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CASES

CASE 11 QVC*

When the Mobile Satisfaction Index was released on February 13, 2013, by Foresee, an organization that carries out surveys of customer satisfaction, QVC was ranked as one of the top three e-retailers on the mobile platform. Although the firm has already been recognized for its customer service for its television and Internet home shopping in many other surveys, the Foresee ranking was in the emerging mobile segment. “Customers are using their mobile phones as integrated parts of their shopping experience,” said Eric Feinberg, one of the directors at Foresee.1

Since it was launched in 1986, QVC has rapidly grown to become the largest television shopping network. Although it entered the market a couple of years after rival Home Shopping Network, the channel has managed to build a leading position. By 2012, its reach had extended to over 200 million households all over the world. It regularly ships almost 165 million products annually to customers, resulting in almost $8.5 million in sales (see Exhibits 1 and 2). It has been attracting audiences to watch its shows across the U.S., U.K., Germany, Japan, and since 2010, also in Italy (see Exhibit 3).

EXHIBIT 1 QVC Annual Sales

2012 $10.1 billion

2011 9.6 billion

2010 7.8 billion

2009 7.4 billion

2008 7.3 billion

2007 7.4 billion

2006 7.1 billion

2004 5.7 billion

2001 3.8 billion

1998 2.4 billion

1995 1.6 billion

1992 0.9 billion

1989 0.2 billion

Source: QVC, Liberty Media.

EXHIBIT 2 QVC Income Statement*

Years ended December 31

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2012 2011 2010 2009 2008

Net revenue $8,516 $8,268 $7,807 $7,352 $7,303

Cost of sales (5,419) (5,278) (5,006) (4,719) (4,682)

Gross profit 3,097 2,990 2,801 2,604 2,584

Operating expenses† (715) (744) (715) (684) (703)

S, G, & A expenses (554) (513) (415) (364) (379)

Operating cash flow 1,828 1,733 1,671 1,556 1,502

Stock compensation (34) (22) (18) (16) (15)

Depreciation & amortization‡ (526) (574) (523) (526) (531)

Operating income $1,268 $1,137 $1,130 $1,014 $956

*All figures in millions of U.S. dollars.

† Operating expenses consist of commissions and license fees, order processing and customer service, credit card processing fees, and provision for doubtful accounts.

‡ Depreciation and amortization includes amortization of intangible assets recorded in connection with the purchase of QVC by Liberty Media.

Source: Liberty Media, QVC.

*Case developed by Professor Jamal Shamsie, Michigan State University, with the assistance of Professor Alan B. Eisner, Pace University. Material has been drawn from published sources to be used for purposes of class discussion. Copyright © 2013 Jamal Shamsie and Alan B. Eisner.

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EXHIBIT 3 Geographical Breakdown of QVC Revenue*

Years Ended December 31

2012 2011 2010 2009 2008

U.S. $5,585 $5,412 $5,235 $4,965 $4,911

U.K. 641 626 599 578 660

Germany 956 1,068 956 942 954

Japan 1,247 1,127 1,015 867 778

*All figures in millions of U.S. dollars.

Source: Liberty Media, QVC

The success of QVC is largely driven by its popular television home shopping shows that feature a wide variety of eye-catching products, many of which are unique to the channel. It organizes product searches in cities all over the U.S. in order to continuously find new offerings from entrepreneurs that can be pitched at customers. During these events, the firm has to screen hundreds of products in order to select those that it will offer. In one of its recent searches, QVC had to evaluate the appeal of products such as nail clippers that catch clippings, bicycle seats built for bigger bottoms and novelty items shaped like coffins.

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But QVC is also trying to entice new customers by battling a perception that direct-response TV retailers sell just hokey, flimsy, or kitschy goods. Its jewelry selection features prestigious brands such as Tacori, which is worn by TV stars. It offers clothing from couture designers such as Marc Bouwer, who has made clothing for Angelina Jolie and Halle Berry. And it has recently added exclusive products from reality stars such as Kim Kardashian and Rachel Zoe. Such vendors have introduced thousands to QVC, often through social media like Facebook and Twitter. “Rachel Zoe brings so many new customers it’s staggering,” said CEO Michael George.2

Furthermore, QVC has expanded its shopping experience to the Internet, attracting more than 9.5 million unique monthly visitors by early 2012. It has continued to attract customers from its television channel to its website, making it one of the leading multimedia retailers. Building on this, the firm has been creating a family of mobile shopping applications for smartphones and tablets. Although QVC is still developing this segment, mobile applications are already accounting for almost 5 percent of their sales.

Pursuing a Leading Position

QVC was founded by Joseph Segel in June 1986 and began broadcasting in November of the same year. In early 1986, Segel had tuned in to the Home Shopping Network, which had been launched two years earlier. He had not been particularly impressed with the crude programming and the down-market products of the firm. But Segel was convinced that another televised shopping network would have the potential to attract a large enough client base. He also felt that such an enterprise should be able to produce significant profits, because the operating expenses for a shopping network could be kept relatively low.

Over the next few months, Segel raised $30 million in start-up capital, hired several seasoned television executives, and launched his own shopping network. Operating out of headquarters that were located in West Chester, Pennsylvania, QVC offered 24-hour-a-day, seven-day-a-week television shopping to consumers at home. By the end of its first year of operation, QVC had managed to extend its reach to 13 million homes by satellite and cable systems. 700,000 viewers had already become customers, resulting in the shipping of 3 million orders. Its sales had already topped $100 million, and the firm was actually able to show a small profit.

Segel attributed the instant success of his company to the potential offered by television shopping. “Television’s combination of sight, sound, and motion is the best way to sell a product. It is more effective than presenting a product in print or just putting the product on a store shelf,” he stated. “The cost-efficiency comes from the cable distribution system. It is far more economical than direct mail, print advertising, or traditional retail store distribution.”3

In the fall of 1988, Segel acquired the manufacturing facilities, proprietary technology, and trademark rights of the Diamonique Corporation, which produced a wide range of simulated gemstones and jewelry that could be sold on QVC’s shows. Over the next couple of years, Segel expanded QVC by acquiring competitors, such as the Cable Value Network Shopping channel.

By 1993, QVC had overtaken Home Shopping Network to become the leading televised shopping channel in terms of sales and profits. Its reach extended to over 80 percent of all cable homes and to 3 million satellite dishes. Segel retired during the same year, passing control of the company to Barry Diller. Since then, QVC’s sales have continued to grow at a substantial rate. As a result, it has consistently widened the gap between its sales and those of Home Shopping Network, which has remained its closest competitor.

Striving for Retailing Excellence

Over the years, QVC has managed to establish itself as the world’s preeminent virtual shopping mall that never closes. Its televised shopping channel has become a place where customers around the world can, and do, shop at any hour at the rate of more than five customers per second. It sells a wide variety of products, using a combination of description and demonstration by live program hosts. QVC is extremely selective in choosing its hosts, screening as many as 3,000 applicants annually in order to pick three. New hosts are trained for at least six months before they are allowed to get on a show. In addition, most of the products are offered on regularly scheduled shows, each of which is focused on a particular type of product and a well-defined market. Each of these shows typically lasts for one hour and is based on a theme such as Now You’re Cooking or Cleaning Solutions (see Exhibit 4).

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EXHIBIT 4 Sample of QVC Programming

Time Monday Tuesday Wednesday Thursday Friday Saturday Sunday

12:00 AM

Barbara Bixby Jewelry

Company’s Coming Reed/Barton

Kathy Van Zeeland Accessories

Victor Costa Occasion

Gifts of Style

Bose Sound Innovation

Kitchen Aid

2:00 AM

Tignanello Handbags

Dennis Basso Boutique

T3 Hair Care Tacori for Epiphany Jewelry

Late Night Gifts

Linea by Louis Dell’Olio

Ecclissi Watches

5:00 AM

Savings by Jeanne Bice

Steel by Design Jewelry

Chaz Dean Hair and Body Care

Boyds Bears and Friends

Arte d’Argento Silver

Gold Jewelry Special

Practical Kitchen Aid

9:00 AM

Barbara Bixby Jewelry

Slatkin & Co. Home Accessories

Mary Beth Accessories

Susan Graver Style

Denim & Company

AM Style Great Gifts by KitchenAid

12:00 noon

Q Check Gifts

Q Check Gifts Q Check Gifts Q Check Gifts Q Check Gifts

Judith Ripka Collection

Gifts from David’s Kitchen

3:00 PM

Barbara Bixby Jewelry

Dennis Basso Boutique

Bags and Shoes Great Gifts Gifts of Style

QVC Beauty Exclusives

Gifts from David’s Kitchen

6:00 PM

NFL Shop Enjoyable Entertaining Reed/Barton

Kathy Van Zeeland Accessories

Philosophy Beauty

Great Gifts Gifts for Mom From Dell

8:00 PM

PM Style Kitchen Gifts Reed/Barton

NARS Cosmetics

Northern Nights Bedding

What’s in my beauty bag?

Saturday Night Beauty

From Dell

10:00 PM

Tignanello Handbags

Tuesday Night Gifts Reed/Barton

Designer Couple Handbags

Tacori for Epiphany Jewelry

Gem Fest Special

Temptation Presentable Ovenware

Nintendo featuring Wii

Source: QVC.

QVC frequently entices celebrities, such as clothing designers or book authors, to appear live on special program segments in order to sell their own products. In order to prepare them to succeed, celebrities are given training on how to best pitch their offerings. On some occasions, customers are able to call in and have on-air conversations with program hosts and visiting celebrities. Celebrities are therefore often schooled in QVC’s “backyard-fence” style, which means conversing with viewers the way they would chat with a friendly neighbor. “They’re just so down-home, so it’s like they’re right in your living room demonstrating,” said a long time QVC customer.4

In spite of the folksy presentation, the sales are minutely managed. Behind the scenes, a producer scans nine television and computer screens to track sales of each featured item. “We track new orders per minute in increments of six seconds; we can look backward in time and see what it was that drove that spike,” said Doug Rose, who oversees programming and marketing.5Hosts and guests are prompted to make adjustments in their pitch that might increase sales. A beauty designer was recently asked to rub an eyeliner on her hand, which immediately led to a surge of new orders.

QVC’s themed programs are telecast live 24 hours a day, seven days a week, to millions of households worldwide. The shopping channel transmits its programming live from its central production facilities in Pennsylvania through

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uplinks to a satellite. The representatives who staff QVC’s four call centers, which handled more than 180 million calls last year, are well trained to take orders.

Of all the orders placed with QVC, more than 90 percent are shipped within 48 hours from one of their distribution centers. The distribution centers have a combined floor space equivalent to the size of over 100 football fields. Finally, everyone at QVC works hard to make sure that every item works as it should before it is shipped and that its packaging will protect it during the shipping process. “Nothing ships unless it is quality-inspected first,” said Paul Day, the logistics manager for QVC. “Since our product is going business-to-consumer, there’s no way to fix or change a product-related problem.”6

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Searching for Profitable Products

More than 100 experienced, informed buyers comb the world on a regular basis to search for new products to launch on QVC. The shopping channel concentrates on unique products that can be demonstrated on live television. Furthermore, the price of these products must be high enough for viewers to justify the additional shipping and handling charge. Over the course of a typical year, QVC carries more than 60,000 products. As many as 2,000 items are typically offered in any given week, of which about 15 percent are new products for the network. QVC’s suppliers range from some of the world’s biggest companies to small entrepreneurial enterprises.

