The World According to eBay
The online auction giant is on a spectacular international growth tear. Here's Meg Whitman's master plan for global domination.
By Erick Schonfeld

(Business 2.0) – What is it about Frank Oltscher that makes him a dream customer for eBay chief executive Meg Whitman and her managers? He's an avid trader—he's even bought a marble fireplace online—but that doesn't exactly explain it. After all, some hard-core eBay customers buy more in a single day than Oltscher bought in the past two years. And true, his personal computer homepage is eBay, which is fairly intense. But it still pales next to other expressions of addiction to the site, like the eBay tattoo a woman in Louisiana had inked onto her ankle not long ago.

No, what makes Oltscher special—what, until recently, set him apart from most other eBay users—is this: He does his trading from his Berlin apartment through eBay's German auction website. That makes him the kind of customer Whitman & Co. lust after today, the validation of a strategic thrust that is poised to propel eBay, already one of the fastest-growing companies in history, into a new phase of turbocharged global expansion.

Five years ago eBay had virtually no international operations. Today its global business is surging. The company has 31 sites straddling the globe, from Brazil to Germany to China. They generated an estimated $1.1 billion in 2004 sales—46 percent of eBay's overall trading revenues—and are growing twice as fast as the company's domestic operations. International trading revenues are likely to surpass domestic in 2005. "International is a very important part of the future growth," says Whitman, sitting in a conference room at eBay's San Jose headquarters. "We're entering new countries that are at a much earlier stage of e-commerce development than the U.S. They should provide higher levels of growth for the foreseeable future."

Of eBay's 125 million registered users, roughly half are outside the United States. These international online shoppers buy a garden gnome every six minutes in Germany, a soccer jersey every five minutes in Britain, a bottle of wine every three minutes in France, and a skin-care product every 30 seconds in China. All told, they're estimated to have traded at least $16 billion worth of goods in 2004. "At the most basic level," says Matt Bannick, president of eBay International, "this concept travels pretty well."

That much is clear. But eBay's international advance is not merely a matter of breezing into foreign territory and throwing up some signs saying "Electronic flea market today!" eBay appears to have cracked the code for one of the toughest tasks in the increasingly interconnected global economy: transplanting a hit business concept into places with vastly different cultures and allowing it enough flexibility to adapt to local conditions without losing the core elements that made it a phenomenon in the first place. How has eBay done this? Gregory Boutte, the country manager for eBay France, provides a simple answer: "The eBay playbook explains the success of eBay."

He's not speaking metaphorically. There is an actual playbook. It consists of several hundred webpages of the collective wisdom of all of eBay's worldwide managers. The playbook is constantly updated and covers topics ranging from online marketing and category management to community outreach. It is the how-to manual by which every eBay country manager lives—or dies. And if eBay executes on that playbook, Bannick says, "Europe alone will be bigger than the U.S. for us."

eBay already has so many signal achievements that it's easy to forget that the company is only nine years old. It hit $3 billion in annual revenue faster than Microsoft, faster than Dell, faster than Cisco. But eBay's global ambitions were more thrust upon it than planned. Whitman, who became CEO in 1998, remembers the first inkling she got about the potential for global growth: "I knew when I got here that we had users from well over 50 countries, and they were using eBay.com in English—a completely American site." But Whitman was focused on perfecting eBay's concept at home before mucking around abroad, and she and her team had real questions about whether eBay would translate internationally. By the summer of 1999, however, mini eBays were springing up all over the world, and Whitman realized that eBay had to turn its attention to global markets or cede them to Amazon, Yahoo, or local startups.

The company's first foreign stop: Germany. Whitman likes to tell the story of how her 84-year-old mother, a veteran Asia traveler, encouraged her back then to take on the Chinese market first, to which Whitman replied, "Mom, there are 40 million Internet users in Germany. There are 1 million in China. Forty million. One million." Sorry, Mom—Germany it would be.

The opening moves established what has become a fixture of the eBay playbook. eBay bought a Berlin-based copycat site called Alando for an estimated $47 million in June 1999, four months after some young German business students founded it. Philipp Justus, a German-born Boston Consulting Group alum brought in by eBay to head up the site, was taken aback by his first visit to Alando's headquarters in a Berlin loft. "It was 50 people," he says. "Half of them were interns."

