eBay Inc. -  Auction Services -  Category Directory

(408) 376-7400

2145 Hamilton Avenue
San Jose, CA 95125
www.ebay.com

Sales

$2.2 billion

Business Description 

Our mission is to build the world’s most efficient and abundant marketplace in which anyone, anywhere, can buy or sell practically anything. We pioneered online trading by developing a Web-based marketplace in which a community of buyers and sellers are brought together in an entertaining, intuitive, easy-to-use environment to browse, buy and sell an enormous variety of items. Through our PayPal service, we enable any business or consumer with email to send and receive online payments securely, conveniently and cost-effectively.

Our Marketplace

Our marketplace exists as an online trading platform that enables a global community of buyers and sellers to interact and trade with one another. Our role is to create, maintain, and expand the technological functionality, safety, ease-of-use, and reliability of the trading platform while at the same time, supporting the growth and success of our community of users.

Our Platform

Our trading platform is a fully automated, topically arranged, intuitive and easy-to-use online service that is available, 24 hours-a-day, seven days-a-week (subject to a weekly scheduled two-hour maintenance period), enabling sellers to list items for sale in either auction or fixed-price formats, buyers to bid for and/or purchase items of interest, and all eBay users to browse through listed items from any place in the world at any time. The platform includes software tools and services available either for no charge or for a fee, that allow buyers and sellers to more easily trade with one another. Our software tools such as: eBay Anywhere, which provides wireless connectivity to eBay; Seller’s Assistant, Turbo Lister, and Selling Manager, which automate the selling process; the Freight Resource Center, which allows users to calculate shipping costs; and PayPal, which facilitates online exchange of funds, are all designed to make our trading process easier and more efficient. Whether provided by us or our commercial partners, services such as our trust and safety programs, user verification, buyer protection and assurance programs, vehicle inspections, escrow, authentication and appraisal are all intended to create a safer trading environment.
 

Our Community

Our community of users is the largest and one of the most loyal online trading communities on the Web. We have aggregated a significant number of buyers, sellers and items listed for sale, which in turn has resulted in an extremely vibrant trading environment. Our sellers enjoy generally high conversion rates and buyers enjoy an extensive selection of broadly priced goods and services. Key components of our community philosophy are maintaining an honest and open marketplace and treating individual users with respect. We seek to maintain the satisfaction and loyalty of our frequent buyers and sellers by offering a variety of community and support features such as announcement and bulletin boards, customer support boards and personal pages as well as other topical or category-specific information exchanges. By ensuring that all users are subject to the same rules and fees, we have created a level playing field enabling individuals and businesses of all types and sizes to access broad markets and compete equally.

Our Value Proposition

Our marketplace makes inefficient markets more efficient.

Traditional offline marketplaces can be inefficient because:

• They are fragmented and regional in nature making it difficult and expensive for buyers and sellers to meet, exchange information and complete transactions;

• They offer a limited variety and breadth of goods;

• They often have high transaction costs due to intermediaries; and

• They are information inefficient, as buyers and sellers lack a reliable and convenient means of setting prices.

We make these inefficient marketplaces more efficient because:

• Our global community of users can easily and inexpensively communicate, exchange information and complete transactions;

• Our marketplace includes tens of millions of items creating a very wide variety and selection of goods;

• We bring buyers and sellers together for a fee much lower than those of traditional intermediaries; and

• Our marketplace provides for efficient information exchange.


In particular, large markets with broad buyer and seller bases, wide product ranges, and moderate shipping costs have been successful on eBay. Our marketplace is most effective, relative to available alternatives, at addressing markets of new and scarce goods, end-of-life products, and used and vintage items.

Our Strategy

We intend to achieve our mission of becoming the world’s most efficient and abundant marketplace by creating marketplace conditions that enable our users’ success. By continuing to foster the vibrancy of the world’s largest network of buyers and sellers and by making the online trading experience faster, easier and safer, we better enable the success of our user community.

