Perfect Store, The

Copyright © 2002 by Adam Cohen

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First eBook Edition: December 2008

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ISBNL: 978-0-316-05464-5

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Introduction

Pierre Omidyar can still remember the exact moment when he realized that eBay, the clunky auction website he was running out of a spare bedroom in his Silicon Valley town house, just might change the world. It was when he tried to sell his laser pointer.

EBay was called AuctionWeb back then, and it was a mess. It had just seven categories, written in cramped blue-black type against a dull, gray background. The item listings, and there were not many, were mainly for old memory cards, secondhand modems, and other computer geekery. To economize, Omidyar was hosting AuctionWeb on his cluttered personal web page, giving the whole project a distinctly amateur feel.

Omidyar had tried to build momentum for the site by talking it up to his friends and colleagues, but their reaction was cool. Cyberspace was still intimidating enough that even big-name corporations were having trouble getting consumers to spend money online. Yet here was a ponytailed computer programmer who looked about eighteen, with an odd little site no one had heard of, insisting that strangers would be willing to trade with strangers in online auctions. Even Omidyar's friends did not mind telling him it all sounded a little crackpot.

So far, the skeptics had been right. Along with his informal attempts at word-of-mouth promotion, Omidyar had been announcing the launch on Internet directories that listed new websites. "The most fun buying and selling on the web!" he gushed in one post, though AuctionWeb had thus far been the site of few sales and not much fun. Back then, everyone with a domain name and a server to host it was trying to get a website off the ground. It looked like AuctionWeb would be just another one of the horde that faded away for lack of interest.

The truth was, that was just fine with Omidyar. When he had banged out the computer code for AuctionWeb over Labor Day weekend, he thought of it as a hobby, and a chance to practice programming for the Internet. He certainly never considered quitting his day job. Just keeping the site running and pulling it back up from its constant crashes was taking up most of his time, and Omidyar was not the workaholic type. Failure was definitely an option.

It was during these lumbering early days that Omidyar decided to sell his laser pointer. Like the site itself, the laser pointer had been a whim—a cheap junior-executive tool he had picked up in a moment of mild ambition. He had bought it with visions of making impressive presentations at work, but all he had used it for so far was pet abuse, shining a red dot on the carpet and watching as his cat chased it around for hours. Two weeks after he bought it, the laser pointer stopped pointing. Omidyar replaced the batteries, but it still would not work. He was going to throw it out.

Instead, he decided to auction it off. It would be a good way to test out AuctionWeb, he figured, and it would cost him nothing. Broken Laser Pointer," Omidyar typed into the heading. He gave the model number and said he had paid thirty dollars for it new. He was careful to explain that it did not work, even with fresh batteries. After starting the bidding off at one dollar, he promptly forgot about it.

The first week, there were no bidders. Omidyar checked the second week and noticed someone had actually bid three dollars. Then someone else bid four dollars. Bizarre, he thought to himself. By the end of the two-week auction, the bidding had reached fourteen dollars for something he guessed was worth—well, just about nothing. As he packed the broken laser pointer up in its case and sent it off to the high bidder, it occurred to him that AuctionWeb had a bright future ahead of it.

Omidyar was telling the laser pointer story one cool October morning in Paris at an outdoor table at Fouquet's, the landmark art deco café at the corner of the Champs-Elysées and Avenue George V. Thinking back on those early days by now required a considerable mental leap. Only four years had passed since he launched AuctionWeb on Labor Day of 1995, but what a four years they had been. AuctionWeb was now eBay, and eBay was an Internet legend, an online retailer valued at more than Sears, or Kmart and J.C. Penney combined. Omidyar himself was now worth more than $4 billion, making him the richest thirty-two-year-old on the planet.

Omidyar had moved to France earlier in the year to work on eBay's international expansion. At least that was the official story. He would make the rounds of eBay's new European offices, where young people were starting up country-specific sites, and share what he had learned in eBay's early days. But the reality was that Omidyar was in the process of putting his past behind him. He had lived in Paris as a child before emigrating to the United States with his parents, and he had talked for years of coming back. Omidyar's friends always knew the day would eventually come. But when he made the move, they were convinced it had been hastened by a desire to regain a measure of anonymity after the wild ride of the last few years.

