BOOK EXCERPT Part 2
The Perfect Store: Inside eBay

by Adam Cohen

In this brisk, engaging chronicle of one of the most stunning success stories in American business history, Adam Cohen takes us inside eBay the corporation as well as into the community of eBay's passionate users. Read an excerpt here.


 

Book Excerpt

The Perfect Store: Inside eBay
by Adam Cohen
ISBN: 0316164933
Paperback (trade), $15.95 US

Continued from Page 1

Omidyar was still offering AuctionWeb for free. He could do it because his expenses were next to nothing-he was still running the site off of Best, his home Internet service. Toward the end of 1995, however, Best administrators were complaining that AuctionWeb was attracting so much traffic that it was slowing down their system. In February 1996, Best began charging him $250 a month, the rate for a commercial account, ignoring his protests that AuctionWeb was not a business.

Best's fee hike changed everything. "That's when I said, 'You know, this is kind of a fun hobby, but two hundred fifty dollars a month is a lot of money,'" Omidyar says. To pay the bills, he started to charge AuctionWeb users—"basically out of necessity," he says. Based on no market research, Omidyar decided he would not charge buyers at all, and that he would not charge sellers to list items. The only fees would be what he called final-value fees, which would be a percentage of the final sales price. The fees, he decided arbitrarily, would be 5 percent of the sale price for items below $25, and 2.5 percent for items above $25.

Omidyar had no way of knowing if users would be willing to pay to use the site. In fact, it occurred to him that fees could bring his little Internet experiment to an end. But Omidyar got his answer soon enough, when piles of envelopes filled with cash and checks started arriving at his front door. The amounts were not large, and the trappings were not fancy. Some of the envelopes contained dimes and nickels Scotch-taped to index cards. Still, when he added up the checks, the coins, and the crumpled bills at the end of February, he found that AuctionWeb had taken in more than $250-more, in other words, than Best was charging him. That put his fledgling little website in a category almost by itself: it was one of the very few Internet companies to be profitable from its first month of operation.



In 1995, it was not clear that commerce would ever take hold on the Internet. A study by the Pew Research Center that year found that just 8 percent of Americans felt comfortable using a credit card online. The Pew study had no statistics on the percentage of Americans who would be willing to participate in auctions with strangers on a website that crashed almost daily, but it figured to be a lot smaller. If AuctionWeb was to have any chance of taking hold, establishing trust and confidence was essential.

Early on, Omidyar set out ethical guidelines for the AuctionWeb community to follow. In his experience, he said, people are generally good. He advised users to treat other people on the site the way they themselves wanted to be treated, and when disputes arose, to give the other person the benefit of the doubt. Omidyar's injunction was essentially the golden rule transported into cyberspace. It was the value system his mother had instilled in him, and one he tried to follow in his own life. "Some people say, 'Isn't that trite, it's like a Hallmark card,'" he says. "But I think those are just good basic values to have in a crowded world."

To a remarkable extent, AuctionWeb operated according to Omidyar's idealistic prescription. Trust on the site was so high in the early days, and the feeling of community so strong, that it was common for sellers to ship items even before they had received bidders' payments. Still, the harmony Omidyar hoped for did not always preavail. When buyers and sellers disagreed, they usually contacted Omidyar directly—easily enough done, since his e-mail address, Pierre@eBay.com, was prominently featured on the site. Omidyar got about a dozen e-mails a day from users complaining about each other. It almost always turned out, Omidyar says, that the dispute arose from a simple misunderstanding. "On the Internet, people forget that when they're dealing with an e-mail address there's an actual human being on the other side," he says. "Often their fears are manifested, or they jump to conclusions and think the most negative interpretations of that e-mail."

One thing Omidyar knew was that he did not want to arbitrate all these disputes. He was busy enough just keeping AuctionWeb up and running in addition to working at his day job. Moreover, true to his libertarian leanings, he believed people should be able to resolve their differences on their own. Omidyar's routine when he received an e-mail with a complaint about another user was to respond to the author, send a copy of the e-mail to the other person in the dispute, and tell them both, "You guys work it out." The parties usually resolved the matter on their own, but Omidyar realized he had to come up with a mechanism for enforcing good behavior. Unlike most companies, AuctionWeb was not able to control the quality of its service. "The brand experience" on AuctionWeb, Omidyar observed, was "defined by how one customer treats the other customer." If Omidyar wanted his customers to have a positive experience on AuctionWeb, he had to convince them to treat each other well.