Growth of eBay User Activity

Our success has been largely dependent upon the success of our community of individual users. This success is reflected in the growth of confirmed, registered users from two million at December 31, 1998 to 62 million at December 31, 2002. At December 31, 2002, we had nearly 28 million active users, based on activity over a trailing 12-month period, compared to nearly 18 million at December 31, 2001. We define an active user as any user who bid on, purchased, or listed an item during the prior 12 months. We attract buyers and sellers to our community by offering:

Buyers
• Selection
• Convenience
• Entertainment
• Value

Sellers
• Access to broad markets
• Low distribution costs
• Ability to maximize prices and increase sales

A Faster, Easier and Safer Trading Experience

Payment Services

Providing more efficient and more effective methods of payment is essential to creating a faster, easier and safer online trading experience. Traditional payment methods such as checks, money orders, and credit cards via merchant accounts all present various obstacles to the online trading experience, including lengthy processing time, inconvenience, and high costs.

Through our acquisition of PayPal, Inc. on October 3, 2002, we intend to accelerate the velocity of trade on eBay by eliminating the various obstacles presented by traditional payment methods. PayPal enables any business or consumer with email access in 38 countries to send and receive online payments securely, conveniently and cost-effectively. PayPal’s network builds on the existing financial infrastructure of bank accounts and credit cards to create an international payment system. PayPal delivers a product well suited for small businesses, online merchants, individuals and others.

Our goal for PayPal is to become the Web’s most convenient, secure, and cost-effective payment solution. PayPal currently offers its account-based system in English to users in 38 countries including the United States. For the post-acquisition period from October 4, 2002 through December 31, 2002, PayPal’s payment volume sent to business accounts, which we refer to as Total Payment Volume, or TPV, totaled $2.1 billion. PayPal’s TPV consists mainly of payments to small businesses. Currently, the majority of these payments relate to sales of goods and services through online trading platforms, primarily on eBay. As of December 31, 2002, PayPal had 23 million accounts. During the post-acquisition period from October 4, 2002 through December 31, 2002, users of eight million of these accounts sent or received a payment that resulted in a fee. As of December 31, 2001, PayPal had nearly 13 million total accounts, of which eight million sent or received a payment that resulted in a fee during the year ended December 31, 2001.

PayPal has achieved its rapid growth through a combination of wide adoption on eBay.com and our website in the United Kingdom, user convenience, competitive pricing and robust customer safeguards. During the year ended December 31, 2002, PayPal’s total number of accounts grew by 10.5 million, an average of 29,000 per day. For the post-acquisition period from October 4, 2002 through December 31, 2002, PayPal processed an average of 440,000 payments per day, totaling $24.0 million in daily volume. The average payment amount sent during this period was $55.

Geographic Expansion

The continued geographic expansion of the eBay marketplace is critical to creating a faster, easier and safer online trading experience. In 2002, eBay, together with certain minority-owned companies, unconsolidated subsidiaries and affiliates, increased its geographic reach to 27 countries including websites in the People’s Republic of China and Taiwan. As of December 31, 2002, through our wholly owned and majority-owned subsidiaries and affiliates, we reached the following countries:

• Australia
• Austria
• Belgium
• Canada
• France
• Germany
• Ireland
• Italy
• the Netherlands
• New Zealand
• Singapore
• South Korea
• Spain
• Sweden
• Switzerland
• Taiwan
• United Kingdom
• United States

As of December 31, 2002, through investments in unconsolidated subsidiaries and affiliates, we reached the following countries:

• Argentina
• Brazil
• Chile
• Columbia
• Ecuador
• Mexico
• People’s Republic of China
• Uruguay
• Venezuela


The globalization of the eBay marketplace provides buyers access to an even greater supply of items and provides sellers an even broader audience of potential customers.

