(FORTUNE Magazine) – On April 20, Meg Whitman, CEO of eBay, found herself in Washington before a group of 210 journalists and guests in the ballroom of the National Press Club. The moderator introduced her by quoting a recent New York Times story about her wildly popular auction Website: "Millions of people have begun embracing the online auction," he read, "an Internet phenomenon that in a matter of months has captivated the nation's bargain hunters and spawned a market for nostalgia."

It was the perfect setup for Whitman, who trotted out stories about how eBay had changed customers' lives: the woman with diabetes and lupus who, after being forced out of a job, reconnected with society by trading over eBay; the struggling antique-shop owner who rescued her business by selling on eBay; the couple in Curtis, Neb., who saved their entire town by persuading neighbors to sell over eBay. The significance of eBay, Whitman explained, goes far beyond commerce: "People are not only buying and selling, they're...using the bulletin boards, the chat rooms, and the eBay Cafe to meet new friends and establish new relationships.... As one eBay user put it, 'eBay and its cyber-incredible world is bringing people together to do a lot more than trading goods. We are trading our hearts.' "

Six days later Whitman traded something far less warm and fuzzy--$260 million in eBay stock in exchange for Butterfield & Butterfield, a 134-year-old auction house in San Francisco. The deal made sense to Wall Street: Though the diabetic woman and the Curtis couple make for great PR, their average auction closes at only about $47, of which eBay's cut is about $3; the average Butterfield & Butterfield auction closes at $1,400, of which the house's cut is almost $400. Buying into the high-end auction business might not add to the cyber-incredible chatter in the eBay Cafe, but it sure promises to boost eBay's business.

On news of the Butterfield & Butterfield acquisition, reaction was split. Stock traders applauded, sending eBay stock up 4%, but Internet message boards lit up with protests. Referring to founder Pierre Omidyar, now eBay's chairman, antique dealer Victoria Powers wrote, "It seems that the 'junk' that brought Pierre millions is just not good enough anymore!" Another posting: "The Average Guy and Average Girl made this behemoth what it is. This is the thanks you get, kids. You made it possible for eBay to become what it wants to become."

Increasingly, it seems, eBay is a company at war with itself. The swap fest that has been endlessly touted as the Internet's happiest marketplace ("People go gonzo over eBay," declared USA Today) is fast evolving into something rather different. While Whitman continues to hype eBay's touchy-feely communitarianism, she's quietly and rapidly overhauling the company in service of a goal the staunchest capitalist would understand: pleasing Wall Street.

In the past three months, Whitman has systematically imposed control on eBay's famously anarchic, free-form environment. She is gearing the site increasingly to big-ticket items and big sellers (eBay takes an average 6% fee on sales), even at the risk of alienating small ones. For example, Whitman is encouraging real-world store owners to expand their sales via eBay. She has introduced a PowerSeller program that gives extra customer support to big vendors--even as middling and smallish users complain loudly about the lack of support available to them. And, in addition to the Butterfield purchase, in mid-May Whitman bought automobile auctioneer Kruse International; the two old-world auctioneers give eBay a steady supply of high-ticket goods and an army of appraisers to perform a function eBay customers have long performed on their own. All the while, Whitman has worked to sanitize eBay's public image, going so far as to suspend some users for posting too many messages trashing eBay. eBay insists the censoring is done strictly to maintain decorum.

By the rules of the old economy, these are perfectly predictable--and seemingly sound--moves for a newly public company to make. What business wouldn't like to attract people with deeper pockets or squelch disruptive customers? Indeed, eBay's stock seems to tick up every time Whitman makes an announcement. But eBay isn't an old-economy business; its growth has come about through a kind of spontaneous generation unheard of in the pre-Internet Age. In fact, eBay may provide an excellent test of just how successfully management practices developed under the old rules can be applied under the new.