But personnel was the least of Justus's problems. Haim Mendelson, co-director of Stanford University's Center for Electronic Business and Commerce, says that in Germany, eBay "didn't understand, when they went in, what needs to be local and what needs to be controlled from headquarters." Indeed, the German website was quickly migrated to eBay's technology center in San Jose, which saved money but also made it more difficult for Justus to respond rapidly to local needs. For instance, a popular feature of Alando's site was its ability to sort auctions by which would end the soonest. But in the United States, you could sort only by which items had been listed most recently, regardless of when an auction would end. Justus implored Web developers in San Jose to create a new sorting feature and other functions for the German site—to no avail. "We were not making our point about how important it was to get this," Justus recalls. He was bombarded by angry e-mails from irate German sellers; trading volume on the site was lagging. Finally, Justus hopped a plane to California, showed up practically unannounced at headquarters, and pleaded his case to a group of startled engineers.

Within a week, many of the problems were fixed—and the German way of listing auctions was eventually adopted by the U.S. site as well. "The U.S. is not the only center of innovation," Whitman notes. "New ideas pop up all over." And all of these ideas get folded into the playbook. In Germany, a lot of work was done on figuring out how to structure categories of goods. Managers would focus on specific categories to learn how sellers wanted to list their products. The category manager for, say, stamps would go to stamp fairs and try to persuade sellers there to try eBay. "We had to make it relevant, category by category," Justus says. "That was pioneered in Germany, then exported."

Today, Germany is by far eBay's largest international site, with an estimated $7 billion in annualized sales. (That compares with $20 billion for the United States.) And it boasts a far higher percentage of active users than any other country site, with roughly three-quarters of registered users trading on a regular basis.

Success in Germany spurred eBay to expand farther afield. Shortly after buying Alando, eBay launched its own sites in the United Kingdom and Australia. Then, in 2001, it went on a buying spree, investing in Korea's Internet Auction Co. and grabbing Europe's iBazar for about $130 million, which put eBay into Italy, the Netherlands, and Spain. eBay also acquired a minority stake in Latin America's leading auction company, MercadoLibre. In all, eBay has spent more than $1.6 billion on international acquisitions.

Once eBay sets up operations, managers rely heavily on the playbook. In reality, each function within eBay has its own playbook. There's a product management playbook, a Web development playbook, an Internet marketing playbook, and many others. And simply being able to tap into the collective experience of other country managers gives each new country site a huge leg up on competitors. At eBay France, for instance, the Internet marketing techniques pioneered in the United States and Germany proved crucial. The playbook details how important it is to drive traffic to the local eBay site through online ads on a given country's most popular websites and search engines. "This was very new to us," says eBay France manager Boutte. Before it was purchased, his French site built awareness primarily through expensive TV ads, as did its competitors. Some of those competitors are no longer in business. "About 65 percent of the people in France don't have Internet connections, so when you spend on TV ads, you're wasting a lot of money," Boutte says. He learned from the playbook that it doesn't make sense to start general TV branding until the number of users on a site reaches critical mass; in Germany and the United Kingdom, for instance, eBay didn't launch TV ads until those countries' sites reached more than $1 billion in annual merchandise sales.

The playbook wouldn't be nearly so valuable if not for eBay's ability to infinitely tailor a common technological and business platform to local markets. This flexibility is built in, since all the products, information, and chat boards on eBay's country sites are created by the buyers and sellers on those sites. "The users of eBay Germany are primarily German citizens, the site is German, and all the conversations are in German," says Bill Cobb, the former head of international operations who now runs eBay North America. Ditto for India, Italy, and elsewhere. "So it doesn't feel like an American brand. It feels like that community's brand. Yet they have this opportunity to access a global trading platform."

In essence, the playbook describes how to set the right conditions for electronic trading to flourish in a particular area. In the more nascent countries, for instance, it's important to focus on Internet marketing and bringing new customers to the site before perfecting detailed category management or rolling out PayPal. Says Bannick, "You don't apply it cookie-cutter to every country."

The playbook hammers home one point above all others: Success is not foreordained, despite eBay's record to date. "If all markets were not essentially local," Wharton Business School professor Eric Clemmons explains, "everyone would just trade on eBay's U.S. site." As it happens, only 12 percent of eBay's total gross merchandise sales are cross-border transactions. Each country is a self-contained battlefield that must be won by slugging it out with rivals.

