Tuesday, June 10, 2008

Innovate or Die! eBay at the Crossroads.

I was watching a TV Special on CNBC last night entitled "The Business of Innovation" and sub-titled "From Boardroom Theory to Business Reality" and I kept waiting for the segment where John Donahoe of eBay came onto the stage and discussed the "Disruptive Innovation" happening at eBay.

Of course that segment of the show has yet to be written and the outcome is far from certain. Will the "Disruptive Innovation" happening at eBay be an example of how to re-invigorate a stagnant business model or how to kill a "good thing".

During the show, they profiled numerous companies that had undergone "disruptive innovation" and not only survived the changes but succeeded in fundamentally changing their business. Do you remember the Korean electronics company called GoldStar? I know I only had a faint recollection of the company. I was surprised to learn that Goldstar is now known as LG a leader in many consumer electronics and household appliance categories -- they changed their brand in order to succeed. Some of these companies are still a work in progress; take the venerable Eastman Kodak.

Kodak is a great example of a business that was in crisis. They made their money selling film and chemicals for film processing and were a hugely profitable, well-known and respected brand, but the winds of change in technology had brought them to a crossroads. Digital cameras had taken over the market and very quickly the once vibrant company was in crisis.

In Nov of 2006, Business Week profiled the struggle at Kodak:

"When Eastman Kodak vowed in 2000 to become a leader in digital cameras, the idea seemed ludicrous. The old-line Rochester (N.Y.) company had film and print all through its DNA. Yet by 2005, Kodak ranked No. 1 in the U.S. in digital camera sales. Its digital sales surged 40%, to $5.7 billion, even as its film-based businesses fell 18%. The key: product innovation, something Kodak knew how to do oh-so-well. The company designed one award-winning breakthrough after another to make digital photography nearly as simple as pointing and clicking.

So why does Kodak Chief Executive Antonio M. Perez now dump on digital cameras, calling them a "crappy business"? Simple: While blazing growth of camera sales has helped blunt the effects of Kodak's fast-fading film revenues, it hasn't replaced the rich profits of the film business. Even the best mass-market cameras yield slim profit margins. So, although Kodak's digital camera business was a roaring sales success, it turned out to be a crushing profit disappointment. Perez, who arrived at Kodak in 2003 and became chief executive last year, had championed a dramatic change only to find it wasn't the right model for turning the company around.

Now he's crafting yet another strategy for Kodak, its third in less than a decade. Building on the mistakes made and lessons learned in recent years, Perez is attempting innovation of another sort -- reinventing the company's core business model. He aims to make Kodak do for photos what Apple does for music: help people to organize and manage their personal libraries of images. He's developing a slew of new digital photo services for consumers that he expects to yield higher returns. They include everything from online photo sharing to a rapid-fire scanning system, called Scan the World, that takes shoe boxes full of yellowed snapshots and converts them into crisp digital images organized by the date originally printed. But the shift from hard product to digital services is a huge challenge. It's "a very hard transformation," says Perez. "History says very few companies have made it."
(bold is mine)

The parallels between Kodak and eBay are numerous; eBay is a global leader in auctions with 90% of the worldwide auction business, much like Kodak was the leader in film, but auctions are not growing fast enough for investors and it is clear that consumers want Fixed Price convenience over "Shopping Victoriously" with auctions, so eBay is changing the way they do business and now want to become the global leader in Fixed price sales.

Just like Kodak became a successful Digital Camera company, eBay feels they can become a successful Fixed Price company, but if eBay doesn't take into consideration the lessons Kodak learned along the way, they are doomed to follow in their footsteps and in a few years they will once again have to revamp their business model, each time moving further and further from their roots.

History is a great teacher, if we actually choose to listen to her. eBay can be a successful Fixed Price leader, but like Kodak not at the profit margins they are used to. There is a reason Amazon is the current leader in the Fixed Price business, they spend money on the "buyer experience" they don't have huge margins because they have exchanged huge profits for huge growth and their whole business model is built on constant innovation. They have a long-term plan and they are aggressively pursuing that goal. eBay, on the other-hand, has a short-term plan and they are aggressively pursuing that goal, the major difference is that eBay will be working on a new plan in a couple of years while Amazon will just continue to innovate.