If Omidyar wanted to lose himself in Paris, his new look was a good start. The old Pierre—the programmer from central casting, who wandered the halls with a beard, ponytail, glasses, and shorts with black socks—had not survived the Atlantic crossing. The Pierre holding forth at Fouquet's had hair that was cut job-interview short; his boyish, olive-skinned face was now clean-shaven; and he was dressed in a smart-looking sweater with a red-and-black geometric pattern, and neatly pressed dark pants. When he had dropped in on eBay's Silicon Valley offices recently his new look had been, he said with a chuckle, "a great shock for the office."

Omidyar's transformation was, however, reassuringly superficial. Beneath the Paris flaneur getup, he was the same iconoclastic, self-effacing code writer he had always been. He had come to Fouquet's alone and on foot. There was no limousine, no entourage, and no public relations executive to filter questions, and the maître d'had no idea who he was. When we talked about eBay's rise, he was unfailingly modest, even a little bewildered, by what he had achieved. Omidyar squirmed when I asked him about his wealth—he was, it turned out, still driving his beat-up VW—and launched into an embarrassed monologue about the steps he was taking to give away his billions. And he still had the distinctive aura about him that his friends recalled from the old days. Call it a profound, existential calm.

Most of all, Omidyar still had the pure, democratic vision that had started it all. In Silicon Valley in the mid-1990s, he recalled as he ordered a pot of dark French tea for himself, and a café au lait for me, high-flying IPOs were spinning off enough money to make millionaires of many of his fellow techies. Omidyar believed in market capitalism, but he was troubled by the gap between theory and practice. Financial markets were supposed to be free and open, but everywhere he looked he saw well-connected insiders profiting from information and access that were denied to ordinary people.

It occurred to him that the Internet could solve this problem by creating something that had never existed outside of the realm of economics textbooks: a perfect market. EBay, Omidyar explained, was designed to be just that. Instead of selling products from a centralized source, it connected individuals to other individuals, so that anyone on the network could buy from or sell to anyone else. In the market he conceived of, the playing field would be level. Buyers would all have the same information about products and prices, and sellers would all have the same opportunity to market their wares. The auction format would, as classic economic theory taught, yield the perfect price, because items would sell at the exact point where supply met demand.

Omidyar paused to look out at the slow parade of stylish Parisians and bedraggled tourists passing by; his eyes widened, as if the sight had reminded him of something. The Internet was originally about people, he said simply. It had been started, and nurtured early on, by academics and government scientists who wanted it to promote the public good. But by 1995, cyberspace was being taken over by big business, which saw the Internet as little more than a hyperefficient way of selling things. "If you come from a democratic, libertarian point of view, having a corporation just cram more and more products down your throat doesn't seem like a lot of fun," he said. "I wanted to do something different, to give the individual the power to be a producer as well as a consumer."

That was not the only way people were being left out, Omidyar explained. As corporations moved in, cyberspace was becoming colder and more impersonal. The Usenet newsgroups he had spent countless hours on as an undergraduate had been lively, social places, where users posted quirky and irreverent messages and engaged in long, rambling discussions. But the e-commerce websites that were emerging treated people as just "wallets and eyeballs," Omidyar said with a frown, limiting their self-expression to clicking on items to buy and typing in credit card numbers.

Omidyar had built eBay to be not just a shopping site, but a community. He had, he admitted, encouraged community on the site in part for purely practical reasons. As eBay gained popularity, so many buyers and sellers came that he could not possibly answer all of their questions about how to use the site. By including their e-mail addresses, Omidyar allowed users to communicate directly among themselves to solve each others' problems. And Omidyar created a message board that allowed users to share information with the entire community without routing it through him. The more self-sufficient the users became, the fewer demands they put on his limited time.

But his interest in community was more than just pragmatic. At a time when the Internet was endlessly compared to the Wild West, Omidyar wanted his corner of cyberspace to be a place where people made real connections with each other, and where a social contract prevailed. He wanted it to operate according to the moral values he subscribed to in his own life: that people are basically good, and given the chance to do right, they generally will. In the first year of AuctionWeb's operation, Omidyar introduced innovations that would make his site in many ways the most genuine community in cyberspace.

Looking back on it now, in his new guise of philosophe de café, Omidyar could see that it all made perfect sense. Throughout history, he explained, gesturing to the waiter for another pot of tea, commerce and civilization had always developed alongside each other. The first markets arose at crossroads, where traders came to reach the largest number of potential customers. If sales at the crossroads were good, the merchants stored their wares there permanently. If they were the best in the whole region, traders brought their families and settled there. In time, they put up walls and built an infrastructure, and commerce transformed the lowly crossroads into a city. EBay had thrived because it fit this classic model: Omidyar had built both the commercial crossroads and the larger community that always came with it.

