazon was on the verge of launching its own auction site filled the air. In late March an Amazon spokesperson made the news official, explaining that more than one hundred businesses that sold toys, rare books, and memorabilia had been signed as "charter sellers" who were ready to stock the Amazon site on its first day. Amazon was also going to introduce an innovation, a free guarantee against fraud by sellers on all purchases up to $250.
Stock traders liked the news. The price of Amazon’s shares jumped eleven points, and eBay's fell six.
On April 2, Amazon opened its virtual auction house, offering more than 50,000 items, or approximately the same number that it had taken Yahoo! Auctions two months of operations to reach. On April 5 the number had passed 60,000. In the same month Amazon acquired Accept, the company that Benchmark EIR Danny Shader had incubated. Considering that Accept had only been in existence six short months, the $175 million worth of Amazon stock that its owners received was a payoff that was more than respectable, and all the more so considering how the company’s original plans had foundered when Accept could not work out an alliance with eBay and it had had to scramble to reinvent itself.
Nevertheless, for Benchmark, the sale was a bittersweet outcome because of the missed opportunity for Accept to ally itself with eBay, and it was bittersweet for Shader and his crew, too, because the sale meant that they had to move to Seattle. As for the Amazon stock that they received in the sale of their company, the temporary illiquidity of the currency left the sellers vulnerable to a drop in the market; the shares that had been valued at $175 million at the time of the sale in April were worth only $100 million in June when the details of the transaction were disclosed to the SEC. Life within a company like eBay, a combatant on the front lines, was noticeably different from life within its venture backer, situated toward the rear. In Menlo Park, Benchmark’s primary rival, "our friends up the street," was Kleiner Perkins Caufield & Byers, which was a competitor on some deals (like Critical Path, the email-services-for-corporations deal that Benchmark had won; or Chemdex, a specialty-chemicals deal that Kleiner had won). But the intensity of the competition between the two was kept in check by the fact that on other deals they were co-investors (beginning with Silicon Gaming and subsequently including Impresse, Juniper Networks, Handspring, and most recently, Accept). As Benchmark’s star ascended, Kleiner’s John Doerr showed signs by late 1998 of having developed a particular dislike of Dave Beirne and Bob Kagle (after hearing secondhand about derogatory comments that Doerr had made about him, Beirne said, "I believe John Doerr wants me to die; I’m totally in touch with that"). But the two firms’ relationship was further complicated by the fact that Doerr went out of his way to maintain a cordial relationship with Bruce Dunlevie. Members of both firms had to talk with members of the other all the time, and this too made the nature of the mutual competition a genteel affair.
At eBay, however, there was no ongoing dialogue with the enemy. In a way, eBay versus Amazon was a proxy war between Benchmark and Kleiner, as Amazon was part of Kleiner’s portfolio and Doerr a director on its board. But this was a war fought in a different fashion from that of venture firms jockeying to advance their reputation. It had an urgency lacking on Sand Hill Road; its outcome would be decided in weeks, not years, or at least was experienced as if it would be; it was fed with daily loads of fresh data gathered from the field and arranged into spreadsheets and analyzed in real time; it involved platoons of troops who were guided by long checklists, dispatched on missions to study the Enemy and strengthen eBay’s own offerings.
Just as it had done when Onsale first went after eBay, the company designated a conference room as the War Room, and three times a week Whitman, Omidyar, and the other members of the executive staff gathered for what was called "the Amazon meeting" to pore over data and plan responses. In the first weeks the room was either the main office’s sole conference room, which accommodated only six people, or Whitman’s office, where four was a crowd. In early May eBay moved across the street to more spacious and freshly remodeled offices in the same complex, and the gathering could spread out in a more generously proportioned conference room (Omidyar had vetoed a move to space that had been found downtown in a large office building, which he deemed "too corporate"). A designated squad of eleven eBay employees had done reconnaissance and bought and sold items on the Amazon site over the course of a week and a half to see what could be learned. The buyers reported that bidding there was fast, quick, and easy, but the selection of items was so limited a visitor had to spend a lot of time searching for interesting items. ("Ah!" Omidyar joked. "Usage minutes up!") One staff member noticed that Amazon allowed a handy way to store a reminder about one’s password; eBay did too, but the link was hard to find. His own mother had called him the other day, distraught because she had lost her password and could not get into her eBay account.
