How the World Got Wired · What Survived

eBay, Quietly

While Amazon was nearly dying and then recovering, a different internet company was, very quietly, behaving as if the bubble hadn’t happened at all.

It was called eBay, and its founder was a young French-Iranian-American computer programmer named Pierre Omidyar.

Omidyar had built the first version of eBay in his living room, over Labor Day weekend in 1995. It was an online auction site — you posted something you wanted to sell, other people bid on it, and at the end of the auction, the highest bidder won. The first item ever sold on eBay was a broken laser pointer, for $14.83. Omidyar emailed the buyer to ask if he understood the laser pointer was broken. The buyer replied: I’m a collector of broken laser pointers.

eBay grew. People sold trading cards, Beanie Babies, old computer parts, antique furniture, and millions of other strange things to each other. Within a year, eBay was doing enough business that Omidyar’s web-hosting company asked him to start paying business rates. He started charging a small fee — twenty-five cents — for each item sold. The fee paid for the hosting.

Then, because the site kept growing, the fees added up to more than the hosting costs.

And then, because the fees were almost pure profit (eBay didn’t have to buy or ship or store any of the things being sold), the company turned out to be enormously profitable.

This is unusual. Most dot-com companies you have read about lost money for years. eBay made money almost from the beginning. By the time of its public offering in September of 1998, it had already been profitable for several quarters in a row. By the height of the bubble, it was one of the only big internet companies that could honestly say: yes, we make actual money.

There is a particular kind of business that eBay turned out to be, and you should know about it because you will meet it again. It is called a network business. A network business gets more useful as more people use it. eBay was useful because there were a lot of buyers — which made it attractive to sellers — which brought in more buyers — which attracted more sellers. Once it had reached a certain size, eBay was nearly impossible to displace, because no new auction site could match its number of users.

The technical word for this kind of advantage is network effects. Once a network business gets big enough, it becomes a kind of fortress. New competitors cannot easily attack it. People sometimes call this a moat, after the water-filled trenches that medieval castles used for defense.

You should remember this idea. It is the explanation for most of the largest companies you are about to meet in the next part of this book. eBay was the first internet company to clearly demonstrate it. It was not the biggest. It was not the most famous. But it was, in a way, the most quietly important — because it taught a generation of business school students and investors that the right kind of internet business could be unbreakable.

eBay bought a small payment company called PayPal in 2002, mostly so that the buyers and sellers on its site would have an easy way to pay each other. PayPal turned out to be even more interesting than the auctions. (We’ll see one of PayPal’s founders later in the book.) eBay eventually let PayPal become its own company again, in 2015. Both companies are still very much alive today.

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