All new products must, however, pass through stringent tests that are carried out by QVC’s in-house Quality Assurance Lab. In many cases, this inspection process is carried out manually by the firm’s employees. Only 15 percent of the products pass the firm’s rigorous quality inspection on first try and as many as a third are never offered to the public because they fail altogether. In addition, Jeffrey Rayport, author of a book on customer service, states that “QVC staff look for a product that is complex enough—or interesting enough—that the host can talk about it on air.”7

About a third of QVC’s sales come from broadly available national brands. The firm has been able to build trust among its customers in large part through offering these well-known brands. QVC also relies upon promotional campaigns with a variety of existing firms for another third of its sales. It has made deals with firms ranging from Dell to Target to Bath & Body Works for special limited-time promotional offerings. But QVC has been most successful with products that are exclusively sold on QVC or not readily available through other distribution channels. Although such products account for another third of its sales, the firm has been able to earn higher margins with these proprietary products, many of which come from firms that are either start-ups or new entrants into the U.S. market.

Most vendors are attracted to QVC because they reap higher profits selling through QVC than they would make by selling through physical stores. Stores typically require vendors to help to train or pay the salesforce and participate in periodic sales where prices are discounted. QVC rarely sells products at discount prices. Maureen Kelly, founder of Tarte Cosmetics, said she typically makes more from an eight-minute segment on QVC than she used to make in a month at a high-end department store.

Apart from searching for exclusive products, QVC has also been trying to move away from some product categories, such as home appliances and electronic gadgets, which offer lower margins. It has been gradually expanding into product categories that have higher margins, such as cosmetics, apparel, food, and toys. Several of these new categories have also displayed the strongest rates of growth in sales for the shopping channel over the past couple of years.

Expanding Upon the Customer Base

Since its start-up, QVC’s shopping channel has managed to gradually penetrate almost all of the cable television and broadcast satellite homes in the U.S. But only about 10 percent of the households that it reaches have actually bought anything from the network. However, QVC has developed a large customer base, many of whom make as many as 10 purchases in a year. QVC devotees readily call in to the live segments to offer product testimonials, are up on the personal lives of their favorite program hosts, and generally view the channel as entertaining. “As weird as it may sound, for people who love the network, it’s good company,” said Rayport.8

QVC is also hoping to attract new customers on the basis of the reasonably strong reputation that surveys indicate that it has established among a large majority of its current buyers. By its initials alone, QVC had promised that it would

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deliver Quality, Value, and Convenience to its viewers. More than three-quarters of the shopping channel’s customers have given it a score of 7 out of 7 for trustworthiness. This has led most of its customers to recommend it to their friends.

QVC has also benefited from the growing percentage of women entering the workforce, resulting in a significant increase in dual-income families. Although the firm’s current customer base spans several socioeconomic groups, it is led by young professional families who have above average disposable income. They also enjoy various forms of “thrill- seeking” activities and rank shopping relatively higher as a leisure activity when compared to the typical consumer.

The firm is also trying to increase sales by making it easier for customers to buy its products by adding features such as an interactive service that would allow them to purchase whatever it is offering on its shopping channel with a single click of the remote. QVC also provides a credit program to allow customers to pay for goods over a period of several months. Everything it sells is also backed by a 30-day unconditional money-back guarantee. Furthermore, QVC does not impose any hidden charges, such as a “restocking fee” for returned merchandise. These policies help the channel to attract customers for products that they can view but are not able to either touch or feel.

In 2012, QVC built on its existing customer base by acquiring Send the Trend, Inc., an e-commerce destination known for trendy fashion and beauty products. It uses proprietary technology to deliver monthly personalized recommendations that can easily be shared by customers over their social networks on an assortment of prestigious brands in jewelry, beauty, and fashion accessories. “The teams at QVC and Share the Trend share a passion for bringing the customer what she wants, in the way she wants it,” said Claire Watts, the U.S.-based CEO

of QVC.9

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Positioning for Future Growth

In spite of its success on television, QVC has not ignored opportunities that are emerging in online shopping. Since 1995, the firm has offered a website to complement its television channel, which has provided it with another form of access to customers. Initially, the site offered more detailed information about QVC offerings. Since then, it has branched out to develop its own customer base by featuring many products that have not been recently shown on its television channel. Over the last few years, QVC has been fine tuning its website by offering mobile phone, interactive-television, and iPad apps.

By 2012, QVC.com, a once-negligible part of the QVC empire, accounted for about a third of the firm’s domestic revenue. CEO Michael George recently stated that 60 percent of QVC’s new customers in the United States buy on the Internet or on mobile devices. “The online business is becoming such a crucial part of the business for QVC,” remarked Douglas Anmuth, an analyst at Barclay’s Capital.10Furthermore, QVC.com is now more profitable than QVC’s television operation. It needs fewer call-center workers, and while QVC must share profits with cable companies on TV orders, it does not have to pay them for online orders for products that have not been featured on the air for 24 hours.

Its online efforts have not led QVC to move its emphasis away from television home shopping. The recent launch of a channel in Italy has proved to be very successful, generating 58 percent more sales than the overall average that it generates from all of its other markets. The firm is making preparations to start a channel in China, providing it with access to a huge developing market. It also has plans to start operations in more European countries.

For many of its loyal consumers, nothing will ever replace shopping on television. The website does not offer the hybrid of talk show and sales pitch that attracts audiences to the QVC shopping channel. Online shoppers also miss out on the interaction between hosts and shoppers and the continuous feedback about the time that they may have to order before an item is sold out. “You know, on Sundays I might find a program on Lifetime Movie Network, but whatever I’m watching, if it’s not QVC, when the commercial comes on I’ll flip it back to QVC,” said one loyal QVC fan. “I’m just stuck on them.”11

ENDNOTES 1. Foresee. 2013. Amazon, QVC, Apple Dominate the ForeSee mobile retail satisfaction index as customer experience improves. PR Newswire,

February 12. 2. Clifford, S. 2010. Can QVC translate its pitch online? New York Times, November 21: B7. 3. QVC. 1988. QVC Annual Report, 1987–1988. 4. Clifford. 2010. Can QVC translate its pitch online? 5. Ibid. 6. Gilligan, E. 2008. The show must go on. Journal of Commerce, April 12: 1. 7. USA Today. 2008. May 5: 2B. 8. Ibid. 9. QVC. 2012. Send the Trend relaunches with QVC to bring shoppers a more personalized e-commerce experience. PR Newswire, October 2.

10. Clifford. 2010. Can QVC translate its pitch online? 11. Ibid.

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CASES

CASE 12 WORLD WRESTLING ENTERTAINMENT*

In February 2013, World Wrestling Entertainment announced that it had attracted one million subscribers to its programming on YouTube, surpassing popular channels such as ESPN, HBO, Comedy Central, and Discovery Networks. Since its launch in 2010, the firm’s YouTube channel has shown remarkable growth, showing a 340 percent increase in subscribers just over the past year. WWE premiered almost 30 hours of original programming on YouTube in 2012, with shows such as Backstage Fallout and Outside the Ring.

The success of WWE on YouTube has helped to further its goal of coupling its live wrestling matches with programming on television, on the Web and on mobile devices, allowing it to become one of the world’s most social brands. The firm added to its presence on the Internet with an exclusive, multiyear agreement to bring WWE programming to Hulu Plus, offering next-day access to its television programs and other exclusive shows. Its apps for smartphones and tablets have also taken off, with the WWE Active being downloaded 3.5 million times since its launch in 2012.

All of these achievements clearly indicate that WWE has moved out of a slump that it had endured between 2001 and 2005. During the 1990s, Vince McMahon had used a potent mix of shaved, pierced, and pumped-up muscled hunks; buxom, scantily clad, and sometimes cosmetically enhanced beauties; and body-bashing clashes of good versus evil to build an empire that claimed over 35 million fans. Furthermore, the vast majority of these fans were males between the ages of 12 and 34, representing the demographic segment that makes most advertisers drool.

Just when it looked like everything was going well, WWE hit a rough patch. The firm’s failure with a football league during 2001, which folded after just one season, was followed by a drop in revenues from its core wrestling businesses. WWE was struggling with its efforts to build new wrestling stars and to introduce new characters into its shows. Some of its most valuable younger viewers were also turning to new reality-based shows on television, such as Survivor, Fear Factor, and Jackass.

Since 2005, however, WWE has been rebuilding its fan base through live shows, television programming, Web and mobile content, and consumer products. The firm has been turning pro wrestling into a perpetual road show that makes millions of fans pass through turnstiles in a growing number of locations around the globe. Its flagship television programs, Raw and Smackdown!, are broadcast in 30 languages in 145 countries, reaching 600 million homes around the world. WWE has been building on its audience with programming such as WWE NXT on its website and WWE Universe-on-the-go on mobile devices. Finally, the firm has been signing pacts with dozens of licensees, including one with toymaker Mattel, to sell DVDs, video games, toys, and trading cards. “We continue to see the distribution of our creative content through various emerging channels,” stated Linda McMahon, who stepped down as president and CEO in 2009 to pursue a career in politics.1

Developing a Wrestling Empire

Most of the success of the WWE can be attributed to the persistent efforts of Vince McMahon. He was a self-described juvenile delinquent who went to military school as a teenager to avoid being sent to a reformatory institution. Around 1970, Vince joined his father’s wrestling company, which operated in northeastern cities such as New York, Philadelphia, and Washington, DC. He did on-air commentary, developed scripts, and otherwise promoted wrestling matches. Vince bought the wrestling firm from his father in 1982, eventually renaming it World Wrestling Federation. At that time, wrestling was managed by regional fiefdoms where everyone avoided encroaching on anyone else’s territory. Vince began to change all that by paying local television stations around the country to broadcast his matches. His

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aggressive pursuit of audiences across the country gradually squeezed out most of the other rivals. “I banked on the fact that they were behind the times, and they were,” said Vince.2

Soon after, Vince broke another taboo by admitting to the public that wrestling matches were scripted. Although he had made this admission in order to avoid the scrutiny of state athletic commissions, wrestling fans appreciated the honesty. The WWF began to draw in more fans through the elaborate story lines and the captivating characters of its wrestling matches. The firm turned wrestlers such as Hulk Hogan and Andre the Giant into mainstream icons of pop culture. By the late 1980s, the WWF’s Raw Is War had become a top-rated show on cable, and the firm had also begun to offer pay-per-view shows.