Category Growth

Category growth both in number and size within the eBay marketplace is a key element in creating a faster, easier, and safer online trading experience. In 2002, we made significant investments to grow existing categories and to expand the number of categories in the eBay marketplace. By focusing development and marketing efforts around re-organized major categories, we achieved greater than 10% growth in all of our major categories and increased the number of categories under which eBay users can list goods for sale from 10, when eBay was first introduced, to more than 22,000 as of December 31, 2002.

As of December 31, 2002, listings on eBay were organized under the following categories:

Major Categories

• Antiques
• Art
• Books
• Business & Industrial
• Cars & Other Vehicles

• Cars
• Motorcycles
• Parts

• Clothing and Accessories
• Coins
• Collectibles
• Dolls & Bears
• Electronics and Computers

• Computers & Office
• Consumer Electronics
• Networking
• PDAs
• Photo
• Video Games

• Home

• Baby
• Home Décor
• Lawn & Garden
• Kitchen
• Pet Supplies
• Tools

• Jewelry & Watches
• Movies & DVDs
• Music
• Musical Instruments
• Pottery & Glass
• Real Estate
• Sports

• Fan Shop
• Memorabilia
• Sporting Goods

• Stamps
• Tickets
• Toys & Hobbies
• Crafts
• Diecast
• Travel
• Everything Else
• Gifts
• Health & Beauty
• More

Specialty Sites

• eBay Motors
• eBay Stores
• Half.com by eBay
• PayPal
• Sothebys.com

Each major category has numerous subcategories, with the most popular items sold on eBay being those that are relatively standardized, well represented with a photo, small and easily shipped and relatively inexpensive.

The eBay Online Trading Experience

The eBay online trading experience begins with a visit to the eBay home page at www.ebay.com or any of eBay’s international sites. eBay’s home page contains a listing of major categories, featured items and theme-oriented promotions. Users can search for items to browse and buy, go to a specific item category, go to a specialty site such as eBay Motors, eBay Stores, or Half.com or begin listing an item for sale.

Registration

Any visitor to eBay.com and our international websites can browse through the eBay service and view the items listed for sale. To bid on, list or purchase an item, buyers and sellers must first register with eBay by completing a short online form and confirmation process.

Buying on eBay

Users can search for specific items by browsing through a list of items within a category or subcategory and then “click through” to a detailed description for a particular item. Users can also search specific categories, interest pages or the entire database of listings using keywords to describe their areas of interest. Our search engine generates lists of relevant items with links to detailed descriptions. Each item is assigned a unique identifier so that users can easily search for and track specific items. Users also can search for a particular bidder or seller by name to review his or her listings and feedback history and search for products by specific region or other attributes. Once a user has found an item and registered on eBay.com, the user may enter a bid for the maximum amount he or she is willing to pay at that time, or for those listings that offer the Buy-It-Now feature, purchase the item by accepting the Buy-It-Now price established by the seller. In the event of competitive bids, the eBay service automatically increases bidding in increments based upon the current high bid, up to the bidder’s maximum price.

We encourage direct interaction between buyers and sellers. Potential buyers wishing additional information about a listed item can contact the seller through email. We believe that this interaction between potential buyers and sellers enhances the trading experience on eBay and is an important element of our service. Once each bid is made, we send an email confirmation to the bidder and an outbid notice to the next highest bidder and automatically update the item’s auction status. During the course of the transaction, we notify bidders immediately via email if they are outbid. Buyers are not charged for making bids or purchases through eBay. In addition, buyers can specify items of interest on a service called “Favorite Searches” (previously called “Personal Shopper”) and receive automated email messages when these particular items are available for sale on eBay.com.

Selling on eBay

Users can sell items on eBay.com by registering and selling items on their own, or with the help of a Trading Assistant.

