EBay’s choice to use acquisition is theoretically sound but is so far not being proven by reality as evidenced by its declining financial performance. The advantages of acquiring a business, with specific regards to eBay are more than the advantages of Greenfield investing. But what is certain is that eBay has to look globally in order to sustain a growth level to which it was previously accustomed.
eBay
In 1995 eBay Inc. was founded by Pierre Omidyar, who created a code for a website that is now the world’s largest online marketplace; a multinational company that has been described as a global economy in itself. As of 2007, eBay had about 84 million active worldwide users, and existed in around 39 markets, meaning that every second around $1,900 worth of goods would be exchanged on its website. This is largely a result of the acquisition of both PayPal (in the year 2002) and Skype Technologies in 2005; which have around 9% of global internet trade, and 309 million registered users as of the first quarter of 2008, respectively. Other eBay acquisitions have included shopping.com, Stubhub, rent.com, StumbleUpon, and LoQUo.com.
Considering that up till 1998 eBay’s focus was to perfect itself at home in the States, it was remarkable to see that by the summer of 1999 it had successfully conducted the first of its many acquisitions over the subsequent years – Germany’s Alando. The success of that story paved the way for eBay to grow further by successfully launching sites in the UK, Australia, Korea, and then Europe, and Latin America. Alando, or eBay.de as it is now known, eventually turned out to be the largest international eBay site.
Foreign Markets
Like any other company seeking to go global eBay too had several choices to make before it could embark on its journey. Entry into a foreign market requires that a firm question the level of control it wants to keep over local decisions, the level of risk in operations it will allow, the payback period, the resources it will employ in the market, the level of improvement in technology the firm introduces to the market, and the strategic importance of that market. The answer to these questions ensures that the firm is in a better position to decide whether it will acquire the existing local business or whether it will set up a completely new business by greenfield investment.
In the case of eBay, its decision has mostly been to acquire an existing business, for such a method allows a firm to take advantage of gaining the existing customer base and retain and make use of the current processes and the local workforce of the business being acquired.
Acquisitions vs. Greenfield Investments
A foremost benefit of acquisitions is that it is quick; time is not wasted in building the business from scratch while global competitors can seize a major chunk of market share and thus turn the investment into a loss. Thus, eBay was able to expand within one hundred days to over 13 different countries. From eBay’s point of view, while these advantages were a great motivator in abandoning its policy of strengthening itself in one market before turning global, an added incentive was that it allowed eBay to acquire now a business that could have grown to become a potential rival later.
A further advantage to acquisitions with respect to eBay is the transfer of technology to form the company it acquires to the parent company i.e eBay. As proven after the takeover of Germany’s Alando, one of the many mini-eBays that were popping up all over the globe, all major innovations do not necessarily have to come from the United States, and as a direct consequence of the persistence of the head of the site Philipp Justus, the US site adopted the new sorting feature for listing auctions from Germany. In addition to which the risk of eBay failing in a new market is minimized substantially by acquisition as the business was already established.
The consequences of eBay’s acquisition strategy are only now coming to the forefront in light of the increased competition it is facing from Amazon and Google currently. The $1.4 billion ‘impairment charge’ the company took in 2007 over the Skype deal, as its value of cash flows generated was not as high as forecasted, is another effect, of which eBay’s strategy of acquiring both direct and indirect competitors is the cause.
In contrast to the acquisition, greenfield investment allows the firm the advantage of establishing the business to its own specification with its own technology and being able to create a customer base for its own brand, rather than piggy-backing on the existing local brand. However, the firm must take into account how to localize its service to the foreign market, which only increases costs if the method chosen is greenfield in the form of labor costs.
While acquisition costs are normally higher than Greenfield investments for eBay it was a race against time. The objective was not to minimize costs but to increase revenue by increasing market share, and thus increasing the overall growth of the company. The company seeks to compete on volume and has provided evidence in this favor by consistently moving to markets where the internet population is either increasing substantially or is already high. By acquiring rather than investing in the foreign firms eBay is ensuring that it does not repeat the same mistake it made in China where eBay’s acquisition of EachNet in 2003 had to be rethought in favor of shutting it down and merging with Tom Online. This was in order to successfully compete with Taobao.com, a local site that was fast becoming China’s most popular marketplace after overtaking EachNet. Instead, global competitor Yahoo! has managed to successfully hold on to the Chinese market with a minority stake in Alibaba, Taobao’s parent.
Keeping With Strategy
On 6th October, eBay announced two acquisitions. One for $820 million cash and $125 million options of Bill Me Later® so as to enhance eBay’s controlling position in payments online, and a $390 million cash acquisition of dba. dk and bilbasen.dk, Denmark’s chief online classifieds and vehicles site, respectively. In addition, the company also announced its plan to decrease labor by 10% in the world, which will not only have an effect on one thousand employees, and temporary workers numbering in several hundred, but also decrease the number of open positions. This plan was meant to make eBay’s organization more efficient and to decrease costs while fortifying the general competitiveness of the existing businesses of the company.
The objective of these acquisitions was to make online payments safer, and more convenient, and thus less likely to turn out as bad debts by using both PayPal and Bill Me Later. Also to provide the company with the technological know-how to improve on customers’ experiences with eBay by the acquisition of dba. dk and bilbasen.dk.
