Inside eBay’s Innovation Machine

Business is steady on an early december afternoon at the iSold It consignment store on Skeet Club Road in High Point, N.C., as customers drop off items to be sold on eBay. Bikes, electronics, power tools—a steady flow of stuff, forming a tributary to the nearly $50 billion flood of goods and services that will be sold on the giant online marketplace in 2006.

iSold It LLC, with almost 200 outlets from coast to coast, has become one of the largest sellers on eBay Inc. by making it simple for anyone to move merchandise across the sprawling auction site. Simple for the folks consigning the stuff, that is—they just fill out a quick form, then go home to watch their online auction and wait for a check—but a fair amount of work for iSold It’s employees, who must check the items in, list them in the most advantageous areas on eBay, keep track of bidding and sales, and follow through with shipping and payment.

Multiply that by the 50,000 different auctions iSold It manages in a typical month—about 15,000 at any given moment, closer to 18,000 during the December holiday rush—and, well, “it gets very complex,” says Dave Crocker, senior vice president of business development at the privately held Monrovia, Calif., company. To deal with that complexity, iSold It is switching from internally developed software to a more sophisticated application from a Salt Lake City firm called Infopia Inc., which links directly to various eBay sites and handles pricing, listing and other key tasks more efficiently.

Infopia is not just another software vendor. It’s part of a growing community of some 40,000 independent developers, all building products using eBay’s own application programming interfaces, or APIs—the connection points that let a program share data and respond to requests from other software. These applications are tailor-made to work seamlessly with eBay’s core computing platform. eBay provides its APIs to the developers for free; its cost is limited to maintaining the code and providing some support resources for the developers.

The payoff: a network of companies creating applications that help make eBay work better, grow faster and reach a broader customer base. (eBay’s other business units, Skype and PayPal, also have open APIs and developer programs.) eBay says that software created by its developer network—there are more than 3,000 actively used applications, including a configurator that allows high-volume sellers to list items more efficiently, and a program that notifies buyers of auction status via mobile phone—plays a role in 25 percent of listings on the U.S. eBay site. The company has about 105 million listed items at any given time; roughly half of its sales come from within the United States.

Sharing APIs is common practice for software companies, but eBay, along with its fellow online-retail pioneer,, is breaking new ground in its industry by establishing a large community of outside developers. And the implications of this strategy go much further than the world of auctions and electronic storefronts.

“It’s about allowing people outside your company to write services that communicate with you-—it could be companies in your supply chain, sharing information about inventories or billing,” says Adam Trachtenberg, senior manager of platform evangelism at eBay (i.e., the guy responsible for the care and feeding of the developer program).

“In the next few years you will see more and more companies with third-party developer networks, even companies you might not think of as likely candidates,” adds Zeus Kerravala, senior vice president of enterprise research at Yankee Group. That could mean companies in far more traditional businesses than eBay, including manufacturers, he says. “These days, executives are telling me ‘we’re more like a software company than a hardware company’—and I say, then act like one. The long-term winners and losers in markets are determined by ecosystems around them, and developer networks fit that model. Developer communities allow companies to do things over the Internet with resources they don’t have themselves,” he says.

Companies can’t just flip a switch and join the game, though, says Daniel Sholler, a research vice president at Gartner Inc. They may need to first embrace the design model of service-oriented architecture, which hides the underlying complexity of a system from users, and allows components of an IT infrastructure to be reused and recombined to support particular processes instead of dedicated tasks. “This is part of the maturation of the Web, the trend toward service-enabling all kinds of systems and sharing information more freely,” Sholler says.

Companies such as Infopia are now creating mash-ups—applications built around APIs from eBay and other firms such as Inc. and FedEx Corp.—that extend the relationship between different companies and their customers. The mash-ups loosely join unrelated entities, portending a new level of interactivity between companies and customers of all kinds. “This is what Web 2.0 does for business,” says Infopia CEO Bjorn Espenes. “Everyone can pick and share information in different ways that are much more automated.”

It’s the future of commerce, perhaps, but eBay has some very traditional issues in mind: growth and competition. The company, now 11 years old, had profits of $1.08 billion on sales of $4.55 billion in 2005, but has grown so large that even the double-digit growth rates it enjoys may not satisfy investor demands. “They are in a tough spot, because they’re approaching maturity with the core auction business,” says Sucharita Mulpuru, a senior retail analyst with Forrester Research Inc. Meanwhile, eBay faces increasing competition from the Web operations of traditional retailers such as Wal-Mart Stores Inc. and Target Corp., and specialty vendors such as Best Buy Co.

eBay needs to expand past the online auction world it dominates. The company must help its large sellers become more efficient and grow its fixed-price marketplaces, and turbocharge its international business, which has not developed as planned; in late 2006, eBay shut down its Chinese affiliate and entered a minority partnership with a Beijing company. The developer ecosystem will play an important role in each of these areas.

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