Registering and Selling Items

Registered sellers can list a product for sale by completing a short online form or using “Seller’s Assistant,” “Turbo Lister” or third-party tools that facilitate the listing of multiple items. The seller selects a minimum price for opening bids for the item and chooses whether the sale will last three, five, seven or 10 days. Additionally, a seller may select a reserve price for an item, which is the minimum price at which the seller is willing to sell the item and is typically higher than the minimum price set for the opening bid. The reserve price is not disclosed to bidders. Sellers with appropriate feedback ratings may also choose to use the Buy-It-Now feature at the time of listing, which allows sellers to name a price at which they would be willing to sell the item to any buyer. Listings that offer the Buy-It-Now feature are conducted in the normal auction-style format, but will also feature a Buy-It-Now icon and price. Until the first bid is placed, or in the case of a reserve auction, until the reserve price is met, buyers have the option to buy the item instantly at the specified price without waiting for the auction to end. A seller can elect to sell items in individual item listings or, if he or she has multiple identical items, can elect to hold a “Dutch Auction.” For example, an individual wishing to sell 10 identical watches could hold 10 individual auctions or hold a Dutch Auction in which the 10 highest bidders would each receive a watch at the price bid by the tenth highest bidder. To be eligible to hold a Dutch auction, a seller must have a sufficiently high feedback rating and must have been a registered seller for at least 60 days. A seller may also specify that an auction will be a private auction. With this format, bidders’ email addresses are not disclosed on the item screen or bidding history screen.
Sellers generally pay a nominal listing fee to list items for sale. By paying incremental placement fees, sellers can have items featured in various ways. For example, a seller can highlight his or her item for sale by utilizing a bold font for the item heading, have his or her auction displayed as a “Featured Auction,” which allows the seller’s item to be rotated on the eBay home page, or utilize the Buy-It-Now feature, which enables a seller to close an auction instantly once a specified price is reached.

When an auction ends, the eBay system validates whether a bid has exceeded the minimum price, and the reserve price if one has been set. If the auction was successful or if the buyer elected the Buy-It-Now feature, we automatically notify the buyer and seller via email, and the buyer and seller can then complete the transaction independent of us. At the time of the email notification, we generally charge the seller a final value fee. eBay does not take possession of either the item being sold or the buyer’s payment for the item. Rather, the buyer and seller must independently arrange for the shipment of and payment for the item, with the buyer typically paying for shipping.

Under the terms of our user agreement, if a seller receives one or more bids above the stated minimum or reserve price, whichever is higher, the seller is obligated to complete a transaction. We have no power to force the seller or buyer to complete the transaction, other than to suspend them from using the eBay service in the future. In the event the buyer and seller are unable to complete the transaction and the seller notifies us, we have the right to credit the seller the amount of the final value fee.

Invoices for listing, feature and final value fees are sent via email to sellers on a regular (at least monthly) basis. We require all new sellers to have a credit card account on file. Sellers who pay us by credit card are charged shortly after the invoice is sent.  A summary of our eBay.com fee structure, as of March 15, 2003, is provided below. All pricing is subject to change.

Trading Assistants

The eBay Trading Assistants program is a network of experienced eBay sellers who have indicated their willingness to assist others in the sale of items for a fee. Interested sellers can search the Trading Assistant Directory to find someone to sell items on their behalf. The Trading Assistants and their clients negotiate the terms and conditions of these services.

Payments

Following a completed transaction, eBay buyers and sellers can exchange funds by the payment method of their choice, typically electronically through our PayPal global payments platform and also via check or money order. PayPal enables any business or consumer with email to send and receive online payments securely, conveniently and cost-effectively. PayPal’s email-driven system builds on the legacy financial infrastructure of bank accounts and credit cards to create an online payment network available to users in 38 countries.

How PayPal Works

Joining the Network

To send or receive a payment, a user first must open a PayPal account. A new user typically opens an account to send money for an eBay purchase or a purchase on another website, for services rendered, or for a payment to an individual in lieu of cash. Allowing new users to join the network at the time of making or receiving payments encourages PayPal’s natural, user-driven growth. PayPal’s account sign-up process asks each new user to register with PayPal his or her name, street address and email address, which serves as the unique account identifier.