In February 1996, Omidyar announced his proposal for how to do just that: the Feedback Forum. "Most people are honest," he wrote in a Founder's Letter posted on the site. However,

some people are dishonest. Or deceptive. This is true here, in the newsgroups, in the classifieds, and right next door. It's a fact of life. But here, those people can't hide. We'll drive them away. Protect others from them. This grand hope depends on your active participation. Become a registered user. Use our Feedback Forum. Give praise where it is due; make complaints where appropriate. . . . Deal with others the way you would have them deal with you.

Remember that you are usually dealing with individuals, just like yourself. Subject to making mistakes. Well-meaning, but wrong on occasion. That's just human.

Through the Feedback Forum, the complaints that landed in Omidyar's e-mail in box would be brought out into the open. The entire community would know about them and have an opportunity to deal with them appropriately. Omidyar made clear from the outset that he wanted positive comments as well as negative ones, both to encourage people to say favorable things about one another, and because positive comments could be just as revealing as negative ones. "I was afraid it might just turn into a gripe forum," he says. "But as I watched it develop over the weeks, I was amazed to realize that people actually enjoy giving praise, too."

The rules of the Feedback Forum were straightforward. Users were allowed to give each other a rating of plus one, minus one, or neutral, and to include a written explanation if they wished. EBay's software then tabulated each user's score and put the total in parentheses after his or her name. The Feedback Forum played the same role on AuctionWeb that reputation plays in a small town. Through the numbers that appeared after users' names, the AuctionWeb community's opinion of them would follow them wherever they went. The new system did not entirely remove Omidyar from the role of enforcer. He decided that when users' Feedback Forum ratings got too low-negative four or less-they would be banned from the site. Omidyar arrived at the cutoff point of negative four without much deliberation-it just struck him as the point at which his assumption of goodness was sufficiently rebutted-and he did not reveal it to users. But even years later it would remain the number that caused eBay to "NARU" someone-to make him or her Not a Registered User.

Around the same time, Omidyar added another feature to the site: a message board called, simply, the Bulletin Board. Like the Feedback Forum, the Bulletin Board was designed to limit his role and place more of AuctionWeb's administration in the hands of the community. Omidyar did not have time to explain to each individual user how to write a listing in HTML, or to give advice on bidding strategy. The Bulletin Board was in the tradition of the Usenet newsgroups Omidyar had long used, a place for people to gather, share information, and ask for help.

As soon as the Bulletin Board went up, the questions poured in. What was the best way to ship? What should a seller do when a high bidder disappeared? The answers came just as quickly. "If someone came on and said, 'Please help me,' there were twenty-five people who would rush to help," recalls Steven Phillips, a retired naval petty officer from Dallas who sold chintz and pottery in the early days. A core group of regulars emerged who functioned as a de facto customer-service department. The site even had-in those innocent, spamless days—a directory of e-mail addresses, making it easy for users to communicate with message board regulars. Phillips alone got 100 to 150 e-mails a day from his fellow AuctionWeb users, and he answered all of them.

With every day that passed, more cash- and check-filled envelopes arrived at Omidyar's town house. In March, revenues hit $1,000, once again more than the site's expenses. In April, revenues rose to $2,500, and in May AuctionWeb took in $5,000. The envelopes were piling up so fast that Omidyar literally did not have time to open them. He used some of the funds to make his first part-time hire. Chris Agarpao, the brother-in-law of a close friend, started coming to Omidyar's home twice a week to open the envelopes and deposit the money. In June, when revenues doubled for the fourth consecutive month, topping $10,000, Omidyar decided it had become a real business. "I had a hobby that was making me more money than my day job," he says. "So I decided it was time to quit my day job."

Omidyar thought when he left General Magic he would be able to reclaim his nights and weekends. But he found that all of his waking hours were now being taken up by AuctionWeb—keeping it running, writing code for new features, and answering user e-mail.

Having worked in start-ups, Omidyar knew that if AuctionWeb was going to keep growing, he would need a strategy that went beyond bringing in Agarpao to open envelopes and deposit checks. "I had a vague idea of what I needed to do as an entrepreneur," Omidyar says. "But I knew I wasn't going to be able to put together a business plan." He started looking for someone who could.

Omidyar thought immediately of Jeff Skoll, a Stanford MBA he had met through friends two years earlier. Skoll, a slightly built, hyperkinetic Jewish Canadian, was a born entrepreneur. His father sold industrial chemicals, and by age twelve Skoll himself was going door-to- door selling Amway products in Montreal. Skoll's youth coincided with a rising tide of separatism in Quebec, and he experienced the depth of French-Canadian nationalist sentiment firsthand when he was making the rounds selling electronic keyboards. He was often asked to demonstrate them, but the only song he could play was "O Canada," the national anthem. It went over well among the English-speakers, but not in French-speaking areas. One woman, on hearing Skoll's musical performance, sicced her dog on him. Not much later, Skoll's family joined the growing English-speaking exodus from the province and settled in Toronto, where he attended high school.