Omidyar's idealism is the paradox at the heart of eBay. The very things he did to make his site less corporate were, in the end, what made it the most successful business on the Internet. His belief in empowering individuals led him to create a site that linked people in a network. It is widely recognized today that, in purely business terms, such "many-to-many" sites are far more powerful than traditional "one-to-many" sites, in which a company like Amazon sells directly to consumers. By leaving the selling up to individuals, Omidyar was able to keep eBay completely "virtual": it does not own inventory or warehouses; it does not ship items or take returns. It is an amazingly efficient model that has allowed eBay, which began to charge fees six months after Omidyar founded it, to achieve gross profit margins of more than 80 percent.

Building community, and caring that people connected with each other, proved equally farsighted. The consensus among Internet strategists today is that the best way to make a site "sticky"—to attract visitors and hold them—is to give them just this sort of social component. On the advice of high-priced consultants, many websites now incorporate features like message boards and feedback forums. But in the fall of 1995 there was no Internet conventional wisdom. Alone in his spare bedroom writing computer code late into the night, Omidyar had to make it up as he went along.

When I completed the magazine article that brought me to that Paris café for tea with Pierre Omidyar, I approached eBay about cooperating on this book. I had written hundreds of stories as a journalist, and I had never made such a request before. But it was clear to me then, as it is even clearer to me now, that eBay was easily the most interesting story of the early Internet age, and one of the most important business stories of our time.

EBay is the great winner in the dot-com sector. After the Internet bubble burst in the spring of 2000, eBay was worth more than onetime powerhouses Yahoo! and Amazon combined. In the fall of 2000, when most Internet companies were struggling just to avoid bankruptcy, Meg Whitman, Omidyar's successor as CEO, announced that eBay intended to grow revenue at 50 percent a year for the next five years. Despite the collapse of the sector and a bruising recession, eBay has exceeded those projections. It was no surprise when the Industry Standard, the now defunct magazine of record of the Internet economy, put eBay on the cover of its penultimate issue and declared that out of the ruins of the dot-com world, eBay had emerged "unstoppable."

But eBay's real significance isn't its own financial success. EBay has, more than any other company, fully harnessed the potential of the Internet. By connecting more than 30 million buyers and sellers around the world, eBay has permanently changed commerce. Things a buyer once would have spent days, weeks, or a lifetime tracking down—the rocking horse he played on as a child, the exact buffalo nickel he needs to complete a collection—are suddenly available at any hour of the day or night, from a PC in the buyer's home. By efficiently moving goods from people who value them less to people who value them more, eBay increases "social utility," as the economists put it, making people, as a whole, happier than they would be without those goods. For sellers, eBay's impact has been just as profound. It has helped them circumvent the old order of high-priced retailing space, exclusive distribution channels, and costly advertising, and market directly to millions of buyers. In eBay's democratic marketplace, an individual seller with few resources can compete on an equal footing with the largest corporation.

The implications of the eBay model—of Omidyar's original conception of a perfect, global marketplace that everyone comes to on an equal basis—are revolutionary. EBay gives individuals a degree of economic independence that was impossible before the Internet. As many as 100,000 people are already making their living selling on eBay. In time, eBay can be a mechanism for bringing people on the margins of the world economy into the economic mainstream. Many CEOs traveled overseas last year, looking to open up new markets. But Whitman is no doubt the only one who spent five days in a rural Mayan village in Guatemala investigating how local craftswomen can pull themselves out of poverty by selling their handiwork on eBay to buyers in the developed world. This transformative power is the most remarkable aspect of the eBay story. EBay is a company that, more than perhaps any other, does what Omidyar had hoped it would: empower people to change their lives.

EBay agreed to cooperate on this book, and gave me greater access than it had ever given to a reporter. In fact, eBay printed up an employee ID for me and invited me to move into its Campbell, California, headquarters. I attended department meetings and presentations to Wall Street analysts. I sat in while eBay's marketing team plotted the launch of new features. I spent time with eBay's customer-service representatives in Draper, Utah, and in its overseas offices in Berlin and London.

I spoke with employees at every level—from Omidyar and Whitman on down to new recruits—about the company's brief but remarkable history. EBay's venture capitalists, its business partners, even the branding company that developed its famous multicolored logo all shared their recollections. Some of the discussions covered well-worn ground, like eBay's wildly successful IPO. In other instances, we talked about parts of eBay's history that had not come to light before, like how off-base eBay's first business plan was about which part of the company would be profitable; how close Omidyar and his cofounder, Jeff Skoll, came to selling the company early on; and just who thought up the famous, but apocryphal, tale that Omidyar created eBay to help his fiancée trade PEZ dispensers.