Making Payments

Senders make payments at the PayPal website, at an item listing on eBay or another online marketplace where the seller has integrated PayPal’s Instant Purchase Feature, or at the sites of merchants that have integrated PayPal’s Web Accept feature. To make a payment at PayPal’s website, a sender logs in to his or her account and enters the recipient’s email address and the amount of the payment. To make a payment through Instant Purchase or Web Accept, a sender selects an item for purchase, confirms the payment information and enters his or her email address and password to authorize the payment. In both scenarios, PayPal debits the money from the sender’s PayPal balance, credit card or bank account and instantly credits it to the recipient’s PayPal balance in the case of an eCheck payment, the funds are credited to the recipient’s PayPal balance after two to three business days. In turn, the recipient can make payments to others or withdraw his or her funds at any time via check, electronic funds transfer, or via the PayPal debit card. PayPal earns revenues when an account receives a payment.

Funding Payments

Senders fund payments in three ways:

• from the sender’s existing PayPal balance;

• from the sender’s bank account, using the Automated Clearing House, or ACH, network; or

• from the sender’s credit card.

We incur funding costs on payments at varying levels based on the nature of the payment. To those users who choose to maintain PayPal balances, we offer a money market rate of return on balances placed in PayPal’s Money Market Fund. The PayPal Money Market Fund, which is invested in a portfolio managed by Barclays Global Fund Advisors, bore a current compound annual yield of 1.44% as of December 31, 2002.

We use the terms “balance” and “PayPal balance” to refer to funds that PayPal customers choose either to invest in the PayPal Money Market Fund (offered only to U.S. customers) or to authorize PayPal to place in FDIC-insured pooled bank accounts as agent of PayPal’s customers. These funds belong to our customers and hence are not reflected in our statement of financial position. Funds belonging to our customers that are not invested in FDIC-insured accounts, such as funds in transit to or from the customer’s bank, are shown as a liability on our balance sheet.

Verification of PayPal’s Account Holders

In order for senders to fund payments from their bank accounts, they first must become verified PayPal users through our Random Deposit technique. Under this technique, we make two deposits ranging from 1 to 99 cents to the user’s bank account. To verify ownership of the account, the user then enters the two amounts as a four-digit code at the PayPal website. In addition to allowing funding via bank accounts, verification also removes some spending limits on users’ accounts and gives them reputational advantages when transacting with other members of the PayPal community.

Withdrawing Money

Each U.S.-based account holder may withdraw money from his or her PayPal account via an ACH transfer to his or her bank account or by a mailed check from PayPal. ACH withdrawals may take three to five business days to arrive in the account holder’s bank account, depending on the bank. Mailed checks may take one to two weeks to arrive and PayPal charges $1.50 per check. Qualifying PayPal business users also can receive a PayPal ATM/debit card, which provides instant liquidity to their respective PayPal account balances. ATM/debit card holders can withdraw cash, for a $1.00 fee per transaction, from any ATM connected to the Cirrus or Maestro networks and can make purchases at any merchant accepting MasterCard.

Other Services

Customer Support

We devote significant resources to providing personalized, accurate and timely support services to our community of users. Buyers and sellers can contact us through a variety of means, including email, text chat and an expanding phone capability. We are focusing our resources on expanding our accessibility and capacity, increasing our category specific support, extending our online self-help features, and improving our systems and processes to enable us to provide the most efficient and effective support possible.

Value-Added Services

We provide a variety of “pre-trade” and “post-trade” services to enhance the user experience and make trading faster, easier, and safer. “Pre-trade” services simplify the listing process and include photo hosting, authentication and seller productivity software. “Post-trade” services make transactions easier and more comfortable to complete, and include payment processing, insurance, vehicle inspections, escrow, shipping and postage. We currently provide these services directly or through contractual arrangements with third parties.

Trust and Safety Programs

We have developed a number of programs to make eBay users more comfortable dealing with unknown trading partners and completing commerce transactions on the Internet.

