EBay
Context
Ori Shimoni in Decentralized Commerce:
"In the 1980s, the classified model began migrating to online forums like Usenet and Bulletin Board Systems (BBS). By 1986, groups like misc.forsale and alt.forsale became bustling hubs for classifieds—from software and electronics to used cars, collectibles, and job listings. These forums operated through a distributed architecture—Usenet’s network of servers synchronized content across the internet without central control, while BBS’s independently operated nodes connected through protocols like FidoNet.
This digital bazaar worked well in its early years. Users posted items for sale, interested buyers responded via email, and parties negotiated directly. Reputation developed organically through posting history, and most transactions concluded with local meetups or postal exchanges. There were no listing or transaction fees, and moderation was handled through community norms. The difficulty of getting online meant most users were tech-savvy enthusiasts who valued their reputation in the community. Bad actors could be identified through their posting history, and community members quickly warned others about fraudulent behavior.
But as millions of new users flooded onto the net in the mid-1990s, these informal trust mechanisms broke down. Scammers exploited their anonymity, spam drowned out legitimate posts, and fraud rings emerged. By 1997, what was once a vibrant marketplace had become a cautionary tale about the limitations of informal trust systems at scale.
Into this void stepped eBay (originally AuctionWeb) in 1995. eBay brought the auction mechanism online—a system that discovered market value through competitive bidding while creating urgency and engagement, unlike static classifieds. But eBay's real breakthrough came from formalizing reputation. In 1997, the platform introduced the Feedback Forum, creating a public record of seller reliability by allowing buyers to rate transactions. By combining auctions with reputation tracking, eBay addressed the pricing and trust problems that limited earlier forums. Transactions skyrocketed, and the company went public in 1998 at a $2 billion valuation. In 2002, eBay strengthened its trust infrastructure by acquiring PayPal, adding secure payments and buyer protection. This created a more reliable trading environment but increased costs, with fees growing from 6% to 12% by the mid-2000s as it evolved from a hobbyist marketplace to a commercial platform.
Despite its successes, eBay struggled with trust issues. Counterfeit goods, false descriptions, and non-delivery scams remained common. The platform took a relatively hands-off approach to policing transactions. While providing a dispute resolution process and some buyer protections, it positioned itself as a neutral marketplace rather than guaranteeing outcomes. This limited liability approach allowed for rapid scaling but left significant risks for users.
Around the same time eBay was founded, Craigslist emerged with a different approach to online commerce."
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History
Charles Leadbeater in We Think:
'The best business idea of the last ten years came about by accident. At least that is the impression Jeff Skoll gives of the growth of eBay, where he was one of the first employees working closely with the founder Pierre Omidyar. Skoll’s account is that a mixture of luck, laziness and necessity lead eBay to adopt a radical low cost, community-based business model. In many respects there is nothing new about e-Bay: it simply applies the scale and ease of access of the Internet to the age old flea market, to connect sellers to an unimaginably large pool of buyers. In other respects, particularly the way the company has been built upon a community, it marks an organisational mutation that could play havoc with traditional, top heavy, process driven, businesses. The fact Omidyar and Skoll stumbled upon the model for e-Bay by accident rather than design was crucial to the company’s subsequent success. In 1995, eBay had about 122 traders. A decade later it had close to 122m, with 25m items for sale at any one time. If eBay had been designed traditionally, from the top down, it would have been too rigid to respond to the emerging needs and ideas of its contributors. Instead, because Skoll and Omidyar could not afford to have central research and development, customer services and a swanky headquarters, eBay had to be built largely bottom up. One of eBay’s most creative resources are the participants. They create the value, using the platform and tools e-Bay that provides.