Vince faced his most formidable competition after 1988, when Ted Turner bought out World Championship Wrestling, one of the few major rivals that was still operating. He spent millions luring away WWF stars, such

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as Hulk Hogan and Macho Man Randy Savage. He used these stars to launch a show on his own TNT channel to go up against WWF’s major show, Raw Is War. Although Turner’s new show caused a temporary dip in the ratings for WWF’s shows, Vince fought back with pumped-up scripts, mouthy muscle-men, and lycra-clad women. “Ted Turner decided to come after me and all of my talent,” growled Vince, “and now he’s where he should be.”3

In 2001 Vince was finally able to acquire WCW from Turner’s parent firm, AOL Time Warner, for a bargain price of $5 million. Because of the manner in which he eliminated most of his rivals, Vince has earned a reputation for being as aggressive and ambitious as any character in the ring. Paul MacArthur, publisher of Wrestling Perspective, an industry newsletter, praised his accomplishments: “McMahon understands the wrestling business better than anyone else. He’s considered by most in the business to be brilliant.”4

In 2002 WWF was also hit by a ruling by a British court that their original WWF acronym belonged to the World Wildlife Fund. The firm had to undergo a major branding transition, changing its well-known name and triple logo from WWF to WWE. Although the change in name was costly, it is not clear that it hurt the firm in the long run. “Their product is really the entertainment. It’s the stars. It’s the bodies,” said Larry McNaughton, managing director and principal of CoreBrand, a branding consultancy.5 Vince’s wife, Linda, stated that the new name might actually be beneficial for the firm; “Our new name puts the emphasis on the ‘E’ for entertainment.”6

Creating a Script for Success

After taking over the firm, Vince began to change the entire focus of the wrestling shows. He looked to television soap operas for enhancing the entertainment value of his live events. Vince reduced the amount of actual wrestling and replaced it with wacky, yet somewhat compelling, story lines. He began to develop interesting characters and story lines by employing techniques that were similar to those being used by many successful television shows. There was great deal of reliance on the “good versus evil” or “settling the score” themes in the development of the plots for his wrestling matches. The plots and subplots ended up providing viewers with a mix of romance, sex, sports, comedy, and violence against a backdrop of pyrotechnics.

Over time, the scripts for the matches became tighter, with increasingly intricate story lines, plots, and dialogue. All the details of every match were worked out well in advance, leaving the wrestlers themselves to decide only the manner in which they would dispatch their opponents to the mat. Vince’s use of characters was well thought out, and he began to refer to his wrestlers as “athletic performers,” who were selected on the basis of their acting ability in addition to their physical stamina.

Vince also ensured that his firm owned the rights to the characters that were played by his wrestlers. This would allow him to continue to exploit the characters that he developed for his television shows, even after the wrestler that played that character had left his firm. By now, Vince holds the rights to many characters that have become familiar to audiences around the world.

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By the late 1990s Vince had two weekly shows on television. Besides the original flagship program on the USA cable channel, WWE had added a Smackdown! show on the UPN broadcast channel. He developed a continuous story line using the same characters so that his audience would be driven to both the shows. But the acquisition of the WCW resulted in a significant increase in the number of wrestling stars under contract. Trying to incorporate more than 150 characters into the story lines for WWE’s shows proved to be a challenging task. At the same time, the move of Raw to the Spike TV channel resulted in a loss of viewers.

In October 2005, WWE signed a new agreement with NBC that moved Raw back to its USA channel. Its other show, Smackdown!, is now carried by the Syfy channel, which has been climbing in the charts. Its newest show, The Main Event, is featured on the local channels that are tied to the Ion network. All of these programs have done well in ratings, particularly for male viewers, because of the growth in popularity of a new breed of characters, such as John Cena, Chris Benoit, and Ray Mysterio. The visibility of these characters has also been enhanced through profiles on the WWE website and mobile apps.

Managing a Road Show

A typical work week for the WWE can be grueling for the McMahons, for the talent, and for the crew. The organization is now putting on almost 300 live shows a year, requiring everyone to be on the road most days of the week. The touring crew includes over 200 crew members, including stage hands. All of WWE’s live events, including those that are used for its two long-standing weekly shows, Raw and Smackdown!, as well as the newer ones, are held in different cities. Consequently, the crew is always packing up a dozen 18-wheelers and driving hundreds of miles to get from one performance to the other. Since there are no repeats of any WWE shows, the live performances must be held all year round.

In fact, the live shows form the core of all of WWE’s businesses (see Exhibit 1). They give the firm a big advantage in the entertainment world. Most of the crowd show up wearing WWE merchandise and scream throughout the show. Vince and his crew pay special attention to the response of the audience to different parts of the show. The script for each performance is not set until the day of the show, and sometimes changes are even made in the middle of a show. This allows the crew some flexibility to respond to the emotions of the crowd as they witness the unfolding action. Vince boasted: “We’re in contact with the public more than any entertainment company in the world.”7

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EXHIBIT 1 Wrestlemania’s Classic Bouts

ANDRE THE GIANT vs. HULK HOGAN

WrestleMania III, March 29, 1987

• The Lowdown: A record crowd of 93,173 witnessed Andre the Giant, undefeated for 15 years, versus Hulk Hogan, wrestling’s golden boy.

• The Payoff: Hogan body-slammed the 500-pound Giant, becoming the sport’s biggest star and jump-starting wrestling’s first big boom.

THE ROCK vs. STONE COLD STEVE AUSTIN

WrestleMania X-7, April 1, 2001

• The Lowdown: The two biggest stars of wrestling’s modern era went toe-to-toe in the culmination of a two-year-long feud.

• The Payoff: Good-guy Austin aligned with “evil” WWE owner Vince McMahon and decimated the Rock to win the title in front of a shocked crowd.

HULK HOGAN vs. THE ULTIMATE WARRIOR

WrestleMania VI, April 1, 1990

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• The Lowdown: The most divisive feud ever—fan-favorite Hulk Hogan defended his title against up-and-coming phenom the Ultimate Warrior.

• The Payoff: Half the crowd went into cardiac arrest (the other half were in tears) when Hogan missed his patented leg drop and the Warrior won.

BRET HART vs. SHAWN MICHAELS

WrestleMania XII, March 31, 1996

• The Lowdown: Two men who didn’t like each other outside the ring locked up in a 60-minute Iron Man match for the title.

• The Payoff: After an hour, neither man had scored a pinfall. Finally, Michaels, aka the Heartbreak Kid, pinned Hart in overtime to win

the belt.

KURT ANGLE vs. BROCK LESNAR

WrestleMania XIX, March 30, 2003

• The Lowdown: Olympic medalist Angle squared off against former NCAA wrestling champ Lesnar in a punishing bout.

• The Payoff: The 295-pound Lesnar landed on his head after attempting a high-flying attack. But he recovered to pin Angle and capture the championship.

Source: TV Guide.

Although the live shows usually fill up, the money from tickets and the merchandise sold at these shows is only enough to cover the cost of the production. But these live performances become a source for all the other revenue streams. To begin with, they provide content for six hours of original television programming as well as for the growing list of pay-per-view and video-on-demand programming. Plus, these performances create strong demand for WWE merchandise ranging from video games and toys to magazines and home videos. In fact, sales of merchandise have represented a significant and growing portion of the revenues from each of the live shows.

Much of the footage from these live shows is also being used on the WWE website, which is the growth engine for its new digital media business (see Exhibits 2 and 3). The firm even produces a show, WWE NXT, exclusively for the website. WWE also offers content on the apps that it has launched for smartphones and tablets. Finally, fans can also follow programming on Hulu Plus. All of these channels serve to promote the various offerings of the firm and carry many segments from its various other television programs.

The entire operations of WWE are overseen by Vince, along with some help from other members of his family. While the slick and highly toned Vince could be regarded as the creative muscle behind the growing sports entertainment empire, his wife Linda had for many years been quietly managing its day-to-day operation. Throughout its existence, she helped to balance the books, do the deals, and handle the details that were necessary for the growth and development of the WWE franchise. Their son and daughter have also been involved with various activities of

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EXHIBIT 2 Breakdown of Net Revenues*

2012 2011 2010 2009 2008

Live and televised entertainment $353.8 $340.0 $331.8 $335.0 $331.5

Consumer products 87.8 94.9 97.4 99.7 135.7

Digital media 34.5 28.1 28.9 32.8 34.8

WWE Studios 7.9 20.9 19.6 7.7 24.5

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Total 484.0 483.9 477.7 475.2 526.5

*All figures in millions of U.S. dollars.

Source: WWE.

EXHIBIT 3 Breakdown of Operating Income*

2012 2011 2010 2009 2008

Live and televised entertainment $118.2 $116.8 $119.2 $124.7 $92.4

Consumer products 47.8 50.6 50.0 52.7 76.5

Digital media 8.9 6.0 5.0 5.8 6.2

WWE Studios (5.5) (29.4) (1.8) 2.2 7.2

*All figures in millions of U.S. dollars.

Source: WWE.

the growing enterprise, with Stephanie McMahon holding an executive position in charge of creative development.

Pursuing New Opportunities

In 1999, shortly after going public, WWE launched an eight-team football league called the XFL. Promising full competitive sport, unlike the heavily-scripted wrestling matches, Vince tried to make the XFL a faster-paced, more fan- friendly form of football than the NFL’s brand. Vince was able to partner with NBC, which was looking for a lower- priced alternative to the NFL televised games. The XFL kicked off with great fanfare in February 2001. Although the games drew good attendance, television ratings dropped steeply after the first week. The football venture was folded after just one season, resulting in a $57 million loss for WWE. Both Vince and Linda insist that the venture could have paid off if it had been given enough time. Vince commented, “I think our pals at the NFL went out of their way to make sure this was not a successful venture.”8

Since then, the firm has tried to seek growth opportunities that are driven by its core wrestling business. With more characters at their disposal and different characters being used in each of their shows, WWE has been ramping up the number of live shows, including more in overseas locations. By 2009, the firm was staging almost 70 shows in locations around the world. Over the past year, WWE has introduced live performances in six new countries, such as

UAE and Egypt. These shows have also helped to boost the worldwide revenues that the firm is able to generate from its merchandise, videos, and DVDs. The company has opened offices in six cities around the world to manage its overseas operations. “While it is based in America, the themes are worldwide: sibling rivalry, jealousy. We have had no push-back on the fact it was an American product,” said Linda.9

There has also been considerable excitement generated by the launch of WWE 24/7, a subscriber video-on-demand service. The new service allows the firm to distribute for a fee thousands of content hours consisting of highlights from old shows as well as exclusive new programming. Much of the firm’s programming, both old and new, is also offered on its website, which has continued to show strong growth (see Exhibit 4). By allowing audiences to watch WWE programming whenever they may want to, these new forms of distribution have allowed the firm to reach out to new audiences.

The new push on mobiles and through Hulu has provided even more opportunities for WWE to expand into digital media. The firm believes that offering their programming on smartphones and tablets will lead to a significant growth in revenues, in part from additional sales of their merchandise. “Our fans have proven that they want to consume WWE content day and night and now, through our new mobile app, they can stay completely connected to the action wherever they are,” said Jason Hoch, WWE’s recently appointed senior vice president of digital operations.10

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EXHIBIT 4 Percentage Breakdown of Net Revenues

2012 2011 2010 2009 2008 2007

Live and televised entertainment

Live events 21% 22% 22% 23% 20% 20%

Venue merchandise sales 4% 4% 4% 4% 4% 4%

Television 29% 27% 28% 24% 19% 19%

Pay per view 17% 16% 15% 17% 17% 20%

Video on demand 2% 2% 1% 1% 2% 1%

Consumer products

Licensing 10% 10% 11% 9% 11% 10%

Home video 7% 7% 7% 8% 11% 11%

Magazine publishing 1% 1% 2% 3% 3% 4%

Digital media

WWE.com 4% 3% 3% 4% 3% 3%

WWEShop 3% 3% 3% 3% 4% 4%

WWE Studios

Filmed entertainment 2% 4% 4% 2% 5% 3%

Source: WWE.