Feedback Forum

eBay’s Feedback Forum encourages every user to provide comments and feedback on other eBay users with whom he or she interacts and enables every user to view other users’ profiles that include feedback ratings and incorporate user experiences. Every registered eBay user has a feedback profile containing compliments, criticisms and other comments by users who have conducted business or interacted with the person. The Feedback Forum requires feedback to be related to specific transactions and provides an easy tool for users to match transaction numbers with the user names of their trading partners. This information is recorded in a feedback profile that includes a feedback rating for the person and comments from other eBay users who have interacted with that person over the past seven days, the past month, the past six months and beyond. Users who develop positive reputations will have a color-coded star symbols displayed next to their user names to indicate the number of positive feedback ratings they have received. Before bidding on items listed for sale, eBay users are encouraged to review a seller’s feedback profile to check his or her reputation within the eBay community.

The terms of our user agreement prohibit actions that would undermine the integrity of the Feedback Forum, such as a person’s leaving positive feedback about himself or herself through multiple accounts or leaving multiple negative feedback for others through multiple accounts. The Feedback Forum has several automated features designed to detect and prevent some forms of abuse. For example, feedback posting from the same account, positive or negative, cannot affect a user’s net feedback rating (i.e., the number of positive postings, less the number of negative postings) by more than one point, no matter how many comments an individual makes. Also, a user can only leave feedback for completed transactions. Users who receive a sufficiently negative net feedback rating have their registrations suspended and are unable to bid on or list items for sale. We believe our Feedback Forum is extremely useful in overcoming initial user hesitancy when trading over the Internet, as it reduces the anonymity and uncertainty of dealing with an unknown trading partner.

SafeHarborTM Program

In addition to the Feedback Forum, we offer the SafeHarborTM program, which provides guidelines for trading, provides information to resolve user disputes and responds to reports of misuses of the eBay service. eBay’s SafeHarborTM staff investigates users’ complaints of possible misuse of the eBay service and takes appropriate action, including issuing warnings to users or suspending users from bidding on or listing items for sale. Some of the complaints the SafeHarborTM staff investigates include various forms of bid manipulation, malicious posting of negative feedback and posting of illegal items for sale. The SafeHarborTM group is organized into three areas: Investigations, Fraud Prevention and Community Watch. The Investigations team investigates reported trading infractions and misuse of the eBay service. The Fraud Prevention department provides information to assist users with disputes over the quality of the goods sold or potentially fraudulent transactions and, upon receipt of an officially filed, written claim of fraud from a user, will generally suspend the offending user from the eBay service or take other action as appropriate. The Community Watch department investigates the listing of illegal, infringing or inappropriate items on the eBay.com site and our international websites and violations of certain of our policies. Upon receipt of a valid written claim of intellectual property infringement by the owner of the intellectual property, we will remove the offending item. Users who repeatedly infringe intellectual property rights are suspended. In addition, we have increased the number of people reviewing potentially illegal items. Our trust and safety initiatives, including user identity verification, insurance, integrated escrow and authentication, are key elements of our programs designed to make eBay a safe place to trade.
My eBay

We offer My eBay, which permits users to receive a report of their recent eBay activity, including bidding, selling, account balances, favorite categories and recent feedback. Users with their own Web pages also may post links from their Web pages to eBay and list the items they are selling on eBay. We also offer About Me, which provides users the opportunity to create their own personal home page free of charge on eBay using step-by-step instructions. The About Me home page can include personal information, items listed for sale, eBay feedback ratings, images and links to other favorite sites.

eBay Foundation

In June 1998, we donated 643,500 shares of our common stock to the Community Foundation Silicon Valley, a tax-exempt donor-advised public charity, and established a fund known as the “eBay Foundation.” Since its inception, the eBay Foundation has made millions of dollars in grants to dozens of programs and initiatives focused on education and expanded access to technology. We also seek user suggestions for worthwhile charities through our website, where charity auctions and other unique promotions are held to support such causes.

