©Terry McCarthy Bill Cobb '79

eBay's old-school business wisdom
eBay's success is in part the result of its leadership refusing the lure of 'irrational exuberance' during the Internet boom, say Kellogg alumni who work there

by Ed Finkel

In the late 1990s, when venture capital flowed toward Internet companies like lava streaming downhill, many startups immersed themselves and rapidly immolated.

Not so with eBay, which today stands as not only a New Economy survivor but a company with numbers that many bricks-and-mortar firms of a similar vintage would envy, say Kellogg School alumni who work there. The firm's resistance to the "irrational exuberance" that Federal Reserve Chairman Alan Greenspan famously warned of has played a significant role in eBay's success and staying power, they say.

"eBay has prided itself on having made a profit ever since it was a startup," says Bill Cobb '79, senior vice president for international business. "We believed you ought to be able to pay your bills right from the beginning. Our only venture capital check is still in the bank. We have been a very cost-conscious culture."

Gil Penchina '97, eBay's vice president for Southern Europe, remembers that five years ago Wall Street analysts were perplexed by eBay's seemingly conservative strategy, pointing out that then-money-losing companies like Yahoo! and Amazon were taking more risks. "Why aren't you people being more aggressive?" they asked. Penchina says, "We always said that the discipline of forcing business leaders to look at [return on investment] and think about profitability would serve us more in the long term."

Cobb recalls that a lot of capital-rich companies at the time spent lavishly on advertising and marketing. "eBay didn't do its first big [U.S.] advertising campaign until the fall of 2002. Abroad it was fall of 2003," he says. "We've been pretty disciplined."

"eBay has understood from the beginning the importance of showing profit," says Philipp Justus '96, who on July 1 was promoted to vice president for Europe, from managing director and vice president for Germany. "Our formula has to do with tradeoff decisions about how much we want to be investing in marketing versus other areas."

eBay has been aggressive with acquisitions, Cobb says, noting that the company paid a "significant premium" to obtain online payment facilitator PayPal for $1.5 billion in late 2002. "That has certainly paid out," he says. "On big decisions, it's your traditional ROI approach and how it adds to market count."

PayPal, which focuses primarily on eBay but also services other sites, enables buyers and sellers to have a much smoother transaction flow and greater confidence in the end result because sellers can see immediately when buyers have paid, Justus says.

"When we look at how we can make trading easier for buyers and sellers, payments are an important part of the process," he says. "The biggest movement on that has definitely been the acquisition of PayPal."

More broadly, Penchina says, eBay has "doubled down our investment in technology to achieve world-class architecture" during the past five years. Among the benefits of that? When eBay acquires other companies, it can migrate them to its technology platform at relatively fixed costs. "Acquisitions become very lucrative as we're able to add them at marginal cost," he says.

eBay has enjoyed other advantages inherent in its nature. The company has expanded to 20 countries in 8 1/2 years since its Labor Day 1995 founding in part because it is not a bricks-and-mortar operation, Penchina says. "We don't need to buy warehouses or set up distribution," he says.

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