How eBay Makes its Money (EBAY)

eBay Inc. (EBAY) began in the mid-1990s as a way for otherwise unconnected buyers and sellers to meet, through the previously unknown method of typing in a URL. According to folklore, founder and current chairman Pierre Omidyar created the site to help his girlfriend deal in Pez candy dispensers. The company now officially debunks the legend, which was created to add public relations color to this unfamiliar, revolutionary new way of buying and selling.

In truth, one of the first items sold on the site was a broken laser pointer. When Omidyar clarified to the buyer that the listing specified that the laser pointer didn’t work, and was told “I know. I collect broken laser pointers,” it became clear that the markets for obscure and esoteric items were larger than anyone had imagined. Put all those markets together, take a cut of every sale, and you’d have a viable business. By the way, even though the Pez story was fictional, there are still enough Pez aficionados among the eBay membership to warrant 10,652 listings for dispensers and dispenser accessories as this article went live. (For more, see: Odd eBay Sales.)

eBay is an idea that came along at the perfect time — the moment that technology had advanced to the point that the ultimate worldwide marketplace became feasible, ushering in an era when spending money on bricks, mortar, or storefronts became more or less optional. Not that eBay doesn’t have huge capital expenditures, mind you. Facilitating a site where market participants come together requires 52,533 servers, consuming 20 megawatts of power, all of it hidden behind the interface of a single unassuming website. Actually, that’s not quite true. The company operates dozens of sites, the eBay brand localized for different markets from Sweden to Poland to Hong Kong. (For related reading, see: How We'll All Be Amazon.com Customers Eventually.)

Even 20 years after its founding, just the description of eBay is elegant in its pithiness: a marketplace for anything (well, except ivory, guns, Nazi memorabilia and a few other forbidden items). Finally, those collectible porcelain dolls and obsolete cell phones can generate cash, instead of just being donated to the local charity store. (For more, see: Navigating E-commerce: Alibaba, eBay and Amazon.)

Like most of its dotcom boom brethren, particularly the successful ones still doing business today, eBay grew both organically and through acquisitions. In this century it’s bought a company roughly every three months, including Skype which was later sold to Microsoft Corp. (MSFT) and StubHub, not to mention a quarter interest in Craigslist. But easily eBay’s most noteworthy acquisition was that of PayPal in 2002, which it purchased for $1.5 billion and will spin off into its own company in 2015. That makes this something of a story of two related concerns. PayPal will soon be publicly traded, and the spinoff will at least temporarily remove eBay from its position as a $68 billion titan. In fact, it’s estimated that the sale will almost halve eBay. PayPal was responsible for 40% of the combined company’s revenues in 2014. (For more, see: What PayPal’s Split from EBay Means for Customers.)

While neither eBay nor PayPal has a literal monopoly, they’re each pretty close. One is the definitive consumer goods market, the other the definitive way to get paid online. That’s what business school professors call “synergy.” Neither has any serious competitors to speak of. eBay boasts 155 million users, which is only 3,000 times as many as the next largest all-purpose online marketplace, Bonanza. Even the latter’s low listing fees (3%) can’t compensate for eBay’s ability to offer 155 million potential buyers to every seller. Never underestimate the importance of being the first to market. (For more, see: 5 Successful Companies that Survived the Dotcom Bubble.)

As anyone who’s paid eBay’s 10% listing fees can attest, that market share allows the company to make an absurd amount of money. Revenues increased to $17.9 billion last year, representing growth that’s more sustainable if less exponential than eBay enjoyed in its early years.

Not all of eBay’s money comes from listing fees, though. Or did you not notice the highlighted listing on every page, every time you shop? eBay sells $2.8 billion worth of advertising every year. If eBay were purely an ad agency, it’d be among the United States’ couple dozen largest. (For more, see: How Does Alibaba Make Money? A Simple Guide.)

Since 2011, eBay’s international revenues have outpaced its domestic ones. Last year the company generated $8.5 billion in the United States, $9.4 billion elsewhere. eBay’s second-largest market is the United Kingdom, where revenues topped $2.6 billion last year. That’s followed by Germany at $2.1 billion. Curiously, the rest of the world is pacing growth in the Big Three markets almost note-for-note, accounting for 26% of revenue every year since 2011.

Not to overstate the case, nor to predict the future, but eBay certainly seems to be in an ideal position to maintain its dominance for decades hence. The now-diminished, then-unassailable players of bygone decades — United States Steel Corp. (X) is one example that comes to mind — seem to have been far more susceptible to competition than eBay is today. The barriers to entry in eBay’s industry are prohibitive, the reputation of the market leader is intact, and it’s hard to imagine future technology superseding what we have now, at least with regard to pairing up buyers with sellers. Until the internet becomes obsolete, it looks as though eBay will remain the online marketplace for the world at large. (For more, see: 8 Secrets For Selling on the New eBay.)