Our eBay Platform

The eBay platform is composed of a scalable transaction processing system, consumer user interface, and externally accessible Application Programming Interface, API, for third-party integrations. The scalable system is primarily based on internally developed proprietary software, but also includes selected vendor components. The eBay platform supports the full selling and buying processes, including initial registration for the service, placing bids and managing outbids, listing items for sale, and auction close. The platform also manages various notifications for sellers and buyers, including daily status updates, bid and outbid notices, registration confirmations, account change notices, billing notices, and end-of-auction notices. The platform maintains user registration information, billing accounts, current item listings and historical listings. All information is regularly archived for record-keeping and analysis purposes. The platform regularly updates a comprehensive search engine with the titles and descriptions of items, as well as pricing and bidding updates for active items. The platform also updates the seller’s billing account every time an item is listed, a feature is selected, or an auction closes with a bid in excess of the seller-specified minimum bid. The platform sends electronic invoices to all sellers on a regular (at least monthly) basis. In addition to these features, the eBay service also supports a community bulletin board and chat areas where users and eBay customer support personnel can interact. Our overall system volume is significant, with peak usage of 580 million pageviews per day, 60 million item searches per day, and 4.5 gigabits per second of data traffic.

Our platform is designed around industry standard architectures to reduce downtime in the event of outages or catastrophic occurrences. The eBay service provides 24 hours-a-day, seven days-a-week availability, subject to a weekly scheduled two hour maintenance period. Substantially all of our system hardware is hosted at Cable & Wireless and Qwest facilities in the San Jose, California, area and Sprint Communications facilities in Sacramento, California, each of which provides redundant communications lines and emergency power backup. These systems and operations are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures and similar events. They are also subject to break-ins, sabotage and intentional acts of vandalism, and also to potential disruption if the operators of these facilities have financial difficulties.

We do not maintain fully redundant systems or alternative providers of hosting services, and we do not carry business interruption insurance sufficient to compensate us for losses that may occur. Despite any precautions we may take, the occurrence of a natural disaster, or any decision by Cable & Wireless, Sprint or Qwest to close a facility we are using for financial reasons without providing us adequate notice or other unanticipated problems could result in lengthy interruptions in our services. In addition, the failure by Cable & Wireless, Qwest or Sprint to provide our required data communications capacity could result in interruptions in our service. Any damage to or failure of our systems could result in interruptions in our service. Interruptions in our service will reduce our net revenues and profits, and our future net revenues and profits will be harmed if our users believe that our system is unreliable.

Our platform consists of Sun database servers running Oracle relational database management applications with a mix of Sun and Hitachi storage devices along with a suite of Pentium-based Internet servers running the Windows NT and Linux operating systems. We use F5 Networks, Inc.’s load balancing systems and our own redundant servers along with select software from Veritas Inc. to provide for fault tolerance, and we use IBM’s WebSphere application server for certain platform functions. These third-party technology licenses may not continue to be available to us on commercially reasonable terms. The loss of these technologies could require us to obtain substitute technologies of lower quality or performance standards or at greater cost.

We have experienced occasional system interruptions, which we believe will continue to occur from time to time. These outages have stemmed from a variety of causes, including third-party hardware and software problems, human error, intentional external attacks (denial of service attempts), and eBay proprietary software issues. The volume of traffic on our websites and the number of items being listed by users has been increasing continually, requiring us to expand and upgrade our technology, transaction processing systems, API capacity, security infrastructure, and network infrastructure and to add new engineering and operations personnel. The process of upgrading and expansion is part of the regular maintenance and site revisions. We may be unable to accurately project the rate or timing of increases, if any, in the use of the eBay service or expand and upgrade our systems and infrastructure to accommodate these increases in a timely manner. Any failure to expand or upgrade our systems at least as fast as the growth in demand for capacity could cause the website and API functions to become unstable and possibly cease to operate for periods of time. Unscheduled downtime would harm our business.

