Sunday, September 14, 2008

The Network Effect Works in Both Directions!

According to Wikipedia: "In economics and business, a network effect (also called network externality) is the effect that one user of a good or service has on the value of that product to other users....
.... Over time, positive network effects can create a bandwagon effect as the network becomes more valuable and more people join, in a positive feedback loop."
We've seen real world examples of the "network effect" in the exponential growth of companies like MySpace, Facebook, Twitter and one of the first "network effectors," eBay.
During eBay's formative years, the site was dominated by sellers, or more accurately traders; as most users on the site, both bought and sold. As the site grew and became part of popular culture, the "network effect, began to have an impact and propelled the site to exponential growth. As the user base grew, the mix of users began to change; creating positive results for sellers. Soon there were more buyers than sellers and I can attest to the benefit this had for those of us making a living on eBay; as a seller, my business grew over 400% from 2002 through 2003, but as word spread, that sellers were "making millions," it began to also increase the number of sellers coming to the site. 
At the beginning of 2004, I was projecting sales of $6 million by the end of the year, but when all was said and done we only reached $4.6 million, a 28% increase from the year before. My company began seeing problems in March of 2004, as a flood of new competition came to the site and I was slow to react, but that's another story. I believe the media category started to see problems before other categories.
Adam Nash, a former Director of eBay Express, explained this phenomenon in his A Eulogy for eBay Express; "It all started in Q4 2004, which was a real wake-up call for eBay. It was the first quarter where the metrics made it clear that there were significant issues with the way buyer demand was scaling on eBay.com." 
So the issues we see on the site today, began almost 4 years ago and nothing eBay has tried since has been able to stem the tide:
  • Stores in Search - tried and then reversed after 45 days.
  • Punitive fee increases on Stores (Aug 2006)
  • Official Launch of eBay Express [eBay Live 2006]
  • Re-focus on CORE with Windorphins and "Shop Victoriously" (2007)
  • Meg leaves Q1 2008
  • New management and new Focus on Fixed Price (2008)
Through all of these attempts at reversing the trend, we have seen no improvement. In fact the current problems on the site are greater than at any time in eBay's history; buyers have disengaged and sellers have moved to other venues. 
Has the "network effect" worked its magic in the opposite direction? I think a case can be made for that. Buyers left first and are being followed by sellers, the exact opposite trending of the early years of eBay.
The fact is, it takes less time to unwind something then it does to wind it up. eBay grew from 1995 to 2004, to reach the top of the mountain, but it appears, once they go to the top of the mountain they they just rolled over the other side; that growth is unwinding and appears to be spinning out of control. 

Just my 15%

11 comments:

Henrietta said...

What comes to mind is an endless song my kids loved and used to drive me insane for years "the bear went over the mountain ... to see what he could see"

Anyone who has children knows what the bear saw, another mountain.

Sellers are tired of mountains and long for the green and level playing fields, which have been paved and turned into a parking lot for the likes of Buy.com

Anonymous said...

So sad. It sounds like you've just layed the groundwork for a eulogy for ebay. So many of the little sellers on ebay were also buyers, and vice versa. When they began raising fees on the sellers, they also began to curtail buyer demand, hence the network effect in the opposite direction.

ms.pat said...

Ebay's greed has a lot to do with the state they're in today. You can't just squeeze revenue out of sellers to the point where they can't make an honest profit and they can't offer buyers good prices. I believe that's part of what happened all along. Also, back in 2004 is when they started to dumb down auctions - eliminating Going, Going, Gone and started cluttering the site with ads. When times are tough most large companies will cinch their belts and put on a hiring freeze until they're back on track....not Ebay, they went out and bought Skype - and threw millions of dollars down a Chinese well (is China still getting free listings?). Much of the downfall can be blamed on really poor planning and a desperation to make every quarter look so much better than the last one. Well, now sellers caught in the middle and thoroughly disgusted are on their way out. I found it surprisingly easy to leave the site since they messed up my business so much I couldn't sell much of anything. Ebay mistakenly has/had the idea that they bring buyers and sellers together...well, that's simply not true for most small sellers and some powersellers too. Its no longer a privilege to list on that site and Ebay better understand that. They've made it hell on sellers and now sellers are telling THEM where to go!
Now, I say I hope they stew in their own juice - they get no pity from me!

Oh...and Mr. Donahoe, I'm still waiting to get that picture of you on the unemployment line...camera is loaded and ready ;-)

Watching and Loving it all said...