My goal of getting "inside" eBay posed a metaphysical question: Where exactly is eBay? It is not a bricks-and-mortar institution like IBM or Harvard University, with a front door or a campus gate. Part of eBay is in its California headquarters, but much more of it is not. EBay exists, like a religion or a social movement, wherever its adherents happen to be. To get inside eBay, I had to travel to the places where it manifests itself —the office of a rare-autograph dealer who is gradually moving his business onto eBay; a convention of clothing-iron collectors in Kansas City, whose world has been transformed by eBay; and the London offices of eBay-U.K., where a webmaster labors to keep Americanisms off the site.

I also strolled a bit, figuratively speaking, down the dark alleys near eBay's docks. I paid a visit to the inventor of "sniping" software—highly controversial in the eBay community—which enables bidders to jump in at the last minute to win an auction. I talked shop with investigators who track down fraud on eBay. And I had a long, rambling lunch in Times Square with a young woman who does a brisk business selling child pornography on eBay.

EBay has its detractors, and I spoke with more than a few of them. I sat down with a hard-driving anti-eBay activist, who publishes a near-daily newsletter that rails against eBay for being excessively greedy and corporate. I talked with a Texas toy dealer who organized the Million Auction March, an attempt to move one million auctions off eBay to protest high fees and perceived insensitivity to small sellers. And I traveled to Pittsburgh to see one of the nation's leading thrift store aficionados, who worries that eBay is ruining shopping.

I also took a leap into eBay's future. I traveled to Central America, to the same rural Mayan village Whitman visited, and met the craftswomen who make the fabrics and belts that they sell for a pittance to middlemen, known as coyotes, who then resell them for up to four times as much in Guatemala City. I went down there with the eBay Foundation and observed as that nonprofit organization worked to use eBay to bring the village into the global economy.

And I hung out on the eBay website. I lurked on the message boards and did countless searches just to see what was for sale. I even bought a few things. Some were practical—the eyeglass frames I wear, a Swiss Army watch. Others were offbeat, like a cotton shirt decorated with tropical fish, sold by a fine arts graduate student in Iowa who put all of his possessions up for sale on eBay. No one can truly experience eBay, of course, without acquiring at least one "only on eBay" item. I now own a small Turkish carpet, handwoven in Iran in the 1960s, featuring a likeness of President John F. Kennedy with slightly Middle Eastern features.

In the movies, it is a screenwriting cliché to have an old man talking into a tape recorder, looking back on his life and career. As I flew home from Paris, it occurred to me that my conversation with Omidyar had been a bizarre new-economy twist on that shopworn device. Hard as it was to believe, his whirlwind Internet career, from starting AuctionWeb as a hobby to retiring with his billions, had unfolded in just four years. At thirty-two, he was far too young to be the wizened patriarch speaking for posterity, and the milestones he had described were almost laughably recent. But we are living in the Internet age now, in which even history must be told on Internet time. And Omidyar—with his little auction website—had managed to turn a few short years into the Internet version of a lifetime.

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Chapter one

Pierre Omidyar was born in Paris in 1967 to a French-Iranian family that placed a premium on intellectual pursuits. Omidyar's parents had been sent to France by their families as young adults to get a better education than was available in Iran in the early 1960s. Omidyar's father attended medical school; his mother studied linguistics at the Sorbonne. They met for the first time in their adopted land—an encounter that was all but inevitable, given the size of the city's Iranian community—and eventually married. When Pierre, their only child, was six, they emigrated to the United States so that his father could begin a urology residency at Johns Hopkins University in Baltimore.

Growing up in and around Washington, D.C., Omidyar was a typical American child, except for his early fascination with computers. In seventh grade, Omidyar used to sneak out of gym class and make his way to the unlocked closet where his science teacher stored a cheap Radio Shack TRS-80. While his classmates played dodgeball and practiced layups, he used the "trash 80," as it was known, to teach himself to program in BASIC. Omidyar lived in Hawaii during eighth and ninth grades, while his mother did linguistics fieldwork. When he returned to Washington, he graduated to an Apple II, and he was programming in PASCAL, a step up from BASIC. Omidyar used his skills to get his first paying job, computerizing his school library's card catalog for six dollars an hour. "I was your typical nerd or geek in high school," he says. "I forget which is the good one now."