Finally, WWE has also become involved with movie production, using its wrestling stars and releasing a few films over the past decade. Recent releases include Steve Austin’s The Condemned and John Cena’s Legendary. WWE just announced that they have started production with Warner Brothers on a Scooby-Doo animated feature, which deals with a mystery at Wrestlemania. WWE superstars and divas will appear in animated form and lend their voices. “Warner Bros. is thrilled to get into the ring with WWE Studios to bring fans an unprecedented animated adventure,” said Jeff Brown of Warner.11Besides generating some box office revenues, these movies provide revenues from home video markets, distribution on premium channels, and offerings on pay-per-view.

Reclaiming the Championship?

Although WWE may find it challenging to keep building on its already formidable fan base, there is no question that it continues to generate a lot of excitement. Most of this excitement is driven by the live shows, which fill up the arenas (see Exhibits 2 and 3). “They have the most excited fans that have come through our doors,” said the director of sales and marketing at one of the arenas that holds WWE matches. “They make signs, dress up and cheer constantly.”12It is the interest in these shows and the characters that appear in them that provide WWE with many other sources of revenue.

The interest in the live matches is most evident each year with the frenzy that is created by Wrestlemania, the annual pop culture extravaganza that began at New York’s Madison Square Garden in 1985. Since then, it has become an almost weeklong celebration of everything wrestling. No wrestler becomes a true star until their performance is featured at WrestleMania, and any true fan must make the pilgrimage at least once in their life. Linda points to the continued popularity of this event to reject any suggestion that the fortunes of WWE may be driven by a fad that is unlikely to last.

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More recently, Vince’s wrestling empire is facing a challenge from mixed martial arts, a growing form of combat sport that combines kickboxing and grappling. Because of its similarity to wrestling, this new combat sport is expected to pull away some of WWE’s fans. Although MMA started in Japan and Brazil, Ultimate Fighting Championship and International Fight League are promoting it as a new type of spectator sport in the U.S. But Dana White, president of U.F.C. said, “People have been trying to count the W.W.E. out for years. They are a powerhouse.”13

In fact, WWE has begun to tone down its sex and violence during recent years in order to expand their audience by making their shows more family friendly. They no longer use fake prop blood and have toned down the use of abusive language in order to get a rating of TV-PG for their television programming. By making such changes, Vince continues to find new ways to exploit wrestling as a form of mass entertainment. In response to critics who question

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the value of wrestling matches whose outcomes are rigged, James F. Byrne, senior vice president for marketing, stated, “Wrestling is 100 percent entertainment. There’s no such thing as fake entertainment.”14

Those who understand don’t need an explanation. Those who need an explanation will never understand.

Marty, a 19-year-old wrestling addict, quoted in Fortune, October 6, 2000.

ENDNOTES 1. WWE. 2005. World Wrestling Entertainment, Inc. reports Q3 results. Press release, February 23. 2. McLean, B. 2000. Inside the world’s weirdest family business. Fortune, October 16: 298. 3. Bradley, D. 2000. Wrestling’s real grudge match. BusinessWeek, January 24: 164. 4. Mooradian, D. 2001. WWF gets a grip after acquisition. Amusement Business, June 4: 20. 5. Oestricher, D., & Steinberg. B. 2002. WW…. E it is, after fight for F nets new name. Wall Street Journal, May 7: B2. 6. Finnigan, D. 2002. Down but not out, WWE is using a rebranding effort to gain strength. Brandweek, June 3: 12. 7. McLean, B. 2000. Inside the world’s weirdest family business: 304. 8. Bradley, D. 2004. Rousing itself off the mat? BusinessWeek, February 2: 73. 9. Masters, B. 2008. Wrestling’s bottom line is no soap opera. Financial Times, August 25: 15.

10. Business Wire. 2012. WWE launches free mobile second screen app. Business Wire, August 17. 11. Business Wire. 2012. Warner Bros. and WWE Studios form tag team to solve a spine-crunching mystery! Business Wire, August 15. 12. Ball, B. 2011. The face of the WWE. McClatchy-Tribune Business News, January 13. 13. Schneiderman, R. M. 2008. Better days, and even the candidates, are coming to WWE. New York Times, April 28: B3. 14. Wyatt, E. 1999. Pro wrestling tries to pin down a share value. New York Times, August 4: C11.

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CASES

CASE 12 WORLD WRESTLING ENTERTAINMENT*

Developing a Wrestling Empire

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Vince began to change all that by paying local television stations around the country to broadcast his matches. His aggressive pursuit of audiences across the country gradually squeezed out most of the other rivals. “I banked on the fact that they were behind the times, and they were,” said Vince.2

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Creating a Script for Success

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that character had left his firm. By now, Vince holds the rights to many characters that have become familiar to audiences around the world.

Managing a Road Show

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EXHIBIT 1 Wrestlemania’s Classic Bouts

ANDRE THE GIANT vs. HULK HOGAN

WrestleMania III, March 29, 1987

• The Lowdown: A record crowd of 93,173 witnessed Andre the Giant, undefeated for 15 years, versus Hulk Hogan, wrestling’s golden boy.

• The Payoff: Hogan body-slammed the 500-pound Giant, becoming the sport’s biggest star and jump-starting wrestling’s first big boom.

THE ROCK vs. STONE COLD STEVE AUSTIN

WrestleMania X-7, April 1, 2001

• The Lowdown: The two biggest stars of wrestling’s modern era went toe-to-toe in the culmination of a two-year-long feud.

• The Payoff: Good-guy Austin aligned with “evil” WWE owner Vince McMahon and decimated the Rock to win the title in front of a shocked crowd.

HULK HOGAN vs. THE ULTIMATE WARRIOR

WrestleMania VI, April 1, 1990

• The Lowdown: The most divisive feud ever—fan-favorite Hulk Hogan defended his title against up-and-coming phenom the Ultimate Warrior.

• The Payoff: Half the crowd went into cardiac arrest (the other half were in tears) when Hogan missed his patented leg drop and the Warrior won.

BRET HART vs. SHAWN MICHAELS

WrestleMania XII, March 31, 1996

• The Lowdown: Two men who didn’t like each other outside the ring locked up in a 60-minute Iron Man match for the title.

• The Payoff: After an hour, neither man had scored a pinfall. Finally, Michaels, aka the Heartbreak Kid, pinned Hart in overtime to win

the belt.

KURT ANGLE vs. BROCK LESNAR

WrestleMania XIX, March 30, 2003

• The Lowdown: Olympic medalist Angle squared off against former NCAA wrestling champ Lesnar in a punishing bout.

• The Payoff: The 295-pound Lesnar landed on his head after attempting a high-flying attack. But he recovered to pin Angle and capture the championship.

Source: TV Guide.

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merchandise ranging from video games and toys to magazines and home videos. In fact, sales of merchandise have represented a significant and growing portion of the revenues from each of the live shows.

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EXHIBIT 2 Breakdown of Net Revenues*

2012 2011 2010 2009 2008

Live and televised entertainment $353.8 $340.0 $331.8 $335.0 $331.5

Consumer products 87.8 94.9 97.4 99.7 135.7

Digital media 34.5 28.1 28.9 32.8 34.8

WWE Studios 7.9 20.9 19.6 7.7 24.5

Total 484.0 483.9 477.7 475.2 526.5

*All figures in millions of U.S. dollars.

Source: WWE.

EXHIBIT 3 Breakdown of Operating Income*

2012 2011 2010 2009 2008

Live and televised entertainment $118.2 $116.8 $119.2 $124.7 $92.4

Consumer products 47.8 50.6 50.0 52.7 76.5

Digital media 8.9 6.0 5.0 5.8 6.2

WWE Studios (5.5) (29.4) (1.8) 2.2 7.2

*All figures in millions of U.S. dollars.

Source: WWE.

the growing enterprise, with Stephanie McMahon holding an executive position in charge of creative development.

Pursuing New Opportunities

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priced alternative to the NFL televised games. The XFL kicked off with great fanfare in February 2001. Although the games drew good attendance, television ratings dropped steeply after the first week. The football venture was folded after just one season, resulting in a $57 million loss for WWE. Both Vince and Linda insist that the venture could have paid off if it had been given enough time. Vince commented, “I think our pals at the NFL went out of their way to make sure this was not a successful venture.”8

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EXHIBIT 4 Percentage Breakdown of Net Revenues

2012 2011 2010 2009 2008 2007

Live and televised entertainment

Live events 21% 22% 22% 23% 20% 20%

Venue merchandise sales 4% 4% 4% 4% 4% 4%

Television 29% 27% 28% 24% 19% 19%

Pay per view 17% 16% 15% 17% 17% 20%

Video on demand 2% 2% 1% 1% 2% 1%

Consumer products

Licensing 10% 10% 11% 9% 11% 10%

Home video 7% 7% 7% 8% 11% 11%

Magazine publishing 1% 1% 2% 3% 3% 4%

Digital media

WWE.com 4% 3% 3% 4% 3% 3%

WWEShop 3% 3% 3% 3% 4% 4%

WWE Studios

Filmed entertainment 2% 4% 4% 2% 5% 3%

Source: WWE.

Reclaiming the Championship?

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WrestleMania, and any true fan must make the pilgrimage at least once in their life. Linda points to the continued popularity of this event to reject any suggestion that the fortunes of WWE may be driven by a fad that is unlikely to last.

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Those who understand don’t need an explanation. Those who need an explanation will never understand.

Marty, a 19-year-old wrestling addict, quoted in Fortune, October 6, 2000.

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CASES

CASE 13

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EBAY Expanding into China*

Like many U.S. Internet companies, eBay has repeatedly tried to broaden its reach by entering new appealing sectors, such as mobile commerce, and expanding into other geographical sectors, especially in Asia, where local rivals had strong ties to users. With Asia’s population exceeding 4 billion, more than half the world’s population, and Internet usage in the region skyrocketing at 620 percent,1eBay needed to develop a strategy that would successfully adapt to Asian local markets and compete with local competitors such as Taobao, China’s top auction site.