eBay was galvanized into immediately matching Amazon’s free fraud insurance and accelerating plans to offer a thousand new categories and localized listings that made it easy to search for items available in one’s own city. Bob Kagle had long pushed eBay to add a service he called "persistent search," which would allow a buyer to submit a request for a kind of item and receive email when such an item was listed by a seller; now eBay added it, calling it "Personal Shopper." Out of the hearing of eBay, Kagle said, "Competition brings out the best. It may not be the most comfortable feeling for the participants, but it does produce a better result. ’Cause I guarantee you that the user experience at eBay will be better as a result of this—much sooner!"
Omidyar also took clear pleasure in the improvements eBay was making. "Excellent," he’d say at eBay’s Amazon meetings, accenting and drawing out the first syllable. Whitman kept the pace of the meetings brisk but not so brisk that jokes didn’t fly frequently. She and the team could exchange half-completed sentences; the working relationships were close, and that was helpful. Back in the fall, when Whitman returned from the IPO road show, she had commented on how strange an experience it had been, finding herself in nonstop meetings with one group of investors after another who were "nothing but white males" and how good it was to be home—this she said to nothing-but-white-male colleagues. But the eBay crew was not the love-to-hear-themselves-talk, feelings-impervious guys that constituted white-maleness; only when she stepped away from the eBay world was she reminded that her guys were different. The atmosphere of an emergency was sustained even though a week after Amazon introduced its auction site the number of listings slipped and then stayed static for weeks. The Amazon meetings continued, and the data was scrutinized as carefully as if Amazon had 2.3 million listings like eBay, and not 55,000.
One thing that Amazon’s entry had exposed indirectly, by contrast, was how eBay’s customer service had not kept pace with the growth of its auctions. The service was badly broken, and frustrated customers tried to reach Whitman herself to complain when no one in eBay’s customer-service department responded to their pleas. When she learned that her administrative assistant was fielding calls from irate customers, she told her assistant to put the calls through. In early May she got one from a customer who claimed he had sent twenty email messages to customer service and had not received a single response. So while Whitman waited, her assistant called down to customer service to see if someone could be found to straighten the matter out. The phone rang but no one picked up. She tried another extension, and another, with no luck. The twentieth attempt succeeded in locating someone. Whitman told the story to the Amazon-meeting attendees without appending an editorial; the newly hired head of customer service took it all in, mumbled a promise that big changes were on the way, and let it go. But knowing that the CEO was personally fielding calls from angry customers when they could not find someone to speak with in his department would provide all the incentive he needed, and she knew it.
The Amazon meetings should have been called the Amazon-and-Yahoo! meetings because even while Amazon seemed to stall, Yahoo!’s listings kept climbing. Its rate of completion remained low, less than 20 percent, but the raw number of listings passed 200,000 in April. "Why is that?" Whitman asked of the assembled group.
"There’s always a group that likes RC Cola because it’s cheaper," said Steve Westly. Free listings would always be cheaper than eBay’s.
On April 23 the customary late-afternoon Amazon meeting was canceled at the last minute, preempted by a more pressing matter: negotiations to do a deal with the leading terrestrial auction firm, Sotheby’s, which was also openly talking to Amazon, playing the one against the other. Whitman and Omidyar were in frequent communication with Bob Kagle, who was anything but encouraging of eBay’s moving forward with Sotheby’s. He told them not to be unduly worried about "Will we look like we’re losing to Amazon if Amazon does this Sotheby’s deal and we don’t?" Sotheby’s was not a must-have. A sensible deal with them? Sure. What Sotheby’s could provide was credibility to move eBay’s average selling price up and authentication services around art objects—that made sense to him.
