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The Real eBay Magic: Irrational Commerce

It’s been quite a while since my last eBay-related post, and nine months since my high traffic post, A Eulogy for eBay Express.  However, this past week Keith Rabois wrote a fairly inflammatory article for TechCrunch that I thought was worth discussing.  Keith is currently an executive at Slide, and was formerly a founder at LinkedIn and an executive at PayPal, so his consumer internet credentials are fairly substantial.

His article was entitled:

TechCrunch: How Facebook, MySpace and YouTube Killed eBay

Told you it was inflammatory.

However, I’m not normally the one to take eBay flame bait.  After all, if I was, I’d be posting twelve times a day on the topic.  But Keith actually hit upon a deeper insight in his piece that is worth calling out, because it provides insight into both eBay and other successful, engaging web products.

Although it was always classified as an e-commerce destination, the quirkiness of the eBay marketplace was once a major source of entertainment on the Web. It was where people sought and bought everything from the first broken laser pointer to Beanie Babies to Bob Dylan’s boyhood home. While the catch—anything from an antique clock to a Gulfstream II—was rewarding for the buyer, it was generally the entertainment and excitement of the chase that brought a buyer to eBay in the first place.

This insight, that eBay’s success was driven by entertainment and engagement is extremely strong.

The rest of the article follows this path:

  • In January 2004, over 47% of internet users visited eBay once per month.
  • In December 2006, while the % of audience stayed the same, people were spending 3x the time on MySpace
  • In 2007 Facebook & Youtube added to this drift of attention and engagement (timeline is off here a bit, since Youtube took off well before 2007).
  • eBay stripped out the fun, not pursuing eBay 3.0 strongly enough, and then Donahoe pushed towards an Amazon-focused approach.  Fun gone.

I don’t personally agree with much of the deductive flow here, actually.  Overall, Myspace, Youtube & Facebook have significantly increased the engagement overall on the internet, taking metrics like “daily visits” and “daily unique users” and “time on site” to previously unthinkable numbers.  It isn’t a zero-sum game, per se, because the overall number of users and time spent on consumer internet sites has grown dramatically.

More importantly, the assessment of eBay 3.0 and the current strategy makes it sound like eBay’s current approach is largely management-driven, when in reality the overwhelming global scale and activity of eBay buyers (and sellers) has made the current direction almost fait accompli.  In 2006, the number of eBay listings that were fixed price (including store listings) was already well north of 50% and rising rapidly.  The marketplace was voting through billions of bids, BINs and listings, and it was voting for a higher and higher proportion of fixed price commerce.

But I digress.  The point is that Keith got something very, very right in his article about eBay.

eBay was never meant to be just e-commerce.  It was fun.  It was exciting.  It was empowering.

It was engaging.

There are a couple strong reasons for this.

First, if you’ve read my previous posts on game mechanics in the design of engaging software and websites, you’ll know I’m a big fan of Amy Jo Kim‘s work here.  In fact, eBay demonstrates all five of the “fundamental games” that humans like to play.  This wasn’t done intentionally, but it explains a lot of the almost visceral, addictive reaction that people had to eBay.

Second, eBay captured irrational economic behavior on both the buyer and seller side of the marketplace brilliantly.  Buyers exhibited a number of irrational behaviors that we now describe and associate with behavioral finance.

These irrational behaviors on the buyer side, combined with the game mechanics of the site, effectively created a lift in demand.  Combined with the transparency and breadth of the online marketplace, you had literally a huge multiplier on e-commerce demand.

On the seller side, however, engagement was driving irrational behavior too.  Buyers of collectibles became sellers in order to “fund their habits”.  (I know this personally, since I began selling coins on the site to help keep my PayPal “slush fund” fully tanked so I could buy coins…)   More than anything, people fell in love with the empowerment eBay offered.  You didn’t have to have $100,000 to open a business, an SBA loan, or an MBA.  The web was full of stories of people just driving around garage sales, picking up items on clearance at local department stores, and stocking up at flea markets.  Some of these sellers grew businesses that measured in millions of dollars, promoting hope that anyone could build a business on eBay.

Of course, there was a kernel of truth to this.  An unprecedented number of successful businesses were built over eBay.  But most sellers were nowhere near any sort of traditional business scale.  There is a reason, after all, that PowerSeller starts at just $1000 a month.  And that’s $1000 of sales revenue, not profits.

Can you imagine any real-world storefront with only $12,000 a year in sales?

People would spend 8, 10, even 12-hours a day looking for inventory, listing items, answering questions, and shipping goods.  When people went to the first eBay Live, they even made sure that on the road trip out to California, they brought enough packing materials to keep shipping items.  They made buyers happy because it wasn’t just a business for them, it was a way of life.

In every sense of the word, it was irrational commerce.  It was a labor of love, not economics.  Sure, it was a good way to pad the income of a family.  But for many the money was just a rationalization – they were really in it for the excitement, the activity, the empowerment, and of course, the community.  If you calculated the “wage rate” of many of these sellers, it would be shockingly low.  But no one did, because that wasn’t the point.  It was fun.  It was empowering.  And it was only just the beginning…

I didn’t get to go to the first eBay Live in 2002, but I did go to three starting with the third in New Orleans in 2004.  I’ll never forget, at one point Pierre was touring the booths (I believe he was giving a speech that day).  A group of us were discussing how to manage the insanity of the event – the intensity and sometimes aggression of some attendees who had to have every pin, every collectible.

I won’t get the quote right, but Pierre said something there that has stayed with me to this day.  To paraphrase, he said that he loved the energy, and that the insanity is part of what made eBay great.  If eBay became just another sales channel, then it would lose its magic.