In 2012 Xiu.com and eBay partnered up to launch an online shopping platform, named eBay Style, that aimed to “bring the very best of eBay to Chinese consumers, particularly in fashion.” Xiu.com focuses on the sale of products from overseas to Chinese customers in a way that they are comfortable with. The company is based in Shenzhen and has roughly 800 employees. With the new partnership in place, Chinese consumers are able to access the global collection of products on eBay’s platform, while Xiu.com took control of managing all sales, logistics, and customer service. Xiu.com also took responsibility for curating and translating the inventory and implementing a product search function suitable for Chinese customers. The new eBay Style included only new items from a collection of 5,000 brands across all categories, including apparel, handbags, shoes, accessories, health and beauty products, and other lifestyle categories. At the time of the deal’s fruition, Xiu said it employed almost 1,500 people in China and mentioned new smartphone and tablet apps that were in the making.2 Even with this new deal, eBay Style faced unyielding competition, especially Alibaba’s Taobao.com, the largest Chinese online retailer. Also, Alipay, a payment processing company and another unit of the Alibaba Group, had 300 million users, three times as many as PayPal in China.3

Taobao, eBay Style’s largest threat, consciously portrays itself as a Chinese company. For example, online moderators use screen names imitative of popular characters from Chinese kung-fu novels.4Taobao also strived to implement a more interactive and user-friendly customer service initiative. In 2003 Taobao began using an instant communication tool called Aliwangwang to help buyers and sellers interact with one another. Alipay, an online payment system, was started a year later. By 2010 Taobao assisted over 80 percent of the e-commerce market in China, with roughly 170 million registered users.5At the same time, eBay decided to concentrate its focus on cross-border e-commerce, where Chinese consumers sell to consumers overseas. It currently operates as the leader in that segment.

eBay

Since its inception in 1995, eBay has enjoyed strong revenue growth and been a dominant player in the online auction industry. The company posted net income of $3.2 billion and revenue of $11.65 billion for 2011 (see Exhibit 1).

eBay’s founder, Pierre Omidyar, envisioned a community built on commerce, sustained by trust, and inspired by opportunity. The company’s mission was to “enable individual self-empowerment on a global scale” and employ “business as a tool for social good.” Omidyar cited “trust between strangers” as the social impact tied to eBay’s ability to remain profitable.

The company’s unique business model, which united buyers and sellers in an online marketplace, attracted over 221 million registered users. eBay has enabled e-commerce at multiple levels (local, national, and international) through an array of websites, including eBay Marketplaces, Pay-Pal, Rent.com, Shopping.com, and its newest addition, eBay Style. The company’s range of products and services evolved from collectibles to household products, customer services, automobiles, and the mobile industry. The variety of products attracted a range of users that included students, small businesses, independent sellers, major corporations, and government agencies.

Despite eBay’s outstanding growth performance, the company still faced a number of challenges in both domestic and international markets. The low entry barriers in the online marketplace attracted a number of large dot-com competitors, including Amazon, Yahoo, uBid, and Overstock. Historically, the company had acquired other online competitors, such as Stubhub (tickets), but established players such as Yahoo and Amazon posed a major threat to eBay’s market share and ability to sustain profitability. Still, eBay’s top management felt that the company would end up as a specialty business, an idea suggesting that it would face little threat from these major competitors. The company had no plans for further big acquisitions but intended to expand and identify synergies within existing business lines.

*This case was prepared by Professor Alan B. Eisner and graduate students David J. Morates and Shruti Shrestha of Pace University. This case was solely based on library research and was developed for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2013 Alan B. Eisner.

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EXHIBIT 1 Income Statements (in millions, except per-share amounts; year-end December 31)

2009 2010 2011 2012

Net revenues $8,727 $9,156 $11,652 $14,072

Cost of net revenues 2,480 2,565 3,460 4,216

Gross profit 6,248 6,592 8,191 9,856

Operating expenses:

Sales and marketing 1,886 1,947 2,435 2,913

Product development 803 908 1,235 1,573

General and administrative 1,418 1,079 1,364 1,567

Provision for transaction and loan losses 383 392 517 580

Amortization of acquired intangible assets 263 190 267 335

Restructuring 38,187 21,437 (489) —

Total operating expenses 4,791 4,538 5,817 6,968

Income from operations 1,457 2,054 2,373 2,888

Interest and other income, net 1,422 45 1,537 196

Income before income taxes 2,879 2,098 3,910 3,084

Provision for income taxes (490) (297) (681) (475)

Net income $2,389 $1,801 $3,229 $2,609

Net income per share:

Basic $1.85 $1.38 $2.50 $2.02

Diluted $1.83 $1.36 2.46 1.99

Weighted average shares:

Basic 1,289 1,305 1,292 1,292

Diluted 1,304 1,327 1,312 1,313

eBay did however acknowledge its inability to grow and compete in certain international markets. The company created localized sites in 24 countries and established a presence in Latin America through its investment in MercadoLibre.com. However, eBay’s numerous attempts to penetrate the Asia Pacific market, specifically China and Japan, ended in failure, with the company pulling out of Japan and buying out Chinese start-up Eachnet, essentially canceling years of invested work. According to many analysts, the company’s recent interest in its South Korean rival Gmarket Inc. and joint venture with Beijing-based Tom Online were further indications that eBay couldn’t compete in these countries. To remain successful and enjoy the same financial performance as it had in the past, eBay needed to develop an effective strategy to compete in major Asian markets and mitigate the risk of existing local competitors.

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Evolution of Auctions

Traditional Auctions According to Greek scribes, the first known auctions occurred in Babylon in 500 BC. At that time, women were sold on the condition of marriage, and it was considered illegal for daughters to be sold outside auctions. Auctions evolved during the French Revolution and throughout the American Civil War, where colonels auctioned goods that were seized by armies.6Although there were various types of auctions, they all provided a forum where sellers could find buyers. Auctions were considered one of the purest markets, because buyers paid what they were willing to spend for an item, thereby determining the true market value of the item. Over time, auction formats evolved, and through technological advances and improved communication they found a new home—the Internet.

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Online Auctions The primary difference between traditional and online auctions is that the online auction process occurs over the Internet as opposed to at a specific location where both buyers and sellers were present. Online auctions offer strategic advantages to both parties that are not typically available in traditional auctions. Buyers can select from millions of products and engage in multiple auctions simultaneously. Given the massive inventory of an online auction market, items are usually available in multiple auctions, allowing buyers to compare starting bid prices and search for better prices. Sellers are exposed to millions of buyers, since more buyers have access to the Internet and feel comfortable making purchases online. Thus, the Internet gave buyers and sellers access to a marketplace that spanned the world.

Online auctions also offer the following strategic advantages:

1. No time constraints. A bid can be placed at any time. 2. No geographic constraints. Sellers and buyers can participate from any location with Internet access. 3. Network economies. The large number of bidders attracts more sellers, which attracts more bidders, and so on. This

creates a large system that has more value for both parties. Online auctions also allow businesses to easily sell off excess inventory or discontinued items. This is done through either business-to-business (B2B) or business-to- consumer (B2C) auctions. Offering products and services in an online auction helps small businesses build their brand and reputation by establishing a devoted customer base. Finally, some businesses use the online marketplace as an inexpensive yet effective way to test-market for upcoming products.

E-Commerce

Although Vannevar Bush originally conceived the idea of the Internet in 1945, it wasn’t until the 1990s that the Internet became overwhelmingly popular. According to Internet World Stats, in June 2012 there were over 2.4 billion Internet users in over 150 countries. Exhibit 2 shows world Internet usage and population as of June 30, 2012, and Internet usage growth between 2000 and 2012.

As of 2012, North America was the region most penetrated by the Internet, with approximately 78.6 percent of the population already online. However, Internet usage growth between 2000 and 2012 was considerably less in North America than in other regions. Internet usage growth was highest in developing regions, such as Africa, the Middle East, Latin America, and Asia, where penetration was low. Considering that close to 80 percent of the world’s population resides in these areas, it is inevitable that Internet usage growth will continue to increase dramatically in these regions.

Although Asia constituted approximately 56 percent of the world’s population, its penetration rate was only 27.5 percent. Compared to other regions with high usage growth rates, such as Africa and the Middle East, Asia invested more in its technology infrastructure and contained by far the most current Internet users, making it a more attractive market.

As the usage growth of the Internet increased, so did the popularity of e-commerce. E-commerce, or electronic commerce, is the concept of conducting business transactions over the Internet. Like online auctions, e-commerce eliminates boundaries such as time and geography, allowing businesses and customers to interact with one another constantly. As more users were exposed to the Internet, they became comfortable with the idea of conducting

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transactions online. In correlation with Internet growth usage, revenue generated through e-commerce has increased dramatically since the 1990s.

EXHIBIT 2 World Internet Usage and Population Statistics, as of June 30, 2012

World Regions

Population (millions)

Internet Usage

(millions)

Percentage of Population Penetrated

Usage as Percentage of

World Total Usage Growth, 2000-2012(%)

Africa 1,073,380,925 167.3 15.6 7.0 3,606.7

Asia 3,922,066,987 1076.7 27.5 44.8 841.9

Europe 820,918,446 518.5 63.2 21.5 393.4

Middle East 223,608,203 90.0 40.2 3.7 2,639.9

North America

348,280,154 273.8 78.6 11.4 153.3

Latin America

593,688,638 254.9 42.9 10.6 1,310.8

Australia 35,903,569 24.3 67.6 1.0 218.7

Total 7,017,846,922 2405.5 34.3 100.0 566.4

Source: Internet World Stats. 2012. Usage and Population Statistics, www.internetworldstats.com/.

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In Asia, e-commerce has grown rapidly since China’s admission into the World Trade Organization (WTO) on December 11, 2001. Induction into the WTO allowed China to conduct business with other nations more freely by reducing tariffs and eliminating market and government impediments.

Company Background

Computer programmer Pierre Omidyar founded the online auction website in San Jose, California, on September 3, 1995. Omidyar was born in Paris, France, and moved to Maryland with his family when his father took on a residency at Johns Hopkins University Medical Center. Omidyar became fascinated with computers and later graduated from Tufts University with a degree in computer science. While living and working in the San Francisco Bay area, he met his current wife, Pamela Wesley, a management consultant, who later became a driving force in launching the auction website. The couple’s vision was to establish an online marketplace where people could share the same passion and interest as Pamela had for her hobby of collecting and trading Pez candy dispensers.7Omidyar also envisioned an online auction format that would create a fair and open marketplace, where the market truly determined an item’s value. To ensure trust in the open forum, Omidyar based the site on five main values:

1. People are basically good. 2. Everyone has something to contribute. 3. An honest, open environment can bring out the best in people. 4. Everyone deserves recognition and respect as a unique individual. 5. You should treat others the way you want to be treated.

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On Labor Day weekend in 1995, Omidyar launched Auction Web, an online trading platform. After the business exploded, Omidyar decided to dedicate more attention to his new enterprise and work as a consultant under the name Echo Bay Technology Group. When he tried to register a website for his company, Omidyar discovered

Echo Bay was unavailable, so he decided to use the abbreviated version eBay, which also stood for “electronic bay area.” The company’s name was also selected to attract San Francisco residents to the site and prompt them to buy and sell items.

Initially, the company did not charge fees to either buyers or sellers, but as traffic grew rapidly, Omidyar was forced to charge buyers a listing fee to cover Internet service provider costs. When Omidyar noticed that the fees had no effect on the level of bids, he realized the potential for profitability of his business. To handle and manage the company’s day- to-day operations, Omidyar hired Jeffrey Skoll (B.A.Sc. University of Toronto, MBA Stanford University). Skoll was hired as the company’s first president, and he wrote the business plan that eBay later followed from its emergence as a start-up to its maturity as a financial success. The two worked out of Skoll’s living room and various Silicon Valley facilities until they eventually settled in the company’s current location in San Jose, California.