And eBay doesn't always triumph. In Japan, eBay was aced out by a joint venture between Yahoo and Softbank. Yahoo had only a five-month head start, but it took control of the field and never let go. Yahoo now sees more than $5 billion in transactions a year in Japan. eBay gave up on the country entirely in 2002.

Whitman says the main lesson from that experience was to "go early and go fast." That doesn't necessarily mean going all in; in China and Korea, eBay acquired minority stakes in existing sites and gradually upped the ante as it learned more about the market. In Korea alone, eBay spent $733 million over several years to buy up Internet Auction Co., one of the country's early e-commerce sites.

Today, Korea is eBay's third-largest international market. But when Jay Lee was installed as country manager there in May 2002, he inherited a catastrophe. The business was bleeding cash. Lee discovered that the founders were distracted by trying to move into unrelated areas like real estate listings and insurance. Lee set about refocusing the operation on online auctions, but his own local managers warned him that Korean consumers would never accept the auction concept.

A Korean himself, Lee understood that in Asia there's a stigma against buying used goods. "In Korea," he notes, "even among siblings, you don't pass down your clothes." But he believed that the need to trade is a basic human urge. (Indeed, Whitman often cites a universal primal need to trade as eBay's great ace in the hole.) Lee focused on building up categories to auction off newer items like digital electronics, computers, and fashion. He encouraged enthusiasts to meet on the site's chat boards, where they organized into groups like the Digital Camera Mania Club and the Inline Skating Club that would organize outings and lessons—and talk up online trading. Today, eBay Korea is on track to produce $1 billion in annual online sales. And the stigma against buying used goods is fading, at least online. Such items, Lee says, currently make up 40 percent of eBay Korea's sales.

Lee is now trying to transplant his success to the rest of Asia. But the region is still anyone's gold mine. In addition to Japan, Yahoo is also the leading auction site in Taiwan and has operations in China, Hong Kong, and Singapore. "I think it is a country-by-country race," says Allan Kwan, Yahoo's regional vice president for North Asia.

At eBay, the defeat in Japan still stings, and the company is determined not to lose again. Lee thinks his advantage is eBay's all-consuming focus on auctions and nothing else. He's transferring a lot of the tricks he learned in Korea to China, including offering escrow accounts to build trust in e-commerce. He's also working with Chinese officials to create a "job garden" where potential eBay merchants can learn how to sell online. Today, China is one of eBay's fastest-growing markets; it now has 90 million Internet users. The United States has 200 million. Whitman believes that within five years, there will be more people on the Web in China than in America.

Given the vast potential for eBay in places like China and India, it's not hard to see why some analysts think the company could be entering a phase of enormous profitability. Analyst Mark Mahaney of American Technology Research predicts that international sales will account for 65 percent of eBay's total revenue growth this year, up from 60 percent in 2004. Mahaney estimates that by 2006, fueled by foreign growth, eBay will earn $1.5 billion on revenue of more than $5 billion. It took Microsoft two decades to hit those figures.

Whitman and her team will have to work to make those gaudy numbers, of course. One challenge is how to get global markets to adapt readily to PayPal, eBay's payment mechanism. In much of Asia, for example, such electronic payment systems remain a mystery, and many eBay deals are sealed only with face-to-face cash payments. Another issue: the uncertainty of different countries' laws. Recently, eBay's top manager in India was busted after a pornographic video was offered on the site. But for Whitman, whether eBay can sustain its international march will turn on a more basic question: Can the company continue to create markets where none existed before, and to find the inner electronic trader in people who never imagined that they had one?

People like Michel Suret-Canale, for instance.

For 30 years a struggling French artist who had difficulty selling his work, Suret-Canale began listing his experimental "robotic paintings" and classic nudes on eBay five years ago. Since then he's sold 4,000 works of art directly to collectors as far away as the United States and Asia, for about $100 a painting. He just quit his day job as an art teacher. He feels he has finally found his audience. "I am like a singer, and for 30 years I have been singing in an empty room," he says. Now, thanks to eBay, he's on a global stage. And eBay has a fresh entry for the playbook.

What Sells

eBay's global markets are highly individualized, as a sampling of local favorites demonstrates.