It has been five years,  and for me personally the growth in my understanding of game mechanics, behavioral finance, and web 2.0 product design have given me terms and tools to help explain the irrational engagement that people had with eBay, and currently have with sites like Facebook, LinkedIn & Twitter.

eBay has a very metrics-driven culture, but while site and business metrics accurately reported the results of the incredibly engagement and activity on eBay, as always they never actually provided  the full picture around causality.

So, from my point of view, Facebook, MySpace & Youtube did not kill eBay.  (eBay, of course, is no where near killed in any case, since it continues to be an incredibly large and active site.)

Instead, eBay fell victim to a much more insidious threat than simple competition for eyeballs or time on site.  It fell victim to a version of the Innovator’s Dilemma.  There is a limit to how many people will wrap their lives around selling on eBay.  There is a limit to what percent of people’s purchases they will pursue through an auction process.  There is a limit to the disposable income to spend on collectibles and hard-to-find items – most purchases, in fact, are of new, standard commodity products.  Thus the company and the site follows the aggregated votes of hundreds of millions of buyers and millions of sellers, their “best customers”, and those votes are eventually dominated by the bulk of the e-commerce market.

Reading articles this weekend, like this piece in VentureBeat, they quote Donahoe in the Wall Street Journal as follows:

Asked about eBay’s identity, Mr. Donahoe said he wants shopping on the site to offer the same sort of low-price experience as buying at bulk retailer Costco Wholesale Corp. There, “the inventory is somewhat fluid, but everything they’ve got is a great deal,” he says in an interview.

(Ironic for me, since Costco was one of the examples we looked to frequently in the design and thought behind eBay Express.  I am a huge, unrepentent fan of Costco as both a customer and as a student of great companies.)

eBay 2009 cannot go back to the eBay of 1999, or even 2004.  The size and scale and make-up of the market means that any attempt to “crowd-out” the less engaging aspects of the market would mean drastically reducing the size of eBay.

That doesn’t mean there isn’t hope.  There is still time for eBay to re-invigorate its experience to capture and create elements that drive engagement.  There is time to learn from both the past and the present, and chart a course that will inspire and empower millions.

The original needs that drove eBay to success still exist.  People are finding some of the serendipity and empowerment from Craigslist… but it’s not as actionable or broad.   The game mechanics, for the most part, aren’t there.  Amazon has increased its breadth, but it’s truly an ecosystem designed for large sellers (by eBay standards).  Google has enabled independent websites to purchase traffic… to an extent.  But the more you make selling online like running a business, the more you lose that sense that this is fun instead of work.

Collectors still want to collect.  People still want to find ways to make a little extra money and to be a part of something bigger.  Little kids still collect and trade things from a very young age – no matter if they are stickers, baseball cards, Pokemon, or whatever small colorful items come in sets with variable rarity.  I sold my brother’s broken iPhone (he dropped it in the ocean) for $130 to a man on an island (Reunion) that I had never heard of.  Those eBay stories still exist. Small businesses are still being built on eBay.  Sellers are multi-channel, but eBay can and should offer them unique dynamics that capture a disproportionate amount of their attention, if not their business.  Apple has a small fraction of the computer market, but it captures the lionshare of its attention.  That could be eBay if it was prepared to act boldly and ask hard questions about what eBay reall should be… and shouldn’t be.

eBay cannot be MySpace, Facebook, LinkedIn, YouTube, or Twitter.  Nor should it be.

It should be eBay.

Update (5/27/2009): Turns out I had missed a great post from Rob Go on this same topic, just a few days ago.  Worth reading.

6 Comments Post a comment
  1. After reading the article on TechCrunch, I knew that you would have an insightful response. I agree with your view completely… eBay is not a social networking site, or a video sharing site like YouTube. eBay is designed around buying and selling.

    Still, as a product manager, I can’t help but feel that eBay’s design is stale, and not nearly as engaging as it could be. I agree with your conclusion that sites like eBay could learn from Facebook, YouTube and LinkedIn. In particular… what entices a person to contribute their opinion? What (in the site design) entices a casual observer to actively participate? For eBay, does active participation always have to mean bidding or selling? Sites like Amazon have turned user contributed ratings into a valuable part of their property. I feel that eBays feedback could be vastly improved. Why not let users independently rate products (particularly standard makes and models) and sellers?

    May 27, 2009
  2. James Reffell #

    I agree with this wholeheartedly. It’s actually easier for me to see now, out of the eBay bubble — my personal buying habits were changed by being an employee. Now that I’ve been out a bunch of years, it turns out I’m … a collector! Of old role-playing games. Weird.

    Some of the game aspects still work for me. Completing a collection — oh yes. Finding something that’s undervalued? You bet. The auction and competition part, not so much — I’m that frugal collector for whom the point is to see how much you can find under $10.

    Though there is this one rare game that usually goes for $180 that I’d love to get my hands on…

    May 27, 2009
  3. Jim Griffith #

    Hi Adam,

    Great piece. Spot on in fact. (by the way, first eBay Live was in 2002 in Anaheim. The second, in Orlando, was in 2003.)

    regards,

    Griff

    May 29, 2009
  4. Bruce #

    eBay could gain a significant margin of its lost seller base (and their desirable inventory), if they simply made the fee structure more realistic again for sellers.

    The 2008 fee structure for the new fixed price format really only helped large commodity sellers, especially those with SKU based product.

    Time is money and by now, many former sellers realize that a cashier at Wal-Mart makes more money per hour than the average ebay seller in 2009. eBay underestimates that people talk and the word got out awhile ago on this…

    You are absolutely right; ebay selling was more about a lifestyle than about the money actually earned. eBay could once again tap into this but they need to realize they can ultimately make MORE money by charging LESS.

    May 29, 2009

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