By the middle of 1997, after less than a year under the name eBay, the company was hosting nearly 800,000 auctions a day. 8Although the rapid expansion of eBay’s traffic caused the company to suffer a number of service interruptions, the site remained successful and continued to gain the confidence of its strong customer base. Skoll remained president until early 1998, when the company hired Meg Whitman as president and CEO. At the time, the company had only 30 employees and was solely located in the United States; in a decade the number of employees went up to over 15,000. In September 1998 eBay launched a successful public offering, making both Omidyar and Skoll instant billionaires. By the time eBay went public, less than three years after Omidyar had created the company, the site had more than a million registered users. The company grew exponentially in the late 1990s and, based on its 2011 performance, indicated no sign of stopping. Exhibit 3 highlights the company’s recent growth performance by segments.

Whitman stepped down as the president and CEO of the company on March 31, 2008, but remained on the board of directors. Omidyar, the chairman of the board, said this

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about Whitman, “With humor, smarts and unflappable determination, Meg took a small, barely known online auction site and helped it become an integral part of our lives.”9Both Omidyar and Whitman were confident that the new CEO, John Donahoe, was a good choice to lead eBay. Donahoe joined the company in 2005 as president of eBay’s largest division, Marketplaces, and within three years managed to double the revenues and profits for this business unit. Before joining eBay, Donahoe served as the CEO of Bain & Company, an international consulting firm based in Boston. 10“I’m extremely confident in John’s skills and the abilities of John’s veteran management team,” Meg Whitman commented on the transition. 11

EXHIBIT 3 eBay Growth (in millions, year-end December 31)

Supplemental Operating Data 2010 2011 2012

Marketplace Segment:

Gross merchandise volume* $61,819 $60,332 $67,763

Payments Segment:

Net total payment volume† $91,956 $118,758 $144,937

*Total value of all successfully closed items between users on eBay Marketplaces trading platforms during the period, regardless of whether the buyer and seller actually consummated the transaction.

†Total dollar volume of payments, net of payment reversals, successfully completed through eBay payments network or on Bill Me Later accounts during the period, excluding the payment gateway business.

Source: eBay Inc., www.ebayinc.com/.

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Whitman’s confidence appears to have been well-founded. In 2012, after 4 years on the job as CEO, Donahoe had helped eBay make impressive progress. Although eBay’s financial outlook was not dreadful when Donahoe took over in March 2008, there was a growing perception that its growth was beginning to decline and that its run as the leader of the e-commerce industry was behind it, as Amazon began to make strides toward becoming the next best thing. During the global financial crisis, eBay’s stock had fallen to almost $10 per share in February 2009, far below the optimistic price of $58 that it reached in 2004. Since 2009, however, the stock has been on a stable uptrend, more than doubling during a 12- month period from 2011 to 2012 and closing at almost $49 in November 2012. “What John Donahoe has accomplished over the past few years is one of the most remarkable feats in the valley’s history,” said Gil Luria, an analyst at Wedbush Securities. So what has the new CEO done to spurt this turnaround? Luria noted that eBay began investing more in technology and was willing to take risks regarding altering the look and feel of the platform’s shopping experience. 12

eBay Now was also implemented to offer same-day delivery of products from online and offline merchants in San Francisco. ThinkEquity analyst Ron Josey wrote, “We view eBay Now as one of the most innovative products eBay has launched in some time.” The new service functions as a mobile app, one representation of Donahoe’s vision for eBay to begin embracing the increasing trend of mobile and offline shopping. “We’ve gone from competing in a $500 billion e-commerce market to now a $10 trillion retail market,” Donahoe recently told analysts. 13

eBay Platforms

eBay’s overall strategy comprised three primary components: products, sense of community, and aggressive expansion. All three components evolved around the various geographic and specialty platforms the company introduced.

Product Categories eBay had an array of product categories and trading platforms that offered a range of pricing formats, such as fixed pricing. Relatively new for the company, establishing a fixed-price format allowed eBay to compete directly with major competitors such as Amazon.com and penetrate new market space. Before fixed pricing, selling prices were solely determined by the highest auction bid, and this took days or weeks, depending on the length of the auction. eBay’s different trading platforms also offered distinct services and target-specific market niches, which allowed eBay to broaden its customer base. The platforms included:

• PayPal: Founded in 1998 and acquired by eBay in 2002, PayPal enabled individuals to securely send payments quickly and easily online. PayPal was considered the global leader in online payments, with tens of millions of registered users. In 2011 Paypal’s president, Scott Thompson, expected revenue to double to $6 billion to $7 billion by 2013. He also predicted that 75 percent to 80 percent of eBay transactions will be done through PayPal by 2013, up from 69 percent in 2010.14

• Rent.com: Acquired by eBay in February 2005, Rent.com was the most visited online apartment listing service in the United States, with more than 20,000 properties listed.

• Online classifieds: By 2009, eBay had the world-leading portfolio of online classifieds sites, including Kijiji, Intoko, Gumtree, LoQUo.com, Marktplaats.nl, and mobile.de. CEO John Donahoe said, “We are the global leader in classifieds, with top positions in Canada, Australia, Germany, Japan and the United Kingdom, and sites in more than 1,000 cities across 20 countries.”15

• Shopping.com: With thousands of merchants and millions of products and reviews, Shopping.com empowered consumers to make informed choices, which drove value for merchants.

• Stubhub.com: StubHub was an online marketplace for selling and purchasing tickets for sports events, concerts, and other live entertainment events.

• eBay Express: eBay Express behaved like a standard Internet shopping site but gave sellers access to over 200 million buyers worldwide. Sellers could design product categories within minutes, and buyers could purchase from multiple sellers by using a single shopping cart.

• eBay Motors: This specialty site was considered the largest marketplace for automobile buyers and sellers. Buyers could purchase anything from automobile parts to new or antique vehicles.

• Skype: Acquired by eBay in October 2005, Skype was the world’s fastest-growing online communication solution, allowing free video and audio communication between users of Skype software. By November 2009, Skype connected more than 480 million registered users.16

Sale of Skype: eBay’s acquisition of Skype was expected to enhance the customer experience by improving

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communication between buyers and sellers. When it acquired Skype, eBay said it hoped the service would support its auctions and its PayPal payment service by letting buyers and sellers discuss transactions. But eBay users were not so chatty. In November 2009 eBay sold Skype to a group led by Silver Lake Partners, a private equity firm in Silicon Valley. The deal was made at $2.75 billion, with eBay retaining a 30 percent stake. Mr. Donahoe said eBay did not regret having bought Skype when company executives believed eBay was in a mortal struggle with Google, which was also pursuing the service. He said the spinoff would allow eBay to focus on its core e-commerce and online payment businesses and avoid extra distractions. “We don’t regret having done this at all. We compete in a dynamic market, and you have to move quickly and take risks,” Mr. Donahoe said. “When we bought Skype we thought it had synergies with our other two businesses, and it turns out it did not. But it also turned out that it’s a great stand-alone business.” 17

In May 2011, Microsoft agreed to buy Skype for $8.5 billion from Silver Lake. eBay said it will earn more than a 50 percent return from the firm’s initial investment of $2.6 billion in Skype six years earlier. “With this sale, we have realized a total return of $1.4 billion on our original investment in Skype,” said John Pluhowski, a spokesman for eBay. Considering that eBay had bought Skype in a heavily criticized deal in 2005 and that it was considered a failed acquisition, the latest Microsoft agreement turned out to be good news for eBay, making eBay one of the big winners in the Microsoft and Skype deal.

Sense of Community The underlying key to all eBay sites and trading platforms was creating trust between sellers and buyers. The company created “community values,” and this was why eBay users were willing to send money to strangers across the country. The Feedback Forum was created in February 1996 and encouraged users to post comments about trading partners. Originally, Omidyar handled disputes between buyers and sellers via email by putting the disputing parties in touch with each other to resolve the issue themselves. He soon realized that an open forum where users could post opinions and feedback about one another would create the trust and sense of community the site required. Buyers and sellers were encouraged to post comments (positive, negative, or neutral) about each other at the completion of each transaction. The individual feedback was recorded and amended to a user profile, which ultimately established a rating and reputation for each buyer and seller. eBay users could view this information before engaging in a transaction. The company believed that the feedback forum was critical for creating initial user acceptance for purchasing and selling over the Internet and that it contributed more than anything else to eBay’s success.

Aggressive Expansion To compete effectively and create a global trading platform, the company continued to develop in U.S. and international markets that utilized the Internet. With intense competition in the online auction industry, eBay aimed to increase market share and revenue through acquisitions and partnerships in related and unrelated businesses. For example:

• In June 2000 eBay acquired Half.com for $318 million.

• In August 2001 eBay acquired MercadoLibre, Lokau, and iBazar, Latin American auction sites.

• On August 13, 2004, eBay took a 25 percent stake in Craigslist, an online network of urban communities.

• In September 2005 eBay invested $ 2 million in the Meetup social networking site.

• In August 2006 eBay announced international cooperation with Google.

• In January 2007 eBay acquired online ticket marketplace Stubhub for $310 million.

• In June 2010 eBay acquired RedLaser, a mobile application that would let customers scan bar codes to list items faster on its online auction site and to compare prices.18

• In December 2010 eBay acquired Milo, a leading local shopping engine that provides consumers access to accurate, real-time, local store inventory and pricing, giving them even more choices and flexibility when shopping online.19

• In December 2010 eBay acquired Critical Path Software Inc., a developer of smartphone applications, to accelerate its lead in mobile20 commerce.

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Company Business Model

eBay’s business model was based on a person-to-person marketplace on the Internet, where sellers conveniently listed items for sale and interested buyers bid on these items. The objective was to create a forum that allowed buyers and sellers to come together in an efficient and effective manner. The business model overcame the inefficiencies of traditional fragmented marketplaces, which tended to offer a limited variety of goods. According to former CEO Meg Whitman, the company started with commerce and what grew out of that was a community, essentially creating a community-commerce model.21The company’s success relied primarily on establishing a trustworthy environment that attracted a large number of buyers and sellers. As eBay’s reputation grew, so did the number of buyers and sellers, keeping the company in line with Omidyar’s original vision. However, as new competitors entered the online auction business and the popularity of the Internet increased, eBay tweaked its business model to accommodate changes in the fast-paced environment.

The company was aggressively expanding globally and looking for new products and services to offer to

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customers. It was also looking closely at the kind of merchants who sold on eBay. In the beginning, eBay focused on a consumer-to-consumer business model, but since some of the individuals became small dealers, the model changed to a mix of consumer-to-consumer and business-to-consumer. The sellers wanted to maintain their business on eBay, since it was their most profitable distribution channel. eBay wanted new ways to generate revenue as a result of more small dealers and businesses selling their products through the company’s website.

eBay generated revenue through three main channels: marketplaces, payments, and, until 2009, communications. Marketplaces, which generated revenue by charging sellers a fee for every item they sold, accounted for over 65 percent of the company’s revenue. As of December 2011 marketplace revenue was approximately $6.6 billion of the company’s $11.65 billion total revenue. Another $4.4 billion of the company’s revenue came from fees charged through electronic payments made through the company website, primarily via PayPal. The newest source of revenue, until November 2009, was communications (Skype), which produced $620 million of the company’s revenue for that year. Although free, Skype generated revenue through its premium offerings, such as making and receiving calls to and from landline and mobile phones, as well as voice mail, ring tones, and call forwarding. Exhibit 4 shows the company’s recent revenue performance by type.