So while theoretically eBay’s use of acquisition as a means of securing a market in foreign countries seems logical, in the real-life it is suffering because it has over-extended itself. In its bid to go global eBay forgot to maintain its core competency in the local markets, as evidenced by the strong comments on the site’s forum. Customers are up in arms with the service and with eBay’s new feedback system, in which customers who give negative feedback will not be as caringly dealt with by the site as customers who give positive feedback. And as is necessary for any online retail organization, in fact for any company, customers are the base of success. It is not surprising then that eBay’s EPS has decreased from $0. 8 in 2006 to $0.3 in 2007, while Amazon’s EPS has increased to $1.1 from $0.5 in the same period as maintained by Yahoo! finance. But this has not restricted eBay from its plan to acquire further if the $1.34 billion worth of investment that is to be made in the aforementioned Bill Me Later, dba. dk and bilbasen. dk is anything to go by. It remains now to see what the new CEO, John Donahoe has in mind for the giant that is eBay that will rescue it from its current slump.
The purpose of eBay was to develop an online auction market with sellers, buyers, and window shoppers, according to the interest of the customer. The reason that eBay thrived in its purpose was that it established a set of rules and guidelines that though meticulously followed, were fluid in their existence when needed. These guidelines created a playbook following which eBay established its competence in the auction market. To facilitate the customer and make them comfortable while surfing the site eBay customized its site to reflect the tastes and flavors of the market they were serving – i.e. an all-American market. When it desired to expand to foreign markets it did so by acquiring a German auction market with an existing customer base. The first task performed was to customize the site to German sensibilities and to reflect their desired products e.g. Garden gnomes, which have turned out to be the biggest seller in Germany. In doing so eBay demonstrated its strategy to think locally and act globally.
The New Playbook for eBay
Whitman’s resignation as CEO of eBay marked the end of a decade for both her and for eBay. And it seems that the new CEO brought more than a new face to the company. The announcements since February of 2008 have shown that eBay is going through restructuring in the internal works, and this restructuring has taken the form of a new playbook for eBay after 13 years of following the first one.
Pricing
eBay has an across-the-board range of products, including in one case a fighter jet and water that Elvis Presley was supposed to have leftover after drinking. Essentially, it serves as a market where users can purchase rather unique products that might not be obtainable elsewhere. However, even these benefits have not been enough to raise transaction volume. It is because of this that there has recently been a change in the fee structure. The result is decreased insertion fees in the United States, by slashing down the cost of listing items by 25-50%, and increased final value fees, which are charged when goods are sold to merchants. Another change has been the removal of fees on galleries for its merchants in the U.S.
The new CEO of eBay, Donahoe, asserted that the net take-rate for the company would fall which means that the fees would now be in tune with the success of the sellers. However, the downside is that some merchants would not get as great a degree of advantage as others with these price changes, such as sellers for whom gallery usage is minimal or non-existent.
Best Match & Sellers
Another change that eBay is bringing to its playbook is on the seller’s side. The search engine will be modified to the new default Best Match so that sellers with higher ratings of buyer satisfaction will be shown in search results more and vice versa. This will serve as a form of control to punish those sellers who charge exorbitant amounts on shipping and handling. In addition to which, sellers with low ratings, or with complaints would be required to conduct their payment transactions through PayPal, a subsidiary of eBay. Hence, eBay kills two proverbial birds with the same stone: punishing merchants who are offending buyers and generating service for its subsidiary.
Feedback
The online auction site recently declared that negative feedback would be banned from sellers to buyers. The news resulted in an uproar as merchants felt that the feedback allowed them to warn other merchants of frauds, while eBay believed that it was being abused as a retaliatory system in the case of buyers who criticized sellers. The problem here is that buyers would still be allowed to post negative feedback about sellers which further served to aggravate the issue.
Strategy
The recent shift from creating the trend to following the trend has resulted in a lot of changes for the company in the last year, particularly to the U.S. side of the business. Although the old strategy of growth by acquisitions seems to still be in play, there have been changes that have been introduced to that strategy. So even if eBay seems to be satisfied with gaining a foothold in foreign markets it does not mean that it is still satisfied by what it already has. Layoffs have been announced that will affect over a thousand employees and several hundred temporary employees, not to mention decrease the motivation for the employees that are left in place.
In keeping with its acquisition phase, eBay is still focused on its tailor-made approach to its foreign markets. Each market represents something new and different for that particular area. And each site is designed by local employees who ensure that they attract new customers using their own strategy, as per their market. As in France where a sizable number of people do not have internet connections it would make no sense to advertise on the local television. A significant degree of local responsiveness was maintained for each market, and the transfer of technology from the Head Office in Delaware ensured that a significant degree of integration was present.
Conclusion
In order to achieve high growth eBay must get off its laurels and start taking back the market share that it has lost, most notably to Amazon and Yahoo! In China Yahoo! has managed to obtain a stronghold by getting a minority share in Alibaba. The previous playbook was effective up to this point but now the firm needs to re-evaluate its position. It served its purpose in getting eBay to a position of strength with its focus on customers as being different in different places. Although the new playbook has mostly been a change in the strategy of the U.S. market, it should stay that way as the only complaints that the company seems to be facing is from that area. That is the market in which eBay is the strongest and it should not surrender its leadership status on the altar of tradition. If change is what is required of eBay, change is what it should embrace. But as it has been doing for the past 13 years, so must it do now – let the local markets establish their own strategies and don’t turn this change that is being introduced in the U.S. market out of necessity into a global strategy.
The purpose of eBay was to develop an online auction market with sellers, buyers, and window shoppers, according to the interest of the customer. The reason that eBay thrived in its purpose was because it established a set of rules and guidelines that though meticulously followed, were fluid in their existence when needed. These guidelines created a playbook following which eBay established its competence in the auction market. To facilitate the customer and make them comfortable while surfing the site eBay customized its site to reflect the tastes and flavours of the market they were serving – i.e. an all American market. When it desired to expand to foreign markets it did so by acquiring a German auction market with an existing customer base. The first task performed was to customize the site to German sensibilities and to reflect their desired products e.g. Garden gnomes, which has turned out to be the biggest seller in Germany. In doing so eBay demonstrated its strategy to think locally and act globally.
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