And the E-Commerce Gold Medal Goes to…

It can be argued that e-commerce has suffered moreagonizing defeats than thrilling victories over thepast year.

But in this Olympic season, one determined company hasearned a perch atop the e-commerce medal stand.Industry judges said they would bestow the gold on onlineauction giant EBay (Nasdaq: EBAY), with AMZN) taking the silver.

“EBay has been profitable nearly since Day One,”Morningstar analyst David Kathman told the E-CommerceTimes. “It has stayed profitable while expandingmargins and maintaining growth, whereas Amazon had tosacrifice growth to get to profitability.”

The San Jose, California-based auctioneer owes much ofits success to its business model, which taps into the truepotential of online communities, according to analysts.

Amazon’s agility and resourcefulness earned it theNo. 2 spot.

Strict Spending

For all of 2001, EBay generated revenue of US$748.8million, representing a 74 percent annual growth rate, and earned pro forma net income of $137.5 million, representing135 percent year-over-year growth.

Those bullish numbers illustrate EBay management’s longstanding fiscal discipline, according to companyspokesman Kevin Pursglove.

“[CEO] Meg Whitman has committedto running EBay by old-economy rules,” Pursglove toldthe E-Commerce Times. “While [e-commerce companies]competed for first-mover advantage and market share,Meg ensured that expenses did not outpace revenue andthat every dollar invested returned at least a dollar.”

Community Service

While leadership and execution have contributedto EBay’s success, Kathman said, the company’s Internet-friendly business model has played perhaps the largest role.

In the simplest terms, EBay’s success depends directlyon the proliferation of a community of buyers andsellers, and the Internet has become the mostefficient and ubiquitous community-building mediumever conceived.

What is more, EBay has used its first-mover advantage to build a critical mass of global buyers and sellers –currently 43 million strong — that perpetuates thecommunity, Kathman added.

“Our community is dynamic and versatile,” Pursglove said. “And with $29 million in daily sales, thecommunity literally reinvents itself every four or five months.”

Model Retailer

On the flip side, by virtue of its retail businessmodel, Amazon contends with the costs of buyingmerchandise from wholesalers and reselling it tocustomers.

To its credit, the e-tail giant has responded to adverseeconomic conditions and to unique pressures in theonline sales channel, some analysts argued.

“It is a tribute to Amazon’s management team that thecompany has made changes in [its] business philosophy andoperational model that take it away from being a pureplay e-tailer,” Yankee Group analyst Paul Ritter toldthe E-Commerce Times.

With its intense focus on the customer, Ritter added,Amazon also forged key brick-and-mortar partnerships withretailers like Borders, Circuit City (NYSE: CC) andToys “R” Us (NYSE: TOY) to satisfy increasingly multichannel consumers.

Customers’ Rights

For its part, EBay relies on customer feedback tocontinually and flexibly improve its offering, saidPursglove.

“We listen to our community, and we are flexible tomake changes,” he noted. “This helps us avoid alot of contentious issues.”

For instance, when EBay’s sellers responded negativelyto the checkout process in October 2001, the companygathered feedback from user groups then quickly made thefeature optional, Pursglove explained.

Up, Up and Away

This agility, seen throughout the company, hasallowed EBay to reach its current level of success,Kathman said.

When an overeager audience flooded EBay’s ill-equippedservers in 1999 and crippled its Web site, the companymade critical infrastructure investments to fixthe problem, he added.

That move carried some risk and led to the company’sonly two quarters of operating losses. But CEO Whitman andher team recognized the importance of uptime for timedauctions, Kathman noted.

As a result, EBay has maintained 99.9 percentreliability over the last two quarters.

Golden Years

Some pundits harp on the fraud cases thatperiodically plague EBay’s auctions.

But compared with the level of overall use, fraud hasbeen relatively rare, Pursglove said. In addition, the company offers insurance and dispute resolution to helpcombat fraud, along with special services likeauthentication for sports memorabilia.

All told, EBay seems destined for another gold medalyear in 2002.

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