In addition to the primary revenue sources, there were specific elements of eBay’s business model that made the company a success. eBay’s dominance of the online auction market and the large number of buyers, sellers, and listed items were primary reasons for eBay’s tremendous growth. The trust and safety programs, such as the Feedback Forum, continued to attract and retain new and current eBay users. The cost-effective and convenient trading, coupled with the strong sense of

EXHIBIT 4 Net Revenues by Type (in millions, except percentage changes)

Year Ended December 31, 2010

Year Ended December 31, 2011

Year Ended December 31, 2012

Net Revenues by Type:

Net transaction revenues

Marketplaces 4,800 5,431 6,078

Payments 3,261 4,123 5,146

GSI — 460 850

Total net transaction revenues 8,061 10,014 12,074

Marketing services and other revenues

Marketplaces 921 1,211 1,320

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Payments 174 289 428

GSI — 130 233

Total marketing services and other revenues

1,095 1,638 2,020

Total net revenues $9,156 $11,652 $14,072

Net Revenues by Segment:

Marketplaces $5,721 6,642 7,398

Payments 3,436 4,412 5,574

GSI — 598 1,730

Total net revenues $9,157 $11,652 $14,072

Net Revenues by Geography:

U.S. $4,214 5,484 6,778

International 4,942 6,168 7,294

Total net revenues $9,156 $11,652 $14,072

Source: eBay Inc., www.ebayinc.com/.

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community, added further value to the company’s business model. However, as the company continued to grow and new trends evolved, eBay had to continue to adjust its model to remain competitive.

International Expansion

As competition intensified in the online auction industry, eBay expanded its international presence in an effort to create an online global marketplace. Gradually, eBay localized sites in the following countries:

• Asia Pacific: Australia, China, Hong Kong, India, Malaysia, New Zealand, Philippines, Singapore, South Korea, and Taiwan.

• Europe: Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Netherlands, Poland, Spain, Sweden, Switzerland, and the United Kingdom.

• North America: Canada and the United States.

In many of the international websites, eBay provided local language and currency options to gain popularity and ensure the sense-of-community feeling. In most cases, eBay expanded its business by either acquiring or forming a partnership with a local company, as it recently has done with Xiu.com in its re-entry into the Chinese market. This strategy helped eBay better understand local cultures and ensure that the company was meeting specific local needs. This approach proved successful with the company’s equity investment in MercadoLibre.com, which targeted Argentina, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Mexico, Panama, Peru, Uruguay, and Venezuela. At the end of 2006, MercadoLibre. com reported 18 million registered users who performed 15.8 million transactions worth $1.1 billion.22Other notable international growth acquisitions are listed below.

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Asia Pacific • Acquired China-based Eachnet for approximately $150 million. eBay’s failure to manage the company resulted in

its recent partnership with communications company Tom Online.

• Acquired all outstanding shares of India’s Baazee.com, which later became eBay India.

• Acquired Korean rival Internet Auction Co. by purchasing nearly 3 million shares. Acquisition has not proved successful due to intense competition from top Korean auction site Gmarket.

Europe • Acquired Alando auction house for $43 million, a company that later became eBay Germany. Alando was

previously considered Germany’s leading online trading company. Germany became eBay’s second-largest market, accounting for 21 percent of the company’s total listings.

• Acquired Dutch competitor Marktplaats.nl, which had 80 percent of the Netherlands market share.

• Acquired Sweden’s leading online auction company, Tradera.com, for $48 million.

• Acquired Denmark’s leading online classifieds businesses, Den Bla Avis and BilBasen, for $390 million.23

For the most part, eBay was successful in expanding in Europe and Latin America, where it was able to quickly adapt to local needs through its partners. The company was also successful in countries it expanded to from the ground up, such as Canada and the United Kingdom. In 2007 the United Kingdom accounted for 15.5 percent of eBay’s total listings. By engaging the local community in these countries, eBay customized its sites to meet specific local needs while providing access to the online global community.

eBay was considered the leader in each of its markets with the exception of Japan and China, in which it struggled repeatedly to gain market share. In 2002 eBay was forced to pull out of Japan due to rising costs and intense competition by rival Yahoo Japan. eBay also faced fierce competition in Korea, where Gmarket, another investment of Yahoo, dominated the market.

Despite its lack of success in local Asian markets, eBay continued its attempts to expand into the region, recognizing the tremendous growth potential that was available. In June 2006 eBay formed a joint venture with PChome Online in Taiwan. PChome Online was an Internet service provider in Taiwan, with more than 10 million members.24 The company offered services such as Internet portal, e-commerce platform, and telecommunications. The move was expected to provide eBay with the local e-commerce expertise it needed to launch a new trading website that catered to the needs of Taiwan’s Internet users.

In 2006 eBay emphasized its commitment to the Chinese e-commerce market by announcing a new joint venture with Beijing-based Tom Online Inc. Tom Online, which primarily sold cell phone add-on services, such as ring tones and avatars, put in $20 million for a 51 percent share and management control of eBay’s online China site, Eachnet.25In 2002 eBay had purchased a 30 percent stake in Eachnet and within a year bought out local investors. Central management control of Eachnet was maintained in eBay’s San Jose, California, location. Many believed the move to partner with Tom Online was a result of eBay’s failure to adapt to local needs and successfully compete with China’s online auction market leader, Taobao, which controlled approximately 70 percent of the market. Jack Ma, the chief executive of Alibaba.com, Taobao’s parent company, believed eBay’s failure in China was due to an inability to build a community effect in the country, which, according to Ma, begins with customer satisfaction. Ma also felt that since eBay had to adhere to a global platform, meeting specific local needs was difficult because changes

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at a global level had to be approved in the United States, which further limited the company’s ability to produce a website tailored to the Chinese market.26

In April 2009 eBay secured agreements to buy a 67 percent stake of South Korea’s Gmarket in a deal estimated to be worth $1.2 billon. The move was part of Donahoe’s effort to increase revenue in coming years. It was expected that Gmarket would help eBay’s push into Asia.27

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Competitors

As eBay’s product offerings and pricing formats evolved, so did its range of competitors. Originally, the company faced competition from alternative auctions or other venues for collectors, such as flea markets and garage sales. However, as the company grew and introduced fixed pricing, the range of competitors included large companies like Walmart and Kmart that also had retail websites. eBay’s product platforms, like eBay Motors, put the company in direct competition with auto dealers and other online auto sites, such as Autobytes. Still, eBay faced the harshest competition from major online companies, including Yahoo and Amazon, which also had online auctions that rivaled eBay’s.

Yahoo! eBay’s larger online competitor was Yahoo, which also had a strong global presence, particularly in Asian markets. Yahoo originally started as a search engine and quickly evolved to include additional products and services, such as Yahoo! Mail, Yahoo! Maps, and Yahoo! Messenger. The company also offered e-commerce services through Yahoo! Shopping, Yahoo! Autos, Yahoo! Auctions, and Yahoo! Travel. Like eBay, Yahoo’s e-commerce sites allowed users to obtain relevant information and make transactions and purchases online. However, Yahoo’s business model primarily focused on generating revenue through search advertising. In the United States, in response to potential threats from web giant Google, Yahoo and eBay formed an alliance in which Yahoo utilized eBay’s payment system, PayPal, and eBay gained additional advertising through Yahoo searches. Still, Yahoo posed a major competitive threat in foreign markets, particularly the Asia Pacific area, through its partnerships with Gmarket and Taobao.

Gmarket Yahoo’s stake in Korean auction site Gmarket proved successful, with more than 17.2 million unique visitors. Founded in 2000, Gmarket was a Korean online auction and shopping-mall website that generated its revenue by charging a fee based on selling price.28Like Taobao, Gmarket offered fixed prices and provided an option to negotiate prices with sellers on an exclusive basis. This allowed buyers to conduct deals instantly instead of waiting until bids were completed. Gmarket also offered cheaper listings. These options, along with constant new features, allowed Gmarket to dominate the Korean online auction industry.29

Gmarket frequently introduced new marketing initiatives to provide sellers with various options to attract new customers. Gmarket grew financially powerful in 2006 when it launched its IPO, and Yahoo purchased a 9 percent stake in the company.

In 2009 eBay decided to secure an interest in its rival and was granted approval to purchase a combined 67 percent stake in Gmarket from Interpark Corp. and its chairman. In May 2010 eBay announced that it intended to work with Gmarket’s founder to expand Gmarket’s presence in Japan and Singapore. Lorie Norrington, president of eBay Marketplaces commented, “This joint venture is a sign of our continued commitment to help grow and lead ecommerce across Asia by offering more opportunities for sellers and extraordinary buying experiences for consumers.”30

Taobao In 2005 Yahoo entered a strategic partnership with Alibaba.com, Taobao’s parent company, which created an instant threat in the Chinese market. The move created one of the largest Internet companies in China, one with a leading position in business-to-business e-commerce, consumer e-commerce, and online payments. Like Gmarket, Taobao offered buyers and sellers quick and convenient ways to conduct business. Its instant messaging and fixed price arrangements allowed transactions to be conducted quickly. In 2006 the company partnered with Intel to offer customers a wireless platform. This further improved communication and convenience when customers were conducting transactions. In 2011 Taobao was eBay’s largest competitor in China, controlling over 80 percent of the Chinese online auction market.31

In early 2010 eBay announced the partnership of Paypal with China UnionPay, a local intrabank card system operator, which would make it accessible for customers to make online purchases from overseas. This move was made to challenge Alipay, a unit of Alibaba Group, which controlled about 50 percent of the market. This partnership would allow international retailers to sell to a large base of Chinese customers, who, combined, held 2.1 billon China UnionPay cards.32”After years of being the export hub for the world, now China is open for business as an import e-commerce market,” said Scott Thompson, president of PayPal. “PayPal’s partnership with China UnionPay removes an important friction point that exists across borders, and we are thrilled to eliminate the payments barrier so merchants can welcome millions of new Chinese customers to their sites.”33

Amazon Despite not having a huge presence in the online auction industry, Amazon was still considered a fierce online global competitor. Amazon started as Earth’s biggest bookstore and rapidly evolved to selling everything, including toys, electronics, home furnishings, apparel, health and beauty aids, groceries, and so on. Still, books, CDs, and

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DVDs accounted for more than 65 percent of the firm’s sales. Although Amazon had a large international presence, the company’s linkage to brick-and-mortar shops in the United States made it a greater threat locally than in foreign markets. Amazon’s international local sites were in Canada, the United Kingdom, Germany, Japan, France, and China. Despite its large online presence, Amazon scaled back its online auction business, cutting staff and shutting down Livebid, as part of an overall corporate restructuring.