By those old rules, eBay is going gangbusters: From 1995 until late 1998, the company did no national marketing or advertising whatsoever. Nevertheless, almost purely by word of mouth, it had 3.8 million registered users at the end of March and grew from 289,000 items listed for sale at the end of 1996 to 2.2 million today. Fueled by the apparently infinite American desire to buy, sell, and talk about Beanie Babies, old coins, and other cultural flotsam, eBay has become one of the few profitable Internet companies, expected to net $24 million this year on $170 million in revenue. In the first three months of 1999, eBayers bought and sold $541 million of goods; by the end of the year, $2.7 billion worth of goods should trade hands over eBay, making it the largest consumer-commerce site on the Web. By comparison, Amazon.com is expected to sell $1.4 billion in books, music, and auctioned goods this year.

Wall Street loves eBay's numbers. With a $23 billion market cap, the company is now worth more than the combined value of Kmart, Toys "R" Us, Nordstrom, and Saks. But Richard Zandi, an analyst at Salomon Smith Barney, calculates that by 2009 eBay will have to be selling $212 billion of goods a year to live up to its current value. To put that in perspective, that's almost 60% more than what the world's biggest retailer, Wal-Mart, sold in 1998.

For Whitman, that's some serious pressure. Which makes it, depending on how you assess the situation, all the more inevitable or all the more nerve-racking that she is moving eBay away from its roots. Whitman is fond of attributing eBay's success to what she calls the "network effect," essentially an escalating cycle in which sellers attract buyers and vice versa. The question is, By altering the size and composition of the network, is she undermining it? Can she keep eBay faithful to its roots and still live up to Wall Street's expectations? Do those roots even matter anymore?

To understand where eBay came from, you have to meet Pierre Omidyar. Sitting in his San Jose office, which is decorated with Pez dispensers and books on collecting them, Omidyar is wearing a short-sleeved shirt batiked with cave drawings and has a long, black ponytail. As eBay's chairman, Omidyar's primary day-to-day function is to vet big ideas. He is the picture of calm, commercially oblivious computerdom.

The story of how Omidyar, now 32, created eBay has become part of Silicon Valley lore: Born in France, Omidyar grew up in Bethesda, Md., and early on started toying with computers. After college, he moved west to work as a programmer. In 1992 he started (and two years later left) a company called eShop, an early e-commerce site later bought by Microsoft. By the time he reached communications-software maker General Magic in 1995, Omidyar was the stereotypical antiauthoritarian, libertarian programmer. And he was starting to have a bad feeling about what the Internet--then in its infancy--was becoming.

In summer 1995, Omidyar's girlfriend, a Pez-dispenser collector, complained that it was hard to find like-minded souls to buy from and sell to. Omidyar saw the vacuum as an opportunity not only to score points with his spouse-to-be but also to develop a possible antidote to the corporate infiltration of the Internet.

"I came from the anticommercial side," he recalls. "You had companies saying, 'This new medium, it's really cool. It reaches all these people. We can sell stuff to them.' I felt like that's not fair. The individual Internet user can benefit from this medium as well, and maybe we can create a level playing field, an efficient market."

When eBay launched on Labor Day 1995, it was that efficient market and little else. Omidyar made no guarantees about the goods being sold, took no responsibility, and settled no disputes. It was a simple system: users went on and bid for items. There were no fees, no registration, no search engine--and for the first month, no customers.

The business took off almost in spite of its creator. Omidyar's sole attempt at marketing was to list eBay on the National Center for Supercomputing Applications' What's Cool site. That was enough: People started piling onto eBay so fast that by February 1996, Omidyar had to institute a fee to recoup his rising Internet service-provider costs. By the end of March, eBay turned a profit.

The business worked much as it does now--a seller describes his item, sets a minimum bid, and chooses how long the auction will last, between three and ten days. Before the auction, eBay charges a listing fee ranging from 25 cents to $2 and takes a cut of the final price, starting at 5% for the first $25 and sliding down to 1.25% as the price exceeds $1,000. Although eBay gets only an average 6 cents for every dollar's worth of goods that trade hands, 5 cents of that is gross profit, thanks to a completely automated system.