Skoll graduated from the University of Toronto in 1987 with an electrical engineering degree and a 4.0 GPA. He then founded two high-tech companies: Skoll Engineering, a consulting firm that helped corporate and government clients set up inventory management and accounting systems, and Micros on the Move Ltd., a computer rental company. Skoll's ambitions, however, extended beyond the comfortable life he was starting to carve out in Toronto. Six years after graduating from college, he headed to Palo Alto, California, to enroll in the Stanford Graduate School of Business. Skoll finished up his degree in 1995, at the same time Omidyar was wrestling with the idea for AuctionWeb, and found himself just as drawn to the Internet as his future partner. Skoll took his freshly minted MBA to Knight-Ridder Information, Inc., a unit of the large newspaper chain, which hired him to help direct its Internet strategy.

Skoll struck Omidyar as an "analytic powerhouse" whose skills would complement his own. But the attraction, at least initially, was not mutual. The previous Thanksgiving, when AuctionWeb was just a few months old, Omidyar had tried to interest Skoll in joining the company, but it had not gone well. "I told Jeff there were people buying and selling on the Internet who never see each other but actually send money and stuff back and forth," recalls Omidyar. "He said, 'That's ridiculous.' " Skoll had just come back from the first meeting of CommerceNet, a nonprofit symposium promoting commerce on the Internet. At the symposium, the moderator had asked the crowd of three hundred how many of them had bought or sold anything online, and only three people raised their hands. It seemed to Skoll that if e-commerce had made so few inroads in that tech-savvy audience, AuctionWeb was fighting a losing battle.

Since that Thanksgiving, however, Skoll had reconsidered. He could see, from his vantage point at Knight-Ridder, that the Internet had the potential to completely transform how goods were sold. One reason Knight-Ridder had established Skoll's unit was that the newspaper giant realized the Internet posed a significant threat to classi- fied ads, one of its major sources of revenue. On the Internet, sellers could have considerably more space to describe their items and post photographs than they would in a print ad. The audience would not be limited to readers of a single newspaper, or of any newspapers at all. Online ads could be interactive, allowing buyers and sellers to contact each other by e-mail. Not least, the Internet allowed for dynamic pricing, which meant sellers did not need to choose a price in advance—they could charge whatever the market would bear. These advantages were, of course, all built into Omidyar's online auction model. Skoll eventually realized that "what Pierre was doing was a lot bigger than just a simple website." In February 1996, Skoll had agreed to do consulting work for AuctionWeb. By August, the site was so successful that Skoll quit his job and signed on full-time.

In Skoll, Omidyar found a yang to his yin. "It was the perfect balance," says Omidyar. "I tended to think more intuitively, and he could say, 'Okay, let's see how we can actually get that done.'" Skoll was the hard-driving one, the one focused on business development and fending off the competition. The more easygoing Omidyar tended the website and nurtured the AuctionWeb community.

When Skoll reported for work, AuctionWeb was still operating out of Omidyar's home. Skoll wanted to move the company to Palo Alto, which he considered to be the "epicenter" of the Internet boom, or at least to nearby Santa Clara. But the Silicon Valley real-estate market was so tight AuctionWeb could not find office space in either city. While they looked for offices, Omidyar and Skoll moved AuctionWeb's headquarters from Omidyar's home to Skoll's, a group house in Los Altos Hills that he shared with a few of his former business-school classmates. Skoll's home had more room than Omidyar's, but it was still nothing like a real office. One of Skoll's housemates worked at the NASA Ames Technology Center, a NASAfunded high-tech incubator in Sunnyvale. He helped AuctionWeb get temporary offices there, a one-room space that could barely fit Omidyar, Skoll, and Agarpao. It was clearly not a long-term solution.

Omidyar suggested expanding the search for permanent quarters to the city of Campbell. A sprawl of suburban homes and office parks, Campbell paid tribute to its long-lost agricultural heritage every May, when it played host to California's largest prune festival. Campbell was not as fashionable as Palo Alto, and it was certainly not the epicenter of the boom. But what Campbell lacked in hipness and frenetic activity, it made up for with more practical attributes. Rents were lower and, more important, there might actually be some offices to be had. From Omidyar's perspective, Campbell had another advantage: he lived there.

