How eBay Works

In 1995, computer programmer Pierre Omidyar set up a Web site called AuctionWeb as a place for people to auction off their collectibles. The story goes that his girlfriend needed a place to sell her Pez collection, and thus eBay was born. A little bit closer to the truth is that Omidyar, like every other innovative thinker in the computer industry in the early '90s, saw the potential of the Internet and was determined to utilize it. His girlfriend's trouble finding collectors who were interested in buying her Pez collection helped reveal the bid idea that would eventually become eBay. Omidyar advertised AuctionWeb primarily through postings in Usenet groups. Some of the first items on AuctionWeb included a pair of underwear autographed by Marky Mark, a Superman lunchbox circa 1967, an old Sun-1 workstation, a 35,000-square-foot warehouse in Idaho and Omidyar's own broken laser printer (which sold for $14). In 1996, AuctionWeb became eBay.

In 2004, eBay hosted 1.4 billion listings with a total of $34.2 billion changing hands. In September 2005, eBay purchased Skype, a global VoIP service with 54 million customers, for $2.6 billion. It also owns PayPal.com, Half.com, Shopping.com, Kijiji.com, ProStores.com and Rent.com, and it has a 25 percent stake in CraigsList.com. By all financial measures, business in eBay world is good.

The rise of eBay stores, where sellers can create their own store fronts and sell items just like they had their own Web site -- except that they pay eBay for each listing and a cut of every sale -- is bringing eBay into the mainstream consumer market and giving people a new revenue stream. A 2005 survey found that approximately 725,000 people living in the United States earned all or part of their income from eBay sales, and another 1.5 million regularly use eBay to earn a little extra cash. The eBay juggernaut has spawned an entire industry that revolves around its platform. Software developers are creating applications to help people find misspelled listings on eBay so they can win items for less than they're worth. Other auction-related software includes "sniper" programs that automatically place a user's bid at the last possible second and programs that alert users to outbids and soon-ending auctions on their cell phone or PDA. Brick-and-mortar eBay consignment shops exist solely to sell people's unwanted items on eBay if they don't feel like doing it themselves.

EBay isn't the only online auction Web site, but it's by far the biggest. Yahoo!, Amazon and Overstock all have their own auction services, and others include uBid.com, AuctionFire.com and PoliceAuctions.com (where you can bid on government-seized property). There are also dozens of fledgling auction sites that offer free listing and other incentives to draw customers from eBay, but eBay continues to break records. Some people think eBay's success will ultimately lead to legal problems. With almost 5 million new listings per day, it's impossible for eBay to make sure none of them breaks a law. In 1999, eBay cancelled an auction for a human kidney (which had reached a bid price of $5.7 million) and several auctions for large firearms, including a rocket launcher and a bazooka. That year, eBay had 6 million registered users. Now it has 150 million. Although eBay prohibits the sale of human body parts and firearms, it's unclear what type of legal responsibility the company might have if one of those auctions were successfully completed. As of October 2005, eBay is looking at possible fines resulting from the alleged sale of prescription contact lenses on the site, even though "Prescription Drugs and Devices" are on eBay's list of prohibited items.

Its astonishing reach may ultimately be its downfall, but for now, eBay remains the poster child for Internet success.

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