But on the other hand, Kagle held that Sotheby’s "was a very elitist brand. eBay is of the people, by the people, for the people. I think you risk changing the character and the tone of the eBay experience by affiliating with Sotheby’s."
Kagle had to win over two people: Omidyar and Whitman. Initially, Omidyar did not see affiliation with Sotheby’s as the threat that Kagle did, but Kagle rang his bell and got him thinking second and third thoughts.
Kagle told his partners that Whitman continued to lean toward Sotheby’s. What would doing a business deal with Sotheby’s say to the eBay community, Kagle wanted to know. "Are we enabling this person-to-person marketplace, or are we taking more than our fair share of the transaction, which I think is what most people would think Sotheby’s does. In fact, Sotheby’s is arguing to us, You guys are stupid. You’re giving up money at the high end by charging low fees."
"To which I respond, Nope! That’s our business!"
Kagle’s position prevailed. Amazon did do a Sotheby’s deal, and eBay announced the purchase of Butterfield & Butterfield, which occupied the midmarket segment of art auction houses. Newspapers played up the fact that a 4-year-old-company "swallow[ed]" a 134-year-old company, "the guppy eating the whale," and Fortune gleefully depicted the purchase as a repudiation of eBay’s roots. (On a message board, one antique dealer wrote, "It seems that the ‘junk’ that brought Pierre millions is just not good enough anymore!") Within eBay, the cultural differences between it and Butterfield were a source of humor in the days that followed the announcement, and eBay’s twenty-somethings sat down with Butterfield’s fifty-somethings to work out the details of the acquisition. Given their stock options, the former group was undoubtedly many times wealthier, at least on paper, than the latter, but their class identity lagged and they did not think of themselves as rich at all (just as Bob Kagle, a centimillionaire, was put off by Sotheby’s culture of privilege). At an internal eBay marketing-group meeting, the young woman, two years out of Stanford, who was the primary liaison with Butterfield in planning a new, joint Great Collections page featuring art objects, told the group, "We’re working on customer service for…." And after fumbling for a few seconds for a euphemism for customers who would be different from the usual eBay customers, she gave up and said, "um, rich folks." The room rang with laughter.
In mid-May, Amazon opened up a price war in books, offering New York Times bestsellers at 50 percent off. Most of the eBay executive staff members were glad to hear of it: another distraction from auctions. Every day Amazon seemed to enter an entirely new business: Investments in pet supplies and an online drugstore had been the most recent moves. But there was another view within eBay that held that the price war in books showed that once again Jeff Bezos was unpredictable, and he could bring woe to eBay without warning.
"Should we be spending any time trying to figure out what Amazon’s next move is?" Meg Whitman wondered aloud.
"If I was making the case," Steve Westly said, pretending he was Bezos, "I’d say I’m not expecting much yet from auctions. They hit a plateau. They’ll go up with another ten-million ad spend."
"They have a hundred people in auctions," said Gary Bengier, eBay’s CFO. "That’s a million dollars a month in head-count costs. They’re going to try stuff."
"He could come in one day and say, ‘Guess what? You’re all going to be working on…pet drugs!’" cracked Mike Wilson, VP of engineering.
"Question is," Whitman said, "should we be doing anything in anticipation? Is there any way we can go to them and say, ‘Can we take this off your hands?’" Remembering what Bezos had said the previous year when the eBay delegation had trooped up to Seattle, she then took back the thought; there was no way Bezos would consider such a possibility.
from eBoys by Randall E. Stross . Copyright ©2000 by Randall E. Stross. Reprinted with permission of crown business, a division of random House, Inc.
Content copyright © 2000 Imagine Media Inc.
Find this article at: http://www.business2.com/content/magazine/indepth/2000/07/25/15103