In 1996, eBay still had one problem: There was no way to make sure what you were buying was real or that you'd get it after you paid for it. The anonymity and physical distance between buyers and sellers on the Internet encouraged counterfeiting and fraud. In the end, it was the eBayers themselves who found a solution. In message-board postings to Omidyar, they suggested he set up a system for buyers and sellers to rate each other. That became the Feedback Forum, a sort of peer-reviewed credit-reporting system. Buyers and sellers rate each other and comment on how their business together went. (A recent posting: "Honest & Trustworthy--FANTASTIC person to do business with--asset to eBay!!") Get negative feedback, and buyers know to avoid you.

The Feedback Forum proved to be the missing element in the formula; what Whitman would later call the eBay "community" finally took shape. "As high tech as eBay is, the closest analogue to what they've created is the original small-town market," says Peter Kollock, a UCLA sociology professor who has been studying eBay for the past two years. "It's a market that relies on identity and reputation for risk management."

What's more, Kollock says, preliminary findings suggest that users are willing to pay up to 30% more in certain markets for items sold by someone with a high feedback rating. "If you told economists or sociologists that you were going to set up this huge, anonymous market where people never meet in person and there's no formal clearing, the prediction you would have gotten is rampant and massive fraud," says Kollock. "It's amazing how small that problem is. That's thanks primarily to this reputation system."

Another force in eBay's evolution was the message boards Omidyar created as a way of encouraging users to answer each other's questions. By mid-1996 about 5,000 people were using eBay (then called AuctionWeb); one of the most visible and entertaining was a former mural painter in tiny West Rutland, Vt. Under the handle "Uncle Griff," Jimmy Griffith spent his days and nights coaching newcomers through the system and lecturing others on what he felt was proper online auction protocol. He'd pepper his postings with pieces of Uncle Griff's fictional biography: that he was a fiftysomething, cross-dressing dairy farmer in West Upperbuttcrack, Vt., and that he still lived with his mother, despite her untimely death 30 years before. "It was silly," Griffith explains, "but my hero is Judith Martin, Miss Manners. I was trying to further her idea of etiquette, only extending it to the way people behave online."

Omidyar brought on Griffith as eBay's first customer-support rep. It was more than just an odd hire: By offering Uncle Griff a position at eBay, Omidyar was paying homage to his users. Not only would their auctions feed the business, but they themselves would build the infrastructure that supported it.

Under this banner of self-reliance, Griffith established eBay East, which would be a main customer-support center for the next several years. He handpicked an enthusiastic, if unlikely, team of local waitresses, school-cafeteria cooks, and housewives; together they personally answered hundreds of queries a day from eBay users, guiding them through the auction process, sorting out glitches in the system.

Back in San Jose, Omidyar and Jeff Skoll--who had joined eBay as president in 1996--devoted their efforts to eBay's computers. The community would grow itself, Omidyar's thinking went, as long as the system worked. And grow it did. By 1997 the company was doubling every three months, far too quickly for Omidyar and Skoll to handle. By mid-1997, without help from outside, the two had built one of the most visited sites on the Web, with more than 150,000 users bidding on 794,000 auctions each day. The average eBay shopper was spending nearly 3.5 hours a month on eBay, longer than the average shopper on any other site. The tide of hype began to rise: GOING ONCE. GOING TWICE. CYBERSOLD! gushed Business Week. It was one of many such headlines.

In June 1997, Omidyar and Skoll took the eBay business plan to Benchmark Capital and got a $4.5 million check for 22% of the company. Benchmark also promised to find seasoned managers to help run eBay. Enter Meg Whitman.

"What you see of eBay today is the tip of the iceberg," says Whitman, nibbling on a fruit salad in her San Jose office. Three Teletubbies bake in the sunlight on her windowsill. "Today [the merchandise] is largely collectible, largely under $300. What we are starting to see--and we really look to our users here, we call them our army of entrepreneurs--is that they are starting to put much more practical items on the site."

Our army. It's an appropriate choice of metaphor. When Benchmark persuaded Whitman to leave her job heading Hasbro's preschool division (after stints at Disney and Procter & Gamble, and as CEO of FTD), eBay was a ragtag band of sellers hawking stuff from their basements. Whitman, a Princeton economics grad with a Harvard MBA, considers it her job to whip that mob into shape. Like any seasoned sergeant, she seems willing to sacrifice a few troops along the way.