In a way, I am getting some sort of sick pleasure out of watching ebay sink into oblivion. I was with them since 1998 selling, and saw the way they disrespected sellers, heaping fee after fee on them, creating rules that hurt rather than helped them. Sellers complained and ebay didn't listen. (well, they did pretend to listen, I have to give that to them.). This is basically what they get when they alienate 50% of their base (which was probably a much higher percentage when you take into account that a good number of the small sellers actually used their proceeds earned on ebay to also buy on ebay, thus creating a micro economy). Good luck ebay. I'm watching with satisfaction as you flounder around in your death throws.

Randy Smythe said...

The company isn't going to go out of business or anything but the marketplace business will continue to struggle.

They will layoff the employees and cut costs so that their profits are still there but none of that will stoke growth.

The Q4 earning s call to be held mid-January will be a very interesting one.

ms.pat said...

I think I remember Donahoe saying, at the start of the year, that the stockholders won't be happy this year. I wonder if he expected what is happening with the sellers. I know he couldn't predict the economy but I'm thinking he knew a lot of sellers would leave and they would have their work cut out for them. In my mind they're only keeping us until their retail site is up and running - and then they'll cut all small and medium sellers loose. Right now they're going to need us to pay the fees for the big retail stores that will be coming in and probably listing free at first. I doubt they'll be selling any older or unique items in the future. That would make them a kind of "super-amazon". Hope I'm wrong. At this point its anyone's guess.

nadine said...

ms. pat, My guess is that they intend to keep selling the older and unique items to 'scent the trail'. If that weren't their intention, they could have kept Ebay Classic going and tried another iteration of Ebay Express, which might have worked if they had marketed it. Their decision to construct the new Amazonified Ebay inside the ebay.com site shows that they don't dare leave the old site and the old marketplace behind. They are counting on it to hold up during the transition and beyond, until the growth of the New Ebay takes over, which is rather unlikely imo.

Anonymous said...

Ebay has enough cash and assets to stay afloat for quite a while. But it does make sense that they're using existing sellers to pay the bills while they get their diamond sellers in place.

In Ina's controversial blog: Operation Catalog, she said, "...and it's my understanding that participants in this pilot will not be charged listing fees, nor will they have to meet eBay's seller standards during the 90-day pilot program...."

Sure, they'll let the little guy stay, if you can make it or want to put up with Ebay's crap. But, down the road, Ebay will kick the little guy to the road.

The general public, who is the average little guy, doesn't like big money bully corporations. Ebay has made some unwise decisions and in the end, I think they'll pay for it.

I just love a good mystery. Especially the ending, when the bad guy/gal gets his just punishment. And yes, John Donahoe will have his golden parachute. Age old story: gain the world, lose your soul.

Rich said...

A few phenomena driving the demise which haven't been discussed much:

1-The "unintended consequences" that occur when changes are made in a new media [McLuhan]. eBay is clueless and probably bewildered by them...

2-The "Market For Lemons" Law [which is ripe fodder for a blog post by you Randy]. [It won a Pullitzer Prize for economic in the early 1970s].

3-The old selling axiom that for every person you piss off, the customer tells six of his/her friends [on "6" your mileage may vary...]

The beast is approaching the event horizon of an ecommerce black hole and there will soon be no possible rescue...

But, that's just MHO ;)

Tony P. said...

When ebay decided to ignore and discredit its customers' concerns, starting in 2004, they began to stroll down a path that has led to where they are currently.

It's a "package deal" - you can ignore any Suggestions, but you'll also end up ignoring any Warnings. We knew the (network) effect of Bad Reputation, no matter if that reputation is earned as a "haven for scammers" or as an Uncaring, Non-responsive service provider.

Ebay exhibited the same qualities as the worse Scammer that ever preyed from within the site. And they still do. They don't see IT like that and that makes it even worse. Technically, that makes them sociopathic, but I prefer to think of them as dumbass jerks.

We - the sellers and buyers - have ALWAYS known more about the ebay transaction, what drives IT and what qualifies as Good Customer Service, than anyone in the SJ ivory towers.

FU EBAY!!!! (yes, that's my new mantra)

My Feedback % and DSR scores are just a little better than Buy.com, but the big difference is the fact that I didn't completely piss-off 493 ebay users last month. That is some major Network Effect, in my book.

The End Has Come said...

Good point Tony P: Every unsatisfied customer on ebay is a customer that turns away from ebay to another venue. Adding large sellers who give poor service might lead to the speeding up of ebay's demise.