The real-estate agent that Omidyar and Skoll pointed toward Campbell came back with a dentist's-office-sized suite on the second floor of 2005 Hamilton Avenue. The suite was located in the The Chinese book I Ching teaches that the yin embodies elements of the yang, and vice versa, and so it was with Omidyar and Skoll. Omidyar, the antimaterialist, was already a millionaire, and would become the wealthier of the two from his stake in eBay. Skoll, the corporate-minded MBA, would later assume a very different role at eBay, that of in-house champion of the community.

Greylands Business Park, a clump of low-rise brick buildings that cried out "business" far more than "park." Greylands was directly across the street from one sprawling shopping center, and diagonally across from an even larger one. The prospective headquarters were as blandly utilitarian as AuctionWeb's website, but they were a clear improvement over the room in the NASA incubator. Omidyar and Skoll told the agent they would take it.

There was just one problem. To evaluate AuctionWeb's financial situation, the landlord wanted Omidyar and Skoll to fax over a balance sheet. AuctionWeb did not have one, and it seemed unlikely the landlord would be satisfied with what the company did have: Agarpao's extensive list of cash deposits. Determined not to let the office space get away, Skoll sat down and began taking inventory. "What are the servers worth?" he asked Omidyar. They guessed about $5,000. Liabilities? They listed that month's phone bill, which had not yet been paid. When he was done, Skoll had a rudimentary balance sheet, which he faxed off. The landlord was unpersuaded. Before AuctionWeb could move in, Omidyar, the only partner who actually had some assets, had to personally guarantee the lease.

Skoll's other priority, after office space, was professionalizing the AuctionWeb site. Skoll argued that the San Francisco Tufts Alliance, the biotech start-up, and Ebola Information-which were all still on eBay.com-were distracting and, in the case of the Ebola page, more than a little creepy. Omidyar, perhaps partly to tweak Skoll, put up a defense of the Ebola page. McKinley's, an Internet search engine that rated websites, had awarded Ebola Information four stars, he reminded Skoll, while it gave AuctionWeb only three. It simply made no sense, Omidyar argued, to remove the one page that could be driving the most traffic to eBay.com. Skoll was not convinced. In the end, Omidyar gave in and reluctantly removed everything but AuctionWeb from the eBay site.

In May 1996, Jim Griffith was sitting at a computer in an art studio in West Rutland, Vermont, shopping for computer parts.

Griffith, who has the bushy white beard, rounded physique, and biting wit of a mischievous St. Nicholas, had come to Vermont in a last-ditch effort to pull his life back together. He was coming off two hard decades of living in New York, where he had started out pounding the sidewalks of the casting-call circuit, struggling to make it as an actor. When his matinee dreams died, he threw his creative energy into a career as a decorative artist, doing ornate painting in the homes of the city's moneyed classes. His friend, Broadway director John Tillinger, introduced Griffith around, and in time his paintbrush was rubbing up against some of the toniest walls in Manhattan, including those of Lauren Bacall's home in the Dakota apartment building.

After ten years of painting upscale apartments, Griffith burned out. The combination of an especially disastrous work project and a head-on collision with middle age pushed him over the edge. He and his partner decided to get out of the city and start over in West Rutland. Griffith had planned to paint murals there and send them to clients back in New York, but he found it was too difficult to line up assignments from out of state. He ended up working as an administrative assistant for the Carving Studio, a nonprofit arts organization dedicated to teaching stone carving.

Working on a clunky old computer, a gift to the studio from a local bank, Griffith joined the information age. As his passion for art redirected itself to computers, he found himself spending countless hours on Usenet newsgroups. Griffith had been on an extended hunt for an obscure type of memory chip when one of his newsgroup contacts e-mailed him that the chip was up for auction at that moment on an online auction site called AuctionWeb. Griffith went to the site and placed a bid. He won it for $10, and he was hooked. Living in one of the most picturesque towns in one of the most beautiful states in the union, Griffith spent much of the summer of 1996 on AuctionWeb bidding on computer parts.

When he was not scrolling through computer listings, Griffith was spending time on the Bulletin Board. He was by now fairly proficient at using AuctionWeb and was happy to answer the technical questions that were being posted. Griffith soon became a fixture on the boards: Uncle Griff, a friendly source of advice for new users. One day, another board poster asked him what he looked like. "I don't know what came over me, but I said, 'I'm wearing a lovely flower print dress and I just got through milking the cows,'" he says. "That's how it started about Uncle Griff actually being a crossdressing bachelor dairy farmer who liked to answer questions."