In my view, eBay has made a fundamental error, they are killing their high margin auction business in favor of a low margin fixed price business, thinking somehow that they can magically make the two co-exist on the same platform-- it isn't possible.So will eBay succeed in changing their model like Kodak did, only to find that their profits are squeezed and investors are still unhappy 1 year from now, or will they step back just for a second and look at some history?

There is certainly a need for change in the eBay business and many of the changes currently being made are correct in theory, but they are based on a fundamental flaw with the business model. Until, that flaw is corrected these changes will not succeed.

What I love about the Internet is that a year from now you will be able to find this post and quickly decide for yourself if I was correct. Is my 12% worth it?

Just my 12%


Anonymous said...

Fantastically written post Randy. Time will tell, indeed. I hope you are wrong, but I have a feeling you may be right...

Susan said...

You said: " . . the major difference is that eBay will be working on a new plan in a couple of years while Amazon will just continue to innovate." I absolutely agree with that, Randy. Too many patches and not enough cure. I hope there's some big, super-secret eBay 2.0 being built to take the place of the old version, but I just don't see it happening. I fear all those Band-Aids they continue to apply are going to make the underlying eBay structure totally topple.

Anonymous said...

Great post, I hope some employees over at ebay read it!

The deal with Buy.com is a perfect example of how ebay's policy changes aren't going to result in greater revenue for them.

Buyers could already get 99.7% of those products on ebay from countless, other reliable sellers at bargain prices. The sales have shifted from all the other ebay sellers to Buy's ebay store but how does that create new revenue for ebay? All that happened was sales moved from one seller to another larger seller...

Unless, the larger, more covert motive is to weed out more independent sellers than ebay wants to really see in all those commodity catagories....hey, we just figured it out!

Anonymous said...

Whether eBay becomes the world leader in Fixed Price, I could care less. I am a small seller of unique items (in other words Antiques and Collectibles), mostly used. Intentionally or not, eBay is slowly killing off sellers such as I. When eBay achieves whatever reinvention goal they have there will still be a very large market for items I sell. But, unless eBay proves wise in their thinking (boy that will be something new), the market will not be on eBay. I'm just waiting for the turmoil to settle a bit and hopefully valid new market places emerge.
Not wishing eBay ALL THE BEST

Anonymous said...

Ebay is all disruption and no innovation. That is why they will fail. Ebay watching is like watching a car crash in slow motion.

permacrisis said...

Ready, aim fire. Got the big toe!
Now for the other four.

That's ebay for you.

Maybe next they'll see the huge, untapped market for film developing!

Randy-- great post. These past 2 years you've really blossomed.

Didja see Richard Brewer Hay had to SHUT DOWN his 'Feedback vs Feedback' blog entry because ppl wouldn't stop posting?

This, even thought they buried it to page 2 under 6 other inane irrelevant topics nobody gave a hoot about.

Tony P. said...

The speculation: is ebay wanting to force the small sellers off? The small sellers pay full fare, yet Buy (et al) pay less. With an ebay full of Big Guys, the revenue will shrink. Ebay will make less money.

I suspect that ebay isn't actively trying to make less money, but I guess that is a possibility! They are Haaarvaaard MBA's, so they do know much more than a mere bit of Noise, like myself.

Seriously, I don't believe any of their contrived poop. The auction segment is waning, but that's mostly due to ebay's own actions and directions. The "novelty" and "economy" reasons only play a small part.

I've always said that the total take from the P&G category for *one week*, would fry the take from the entire media group for a solid month. Just the FVF from the P&G category would prolly do that - not even counting the insert fees.

It takes a whole Chitload of DVD's and CD's to make up the FVF on one single $12,000 piece of antique porcelain. And the market for that $12K piece is still strong, which also dispels the 'auctions are dead' myth.

Anonymous said...

Just noticed oodle which is owned by wal mart uses ebays patented best match as a search option.