Some know eBay for its astoundingly boisterous stock price, others as their favorite place to buy Beanie Babies or antique kimonos. Either way, this gigantic online flea market/auction is one of the major success stories of the Internet Age. Auction-based web pricing systems are hot, and eBay is hottest of all - it controls 88 percent of the market, dwarfing its two main competitors, Yahoo! and Amazon.com. With 10 million registered users and a steady streak of profitability, eBay has won the hearts of investors and collectors alike.

Pioneering the online auction

eBay, a person-to-person selling system, was founded in 1995. Basically, sellers pay a small fee to list items on eBay, and another when items are sold. The service is free to buyers - except for those who get hooked and start buying bearskin rugs or baseball cards en masse. Its CEO, 31-year old Pierre Omidyar, founded eBay when his then-fiance was having trouble finding a place to buy vintage Pez dispensers. Weeks after founding, materialistic Web users flocked to the site.

A booming IPO

eBay went public in September 1998, a lull time in IPO mania. Observers on the Street speculated how well eBay would price, noting that the technology needed to run eBay was not especially proprietary, and that Yahoo! had partnered with Onsale (creating a potential category killer). Nonetheless, Wall Street took kindly to the company, pushing its stock from $18 at initial pricing to as high as $321. Perhaps gross margins of 80 percent encourage traders - that and the fact that eBay has been profitable since its inception.

A Web love affair

Why do investors love eBay? Because Web users love eBay. The site is the undisputed leader of its field. The service has over 10 million registered users. On average, there are over three million items listed for sale at any given time. All these listings attract a lot of collectors - and sellers. According to eBay, thousands have quit their day jobs and set up shop selling on eBay full-time. The service is mostly self-regulating. Buyers and sellers have the option to leave feedback on each other; users may scan these comments before deciding to deal with an individual.

The price of success

Ebay has of course had its share of problems as well. In 1999, it was hit with several hardware failures on its site, including a catastrophic 22-hour outage in June that costed the company millions of dollars in sales. The company has also attracted its share of scrutiny. Many users complain of sellers using multiple emails to bid up their items, or sellers that never deliver, or buyers that fail to buy. Because eBay is a facilitator, not a seller, until recently buyers and sellers had no way of assuring the safety of their transactions. Though it's fielded relatively few incidents with false bidders, eBay has been criticized for allowing the sale of firearms, as well as for lacking an adequate fraud-prevention system. Most notably, in June 2000 the FBI announced it was opening a probe into whether people commit fraud by bidding up the prices of each other's items.

Making eBay a safe bet

To counter these criticisms, eBay introduced SafeHarbor in February 1998, an escrow system that promotes safe online trading, and is taking further steps. In March 1999, eBay introduced a voluntary program called "Verified eBay User". For five dollars, users can submit their social security number, driver's license and date of birth, and in return qualify as a confirmed individual. Buyers and sellers feel safer knowing that Verified users are who they say they are - and eBay makes still more money. The company also automatically insures all auction items for up to $200. In September 1999, eBay changed the terms of its user agreement to prevent anyone from collecting or reusing information about eBay's auctions without permission. The company is quick to point out that fewer than one in 25,000 auctions is fraudulent.

Going for the higher-end

In April 1999, eBay decided to acquire one of its more traditional counterparts. San Francisco-based Butterfield and Butterfield, founded in 1865, runs traditional auctions of artwork, books, wine and antique weapons. Both companies will operate separately, but Butterfield's experts will review photographs and inspect items brought into their offices for authentification purposes. eBay is hoping that the $260 million purchase will attract a new body of users trading higher-end items online. Up until a week before the acquisition was announced, Butterfield had been planning an initial public offering. However it stands to gain more from a deal with eBay - it's offering was valued between $62 and $75 million. The same month, eBay also launched the first of its regional auction sites. Aimed at customers in Los Angeles, the new site will focus on real estate, cars, and similar items more appropriate for local auctions. Eventually, eBay plans to operate sites for each of the top 50 markets.

In July 2000 eBay announced it would cut back on the live online auction business and refocus on Great Collections, the high-end art and antiques site. Thought it had bought Butterfields a little over a year before, eBay planned to lay off five percent of the Chicago auction staff and convert the galleries into an Internet auction facility.

Buying Half - all of it