The Future of eBay

eBay had a number of opportunities in which it had already taken action. By 2011, eBay had made a number of strategic acquisitions that included Rent.com, international classified websites, Stubhub.com, and Shopping.com. These acquisitions added to and complemented eBay’s product offerings and further diversified the company’s targeted market. With increased competition from Google and other major online companies, eBay had to continue to diversify and provide depth in its product offerings to remain competitive. Creating options and targeting distinct market niches would enable eBay to distinguish itself from competitors. This was particularly important because, as e-commerce and Internet usage rates continued to grow, so would the market opportunity for eBay. Because of its market-leading brand, eBay was in a unique position to capture a significant share of the market at an early stage.

eBay could also expand its existing products and services, such as PayPal. The product was relatively new and had the potential to grow and attract new customers, especially in international markets. Expanding PayPal into international markets would enable eBay to provide a simple way to conduct transactions across market borders. Considering the growth potential in developing markets, such as those in Africa, Asia, and the Middle East, expanding PayPal would attract many new customers, thus increasing eBay’s revenue base. In line with e-commerce growth, as more customers felt comfortable with conducting transactions online, PayPal had the potential to be the preferred form of payment over the Internet.

However, for eBay to capitalize on these opportunities, the company would have to overcome the challenges of expanding into large foreign markets such as China and Japan. With almost 79 percent of the North American population using the Internet and only a 27.5 percent usage rate in the Asia Pacific area, eBay had a tremendous opportunity to expand and gain new customers. Considering that the Asia Pacific region had more than 50 percent of the world’s population and was experiencing some of the largest online usage growth percentages in the world, tapping into this market was critical for eBay to expand.

eBay’s operations in China remained small compared to Alibaba Group and other Chinese e-commerce companies, but the company had refocused its energies on export-oriented merchants in China who wanted to reach overseas buyers on its international websites.34Experts viewed eBay’s strategy of forming a partnership with former rival

Alibaba Group as the best way to generate sales from China. All hopes were on Paypal’s acceptance by Chinese partners who were looking to expand international sales. It was critical for eBay to partner with local Chinese companies rather than going alone in the world’s biggest Internet market in order to proceed in the local market.

ENDNOTES 1. Internet World Stats. 2010. Internet Usage Statistics. www.intemetwortdstats.com/stats.htm. 2. Wauters, Robin. 2012, eBay Style: Ecommerce giant inks deal with Chinese fashion site Xiu.com, The Next Web,

http://thenextweb.com/asia/2012/11/12/ebay-style-ecommerce-giant-inks-deal-with-chinese-fashion-site-xiu-com/. 3. Galante, J. 2010. PayPal teams with China UnionPay to challenge Alipay. Bloomberg News, March 17, www.bloomberg.com/apps/news?

pid=newsarchive&sid=au4i5vaUlMNQ. 4. Mark Greeven, Shengyun Yang, Tao Yue, Eric van Heck and Barbara Krug. March 12, 2012. How Taobao bested Ebay in China. Financial

Times, http://www.ft.com/intl/cms/s/0/52670084-6c2c-11e1-b00f-00144feab49a.html#axzz2E2E0o7wP.

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5. Mark Greeven, Shengyun Yang, Tao Yue, Eric van Heck and Barbara Krug. March 12, 2012. How Taobao bested Ebay in China. Financial Times, http://www.ft.com/intl/cms/s/0/52670084-6c2c-11e1-b00f-00144feab49a.html#axzz2E2E0o7wP..

6. Doyle, R. A. 2002. The history of auctions. Auctioneer, November 1, www.absoluteauctionrealty.com/history_detail.php?id=5094. 7. Internet Based Moms. 2007. Pierre Omidyar—the man behind eBay. April. 8. Academy of Achievement. 2005. Biography—Pierre Omidyar. November 9, www.achievement.org. 9. eBay Inc. 2008. Meg Whitman to step down.

10. eBay corporate website, ebayinc.com. 11. eBay Inc. 2008. Meg Whitman to step down. 12. O’Brien, Chris. November, 4 2012. Is eBay’s John Donahoe the best CEO in Silicon Valley?. Mercurynews.com,

http://www.mercurynews.com/chris-obrien/ci_21908264/obrien-is-ebays-john-donahoe-best-ceo-silicon 13. O’Brien, Chris. November, 4 2012. Is eBay’s John Donahoe the best CEO in Silicon Valley? Mercurynews.com,

http://www.mercurynews.com/chris-obrien/ci_21908264/obrien-is-ebays-john-donahoe-best-ceo-silicon 14. Galante, J. 2011. PayPal’s revenue will double by 2013, Thompson says. Bloomberg News, February 10,

www.businessweek.com/=news/2011-02-10/paypal-s-revenue-will-double-by-2013-thompson-says.html. 15. eBay Inc. 2008. eBay Inc. buys leading payments and classifieds businesses, streamlines existing organization to improve growth. Press

release, October 6, www.ebayinc.com/content/press_release/20081006005605. 16. eBay Inc. 2009. Annual report. 17. Stone, B. 2009. In a sale, Skype wins a chance to prosper. New York Times, September 1,

www.nytimes.com/2009/09/02/technology/companies/02ebay.html?_r=1. 18. MacMillan, D. 2010. EBay buys bar-code app. Bloomberg Businessweek, June 23,

www.businessweek.com/technology/content/jun2010/tc20100623_901174.htm. 19. eBay Inc. 2010. eBay acquires Milo, a leading local shopping engine. Press release, December 2,

www.ebayinc.com/content/press_release/20101202006358. 20. eBay Inc. 2010. eBay acquires industry leading mobile application developer. Press release, December 15,

www.ebayinc.com/content/press_release/20101215006520.

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21. Himelstein, L., & “Whitman, M. 1999. Q&A with eBay’s Meg Whitman. BusinessWeek Online, May 31, www.businessweek.com/1999/99_22/b3631008.htm.

22. IT Digest. 2007. Argentina: MercadoLibre has 18mil registered users. January 25, www.infobae.com. 23. eBay Inc. 2008. eBay acquires leading classifieds sites in Denmark. 24. eBay Inc. 2006. eBay and PChome Online to form joint venture in Taiwan. Press release, June 5,

www.ebayinc.com/content/press_release/20060605199313. 25. Knowledge@Wharton. 2007. ebay’s deal with Tom Online offers some timely lessons for managers of global online companies. February 14,

www.knowledgeatwharton.com.cn/index.cfm?fa5view_Article&articleID51562&languageid51. 26. Ma, J. 2005. Alibaba CEO says Taobao will dominate China online auctions. Forbes.com, May 5,

www.forbes.com/feeds/afx/2005/05/20/afx2043109.html. 27. Cho, K., & Galante, J. 2009. EBay offers to buy Korea’s Gmarket for $1.2 billion. Bloomberg.com, April 16,

www.bloomberg.com/apps/news?pid=newsarchive&sid=asyO3.3yVdnE&refer=home. 28. Ihlwan, M. 2006. Gmarket eclipses eBay in Asia. BusinessWeek Online, June 28,

www.businessweek.com/globalbiz/content/jun2006/gb20060628_910393.htm. 29. BusinessWeek Online. 2006. Out-eBaying eBay in Korea. July 17, www.businessweek.com/magazine/content/06_29/b3993080.htm. 30. Caverly, D. 2010. eBay announces new joint venture in Asia. WebProNews.com, May 7, www.webpronews.com/ebay-announces-new-joint-

venture-in-asia-2010-05. 31. Epstein, G. 2010. eBay chief visits his Chinese conqueror. Blogs.Forbes.com, September 9, blogs.forbes.com/gadyepstein/2010/09/09/ebay-

chief-visits-his-chinese-conqueror/. 32. China Tech News. 2010. PayPal works with China UnionPay for online payment services. March 23,

www.chinatechnews.com/2010/03/23/11777-paypal-works-with-china-unionpay-for-online-payment-services. 33. BusinessWire.com.2010. PayPal and China UnionPay open the global marketplace to Chinese consumers. March 17,

www.businesswire.com/news/home/20100317005661/en/PayPal-China-UnionPay-Open-Global-Marketplace-Chinese. 34. Chao, L. 2010. EBay sees a market in China yet. ChinaReal-TimeReport, May 19. blogs.wsj.com/chinareal-time/2010/05/19/ebay-sees-a-

market-in-china-yet/.

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CASES

CASE 13 EBAY

Expanding into China* Like many U.S. Internet companies, eBay has repeatedly tried to broaden its reach by entering new appealing sectors, such as mobile commerce, and expanding into other geographical sectors, especially in Asia, where local rivals had strong ties to users. With Asia’s population exceeding 4 billion, more than half the world’s population, and Internet usage in the region skyrocketing at 620 percent,1eBay needed to develop a strategy that would successfully adapt to Asian local markets and compete with local competitors such as Taobao, China’s top auction site.

eBay

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automobiles, and the mobile industry. The variety of products attracted a range of users that included students, small businesses, independent sellers, major corporations, and government agencies.

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EXHIBIT 1 Income Statements (in millions, except per-share amounts; year-end December 31)

2009 2010 2011 2012

Net revenues $8,727 $9,156 $11,652 $14,072

Cost of net revenues 2,480 2,565 3,460 4,216

Gross profit 6,248 6,592 8,191 9,856

Operating expenses:

Sales and marketing 1,886 1,947 2,435 2,913

Product development 803 908 1,235 1,573

General and administrative 1,418 1,079 1,364 1,567

Provision for transaction and loan losses 383 392 517 580

Amortization of acquired intangible assets 263 190 267 335

Restructuring 38,187 21,437 (489) —

Total operating expenses 4,791 4,538 5,817 6,968

Income from operations 1,457 2,054 2,373 2,888

Interest and other income, net 1,422 45 1,537 196

Income before income taxes 2,879 2,098 3,910 3,084

Provision for income taxes (490) (297) (681) (475)

Net income $2,389 $1,801 $3,229 $2,609

Net income per share:

Basic $1.85 $1.38 $2.50 $2.02

Diluted $1.83 $1.36 2.46 1.99

Weighted average shares:

Basic 1,289 1,305 1,292 1,292

Diluted 1,304 1,327 1,312 1,313

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Evolution of Auctions

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Online auctions also offer the following strategic advantages:

E-Commerce

EXHIBIT 2 World Internet Usage and Population Statistics, as of June 30, 2012

World Regions

Population (millions)

Internet Usage

(millions)

Percentage of Population Penetrated

Usage as Percentage of

World Total Usage Growth, 2000-2012(%)

Africa 1,073,380,925 167.3 15.6 7.0 3,606.7

Asia 3,922,066,987 1076.7 27.5 44.8 841.9

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Europe 820,918,446 518.5 63.2 21.5 393.4

Middle East 223,608,203 90.0 40.2 3.7 2,639.9

North America

348,280,154 273.8 78.6 11.4 153.3

Latin America

593,688,638 254.9 42.9 10.6 1,310.8

Australia 35,903,569 24.3 67.6 1.0 218.7

Total 7,017,846,922 2405.5 34.3 100.0 566.4

Source: Internet World Stats. 2012. Usage and Population Statistics, www.internetworldstats.com/.

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Company Background

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start-up to its maturity as a financial success. The two worked out of Skoll’s living room and various Silicon Valley facilities until they eventually settled in the company’s current location in San Jose, California.