The legend of Uncle Griff grew quickly. On the Bulletin Board, Griffith referred to his AuctionWeb persona in the third-person: Uncle suggests you do this; Uncle would never do that. He also began to fill in ever more elaborate pieces of Uncle Griff 's biography. Uncle Griff lived with his mother, but she was not available to post. He had duct-taped her mouth shut and stuffed her in a closet.

AuctionWeb lifted Griffith's spirits for a while, but by the fall he was spiraling downward again. In mid-October he stayed in bed for two weeks and thought about ending his life. Griffith forced himself to begin therapy and started taking Prozac, a drug that he says "should be in the water supply." Just as he was snapping out of his depression, he got a phone call.

It was Jeff Skoll. He wanted to know why Uncle Griff had stopped posting on the boards. Griffith was stunned that his absence had been noticed at AuctionWeb headquarters. Skoll had an assignment for Griffith. AuctionWeb was receiving fifty to one hundred e-mails a day from users, and it had no customer-support staff. Skoll was prepared to pay Griffith to answer the e-mails on a regular basis, and to keep up his presence on the Bulletin Board. Griffith was up for it, but he wanted to make sure Skoll knew what he was getting into. Uncle Griff was, Griffith pointed out, an unusual persona. "Yeah, we love it," Skoll responded.

Griffith became AuctionWeb's second part-time employee, at a salary of $100 a month, and its first official customer-support person. Skoll asked Griffith to select an alias to use as his AuctionWeb identity. That way, he could keep being Uncle Griff on the Bulletin Board without having his postings carry over to his official duties. When Skoll called, Griffith was looking through a book about one of his favorite movies, Greed, an eight-hour-long silent film directed by Erich von Stroheim. He came across a photograph of the actress Dale Fuller, who played the mad Mexican housekeeper. For his official AuctionWeb work, Griffith told Skoll, he wanted to be known as Dale.

Griffith returned to AuctionWeb with his two identities, Uncle Griff on the boards, and Dale@eBay.com to answer customersupport e-mail. Bulletin Board posters who knew both personas did not make the connection, and Griffith never let on. To help with the e-mail, Skoll sent Dale a Word document, much of it prepared by Omidyar, with suggested responses to frequently asked questions. In addition to handing out advice, Griffith spent a lot of time doing what Omidyar hated: stepping in and trying to resolve disputes. Griffith was amazed by how heated the controversies could get, and how seriously the participants took their online lives. He often got email from posters saying that because of disputes on the Bulletin Board they had cried all night, sometimes all week.

To the noncombatants, the disagreements generally seemed wildly overblown. At one point, Uncle Griff had to step in to defuse an argument between a buyer and a seller of baseball cards that had started in private e-mail and moved onto the Bulletin Board. The fighting escalated until both men were on the boards every night, "screaming" at each other in capital letters. Griffith tried to persuade posters that hostility was counterproductive. "If you've got a bidder who is not honoring their bid, the last thing you should do is send them a nasty e-mail telling them they're a terrible person," he advised. "It may make you feel better for the moment, but in the end it doesn't serve any purpose at all."

When all else failed, Uncle Griff used his offbeat personality to defuse tension. Once, when a flame war was raging between two users, he cut in and announced that he had just been in his attic and had found a trunk that had not been opened for years. It contained a lot of his mother's old clothing, and he asked everyone to try an item on. Uncle Griff offered one board poster a feather boa, another an elaborate hat, and he declared that he himself was putting on a pair of high heels. He made a point of handing off virtual clothing to both of the posters involved in the fight. "Some people would respond, 'Oh, Griff, you're so silly,' " he says. "But what it did was break up the dispute without referring directly to the dispute."

Not long after Griffith got his call from Skoll in Vermont, Patti Ruby got one of her own in Indiana. Ruby owned an Indianapolis antique store with her husband and worked on the side as a computer programmer. Like Griffith, she had come to AuctionWeb early, and had become a personality on the Bulletin Board. Aunt Patti, as Ruby called herself, was knowledgeable about computers and antiques, and willing to take the time to answer users' questions about either. Ruby became eBay's second "remote," as its employees outside of Silicon Valley came to be known. She started out part-time, but within two weeks of Skoll's call she quit her programming job and began working for AuctionWeb full-time. Skoll asked Ruby, as he had asked Griffith, to choose an AuctionWeb identity. She became Louise@eBay.com and remained Aunt Patti on the boards, both personas that would become famous in AuctionWeb's early days.

Copyright © 2002 by Adam Cohen

 
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