Soon after joining eBay in February 1998, Whitman started building her ranks. Significantly, in a company that had always disdained advertising, one of her first moves was to snag Pepsi's head of marketing, Brian Swette, to oversee eBay's embryonic marketing group. Then, in preparation for the IPO, she started making changes to the site. eBay's gray-and-white face was dressed up with bright primary colors, and a bizarre anthropomorphic apple was added by way of a mascot.

Last September, Whitman walled off all firearm and pornography auctions in separate, age-restricted sites. With the dirty laundry safely hidden away, she was ready for the road show. She took eBay public on Sept. 24.

The stock single-handedly revived the market for Internet IPOs. On its first day of trading, the stock went from a split-adjusted $6 a share to $18.08. Suddenly eBay's top executives were multimillionaires--mere paupers compared to now: At a recent $183.75 a share, Whitman's net worth is about $500 million (she has sold shares worth $86 million), Omidyar's $6.7 billion (stock sales: $321 million), and Jeff Skoll's $2.8 billion (stock sales: $170 million).

With riches came the magnifying lens of the public eye. Articles began to appear about rampant rifle, grenade, and pistol sales at eBay. Worse, the articles warned of escalating fraud at the company. SmartMoney called Internet auctions "the perfect venue for scams." The National Consumers League's Internet Fraud Watch declared auction fraud the No. 1 problem on the Web.

Omidyar and Skoll had long insisted that the fraud problem at eBay was minuscule--just 27 reported cases out of every million auctions--and that if users would just use the Feedback Forum, the site would police itself. But Whitman was convinced this laissez-faire policy wasn't cutting it with the public, and in mid-December--over the objections of Omidyar and Skoll--she decided to take action.

"eBay comes from the roots of an open, sort of libertarian, point of view," she says. "It's a bit of a Vermont thing. Like, let's not get government too involved here. We had to make a seminal decision: Were we going to be more proactive to make eBay a safe place to trade or not?"

She got her way. In January the company announced a "comprehensive trust and safety program." eBay granted buyers free Lloyd's of London insurance for purchases up to $200, less a $25 deductible. Sellers got a chance to pay $5 and have their identity verified by credit-rating agency Equifax, and eBay promised tougher action against shill bidders and deadbeat bidders. Whitman also banned firearm sales altogether and banished even pinup calendars and risque postcards to the Adults Only area.

While the changes were mostly toothless, they marked a major shift in eBay policy. For the first time, the company was making top-down decisions instead of letting them boil up from below. That top-down pattern would become common. In early February a major server crashed, which was routine at the time and is still all too common. The site was paralyzed for hours. When it finally came back up, outraged eBayers started venting on the support board. eBay responded first by suspending the customers for 24 hours, then by killing the live board completely, freezing access to instant customer support. "There was a joke going around: 'I guess there are no more problems at eBay,' " says Scott Samuel, president of Honesty Communications, which measures traffic for online auctions. Then, becoming serious, he adds, "These are your customers--you don't do that."

Whitman has declined to resurrect the live board and recently allowed a new round of suspensions on another eBay board. Those have fueled online conspiracy theories that run from the paranoid (that eBay would kick low-dollar vendors off the system) to the plausible (that it would replace the Feedback Forum with Equifax).

To the old-guard, populist users, Whitman's moves smacked of authority flexing its muscles--strictly verboten in the Internet pioneer world and a long way from that "very open, honest, friendly environment" that she likes to talk about in the national media. But nothing drove home eBay's willingness to break with its past more than the announcement that came next: customer support was being shifted to a new corporate facility in Salt Lake City. The new facility, just now opening, will be staffed by a temp agency. eBay East will survive for now, but Uncle Griff's online advice has already taken on a distinct corporate drone: It features an italicized lawyerly disclaimer that "eBay is not liable or responsible for any type of damage or loss caused...by the information below." Griffith now divides his time between Rutland and San Jose. "Things change," he shrugs.