Omidyar arrived at Tufts University, a few miles from Boston, in the mid-1980s, just as the tech world was about to explode. His major was computer science, and his passion was Apple programming. At the time, identifying with Apple was a statement of personal values as much as a choice of technology—the computer-lab version of participating in a 1960s march on Washington. Under the charismatic leadership of Steve Jobs, Apple had styled itself as a hip, iconoclastic alternative to IBM and the other computer behemoths. Apple's view of itself was captured in a now-legendary 1984 Super Bowl commercial in which a lone woman, pursued by storm troopers, hurled a hammer at a Big Brother figure on an enormous television, shattering the screen. Omidyar did his own small part to rebel against mainstream computing by staying out of the Tufts computer lab, which was stocked with PCs, and working from his dorm room on a Macintosh. He eventually wrote his first Mac programmer's utility, a tool for use by other programmers.

In his junior year, Omidyar decided he wanted to spend the summer as a Macintosh programmer. He searched ads in Macworld and sent out letters to companies that used the Mac platform, enclosing a copy of his programmer's utility as a work sample. Omidyar got an interview, and a summer internship in Silicon Valley with Innovative Data Design, one of the first companies to write programs that allowed Mac users to draw images with their computer. The internship led to a full-time job, and he took off the fall semester to keep at it. Omidyar fit in easily in Silicon Valley's programmer subculture. With his ponytail, beard, and aviator-style glasses, he had the look. He also had the worldview. Omidyar was politically libertarian, and he liked talking about philosophy, UFOs, and space aliens. After one more semester at Tufts, Omidyar moved out West for good, finishing up his undergraduate degree at the University of California—Berkeley.

After he left Innovative Data Design, Omidyar took a job at Claris, an Apple subsidiary that developed consumer-applications software. Claris was supposed to be headed to an IPO, but while Omidyar was there it ended up being reabsorbed by Apple. The change in plans led to a mass exodus of talent, and Omidyar was among those who headed out the door. For his next venture, Omidyar teamed up with friends, including a former Claris colleague, in 1991 to found a startup called Ink Development Corporation. Ink Development was producing software for what looked like the next big thing in technology: pen-based computers. The thinking was that users would abandon their keyboards and use a stylus for writing, an approach Palm would popularize years later. "It was going to be great; it was going to bring computers down to the rest of us," says Omidyar. "Of course, the market didn't think so."

A year and a half into their great experiment, Omidyar and his partners realized that pen-based computing was not about to take off anytime soon. As it happened, Ink Development had also put together some software tools for online commerce, and this marginal project now seemed to be the most promising part of the business. The company relaunched as eShop, an electronic retailing company. EShop was moving in the general direction of the Internet, but not fast enough for Omidyar. It was still stuck on the idea of conducting e-commerce on proprietary networks—close to, but still distinct from, the actual Internet. In 1994, Omidyar left eShop. He wanted a job that would let him "do Internet things," he says, as well as put him in more direct contact with people than he had been in his string of programming jobs. Omidyar retained a sizable equity stake in the company he helped found. Two years later, Microsoft bought out eShop, and the stock Omidyar received from the software giant made him a millionaire before he turned thirty.

Omidyar's next job gave him the greater exposure to the Internet that he had been seeking. He joined the developer-relations department at General Magic, a hot mobile-communications start-up. General Magic, which had been started in 1990 by a group of Apple veterans, was trying to take Apple in a post-Macintosh direction by building a new generation of small, communication-oriented Apple computers that would work with telephones and fax machines. In his new position, Omidyar also had contact with people: his job was to help third-party software developers—programmers outside the company—write software that worked with General Magic's Magic Cap platform. It was while Omidyar was at General Magic, working with both the Internet and with people, that he created AuctionWeb.

It started, legend has it, with PEZ.

In the summer of 1995, Pierre Omidyar was having dinner at home in Campbell with his fiancée, Pam Wesley. Wesley collected PEZ dispensers, and she mentioned that since they had moved from Boston to Silicon Valley, she was having trouble finding fellow collectors to trade with. It occurred to Omidyar that the still-fledgling Internet could provide the answer. He came to Wesley's rescue by writing the code for what would one day become eBay.

The PEZ dispenser story has been told and retold in countless popular accounts of eBay's history. But it is, Omidyar concedes, the "romantic" version of eBay's founding. The truth is, in the summer of 1995 Omidyar was doing what every other smart tech person within a hundred-mile radius of San Jose was doing: obsessing about the Internet and the uses to which it could be put.