Sitting in air-conditioned offices with panoramic views across San Jose, amidst the cultural desert of Silicon valley, Skoll exudes none of the hype and hubris associated with valley entrepreneurs. He is Canadian, understated, alert and neatly turned out. An unlikely visionary he is fidgety and highly intelligent. “Traditional companies did try to copy us but each time they did, they just treated people like wallets,” Skoll explained. “They did not see them as a community of participants, and so they did not really connect with them. They just saw the users as a bunch of transactions to be managed. People did not stay loyal to eBay because the technology was better but because they wanted the sense of community.”
eBay has created a shared trading platform, laid down some rules and norms and then provided participants with tools that make it very easy to take part. As in Wikipedia, there are few barriers to entry. Anyone can trade almost anything. Most of the action, and so the value, comes from interactions within the community that operates on the common platform that eBay manages. The value does not flow from e-Bay down a pipeline to the consumers; eBay is not a value chain like Wal Mart or a Tesco. Skoll and Omidyar had to think about the task from the other way around because they lacked the resources for a traditional solution. They could not afford a large customer-services call centre. So they had no option but to see the users as participants, contributors and players, creating collaborative solutions, for themselves. eBay is a market place but also mass self-help on a global scale: the barefoot philosophy taken into business.
After launching the original site – the basic architecture of which Omidyar devised on this home computer over a Labor Day weekend in 1995 – the team were inundated with questions from people trying to work out how to make the auction system work. Omidyar is not a workaholic. He did not want to answer detailed questions from eBay users. So he set up a bulletin board through which people could get their questions answered by other users. eBay participants learned from one another what they could do with the site. They had to make it up as they went along: there was no manual. Omidyar provided the kernel that triggered massive innovation in use. In the site’s early days it was mainly attracting collectors, people with shared hobbies, who were used to swapping tips with one anther, not just buying and selling. Those norms of mutual self-help helped to forge the eBay culture.
The most basic tool for any eBay participant is an item for sale form, an idiot proof ticket to the trading system that describes what you are selling. But as soon as people are given tools it becomes very difficult to predict exactly how they will be used. The eBay rating system is a prime example of a recurring story with innovation: the authors of an innovation often do not understand how their new product will be used. In February 1998, just before eBay went public, the company introduced a system to allow buyers to rate sellers using a stars rankings. Skoll imagined buyers would use the rating system to warn other participants that a seller was untrustworthy. Instead buyers started to use it to praise as well as to complain. They liked having a say. They did not want to be treated as dumb wallets. As a result, good traders built up reputations that meant they were more likely to be trusted by future buyers. A reputation built up on eBay cannot be transferred to another platform. People with good reputations, the major traders, had an incentive to stick with eBay. The tool thus provided a way to lock in traders to the eBay community that gave them status. That was not eBay’s intention. It was a stroke of accidental genius.
Innovating through co-creation with participants requires a lot of trial and error, adaptation and adjustment. You have to give people tools to play around with and see what they pick up on. Rapid learning is much easier if you get fast feedback: make a lot of small mistakes early to avoid making big mistakes later. eBay the company made lots of mistakes which Skoll says stemmed from thinking that the company was the repository of all knowledge and the source of the best ideas. When eBay the company unilaterally decided to make a change to the site - to divide up the Barbie Doll section into dolls and accessories say – it might have made sense to the specialists in marketing. But not necessarily to the Barbie participants. “Most times when an idea came top down from eBay the company it was a mistake. When it came from the community up it was much more likely to succeed,” Skoll reflected. “You can only lead a community so far. It has to be very interactive. It helps to have a few simple rules, to set a few guidelines and boundaries. But then you have to have faith in the people using the system, that they have the intelligence to work it out for themselves. It’s not up to eBay the company to tell people how to present what they are selling or how to ship it. They can work that out for themselves.” So not only do many of the best ideas come about by accident, they do not come from the company at all. They come from the community that the company services.
The almost organic relationship between company and community changed dramatically when eBay the company went public. Many members of the original communities who got the site going felt cheated. The company had to start taking decisions about what it would not allow to be traded, including firearms and fake Rolexes. Many people now regard eBay as just another company, running a trading system or market. However community is still what distinguishes eBay from its competitors." (http://wethink.wikia.com/wiki/Chapter_5)