For her part, Whitman prefers to see the shift as part of an inevitable maturation, as eBay looks to attract a new type of seller whose main concern is getting the highest possible price. "eBay started with individuals selling to one another," she says, but it's moving on to serve as a distribution channel even for traditional stores and businesses: "When you walk through your neighborhood, you always see the small shops and wonder how they survive. Well, a lot of them now keep their storefront, [but] the real money is made on eBay."

In Whitman's drive to make eBay a conduit for merchants, some of eBay's old clientele is finding that doing business on the site has become a trying, unhappy experience. A two-year veteran, who requested anonymity, persuaded her husband to give up his job to help her sell full-time over eBay. As the company grew, she grew with it. She grosses $120,000 a year on the site and says she pays eBay $1,000 a month in listing fees. But now, she says, eBay is ignoring her in favor of a fancier breed of client. Even though she has been enlisted in the PowerSeller customer-service program for big-ticket sellers, her e-mail and phone calls regularly go unanswered. Is she being taken for granted? "I feel like I'm in a co-dependent relationship," she says. "I write to them, I get no response. I e-mail them, nothing. I'm being abused."

So why not go to Amazon? Because she still gets the highest price for her auctions at eBay--a function of the "network effect" that Whitman says creates a kind of snowball phenomenon as both sellers and buyers seek out the largest market under one roof. "This might be one of those businesses where the big actually get bigger through the natural benefit of a larger market," says Whitman. In other words, eBay got there first, and there's no stopping it now.

But in the immature world of e-commerce, how can she be sure that her network won't disintegrate just as quickly as it came together? It's easy to assume that her reforms are inevitable adjustments in the wake of the IPO--after all, she has to answer now to a higher authority than the whims of a bunch of tchotchke-obsessed levelers. But as eBay abandons the small-town market in favor of the bloodless, high-end mall, it risks creating a site no different from Amazon, uBid, or any of the 1,000 other online auction sites. Whitman is gambling with the raw appeal and personality that got the company this far. According to NetRatings, an online rating company, people spend three times as much time on eBay as on any other site. Will its new formula inspire the same intense loyalty?

"How you grow and how you succeed are two different things," says Philip Anderson, an associate professor of Internet strategy at Dartmouth's Tuck School of Business. "The name of the game in making any market is critical mass. eBay's got that. Now they have to have a brand that doesn't just say, 'We have a bunch of cool stuff for sale,' but one that says, 'We deliver perfect transactions.' eBay's brand doesn't say that right now. For eBay to go on a buying spree isn't smart. They need to build their brand first."

In other words, instead of worrying about quick-fix revenue streams like Butterfield & Butterfield, eBay should be trying to perfect its computer systems and instill indestructible loyalty in its customers. Oddly enough, those are the two areas that are suffering most: Though less frequent, server crashes still plague the site, and alienated eBayers are looking elsewhere--including Amazon, generally considered to have the best customer service on the Net. Ross Wright, an eBay trader since January 1998, has already listed on both sites. Wright says that generally his fellow eBay vendors have found Amazon's auctions to be disappointing, but he's e-mailing other vendors and buyers, trying to get them to check it out. Instead of an all-powerful network, it seems eBay may be becoming but one choice among many.

Even those traders who should, by rights, be diehard eBay loyalists are getting a wandering eye. Louie Maistros, the laid-back owner of Louie's Juke Joint, used to rely on a handful of touristy weekends to keep his New Orleans voodoo-supply and record shop alive. About six months ago, at the suggestion of a neighbor, Maistros listed a few items on eBay; within a week he had pulled in $1,000. This year Maistros' eBay auctions should make up 15% of his sales. "I was, like, now why did I open this store again?" he says.

But if Maistros is hooked for now, he feels no more loyalty to eBay than he would to any other vendor. When asked why he doesn't list on Amazon, he pauses, then seems to make a decision. "When I first heard about Amazon," he replies, "I just kind of blew it off. You know, they're not going to have the quantity of people that eBay has. But recently I've heard of a lot of people going over there. I'll probably look into it this week."