We use internally developed systems to operate our service and for transaction processing, including billing and collections processing. We have announced our intention to enhance our billing system with products from CSG Systems. We must continually improve our systems to accommodate the increasing levels of use of our websites. In addition, we may add new features and functionality to our services that would result in the need to develop or license additional technologies. The cost of our development efforts, including the required capitalization of certain site-related software and development costs, totaled $65.3 million in the year ended December 31, 2000, $82.0 million in 2001, and $120.1 million in 2002, and are reflected in our Consolidated Financial Statements under the heading “Product Development.” Our inability to add additional software and hardware or to upgrade our technology, transaction processing systems, security infrastructure, or network infrastructure to accommodate increased traffic or transaction volume could have adverse consequences. These consequences may include unanticipated system disruptions, slower response times, degradation in levels of customer support, impaired quality of users’ experience on our services, impaired quality of services for third-party application developers using our API, and delays in reporting accurate financial information. Our failure to provide new features or functionality also could result in these consequences. We may be unable to upgrade and expand our systems in a timely and effective manner or to integrate smoothly any newly developed or purchased technologies with our existing systems. These difficulties could harm or limit our ability to expand our business.
Our competitive space is characterized by rapidly changing technology, evolving industry standards, frequent new service and product announcements, introductions and enhancements and changing customer demands. Accordingly, our future success will depend on our ability to adapt to rapidly changing technologies, adapt our services to evolving industry standards and to improve the performance, features and reliability of our services in response to competitive services and product offerings and evolving demands of the Internet. Our failure to adapt to these changes would harm our business. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require substantial expenditures to modify or adapt our services or infrastructure. To address the need for rapid change as well as stability, we have undertaken a project to enhance and evolve our current architecture. The new architecture is intended to facilitate continued stability, improved scalability and improved efficiency. As of the fourth quarter of 2002, the new architecture is serving 70% of overall traffic on the eBay websites. This project is ongoing, with phased rollouts through 2004. We plan to time these rollouts in a manner that minimizes the impact to our user community.

Our PayPal Platform

Our PayPal technology assures user access to the PayPal website, both to acquire new customers and to allow existing ones to conduct financial transactions. We focus much of PayPal’s development efforts on creating specialized software that enhances its Internet-based customer functionality. One of PayPal’s key challenges remains building and maintaining a scalable and reliable system, capable of handling traffic and transactions for a growing customer base. The major components of our PayPal network reside at our PayPal facilities in Mountain View, California, at an Equinix data center in San Jose, California, at a Cable & Wireless data center in Santa Clara, California, and at our PayPal operations and customer support facility in Omaha, Nebraska.

Because of the financial nature of the PayPal product, we seek to offer a high level of data security in order to build customer confidence and to protect our customers’ private information. We have designed our PayPal security infrastructure to protect data from unauthorized access, both physically and over the Internet. PayPal’s most sensitive data and hardware reside at its Equinix data center and Cable & Wireless data centers. These data centers have redundant connections to the Internet, as well as fault-tolerant power and fire suppression systems. Because of PayPal’s special security needs, we house our PayPal equipment in physically secure areas and we tightly control physical access to our systems. PayPal’s systems and operations are located in the same geographic area and are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures and similar events. They are also subject to break-ins, sabotage and intentional acts of vandalism, and to potential disruption if the operators of these facilities have financial difficulties. PayPal does not maintain fully redundant systems or alternative providers of hosting services, and does not carry business interruption insurance sufficient to compensate it for losses that may occur. Any damage to or failure of PayPal’s systems could result in interruptions in its service, which could reduce our net revenues and profits, and our future net revenues and profits will be harmed if PayPal’s users believe that its system is unreliable.

Multiple layers of network security and network intrusion detection devices further enhance the security of our PayPal systems. We segment various components of the system logically and physically from each other on our PayPal networks. Components of the system communicate with each other via Secure Sockets Layer, or SSL, an industry standard communications security protocol, and require mutual authentication. Access to a system component requires at least two authorized staff members simultaneously to enter secret passphrases. This procedure is designed to protect us from the unauthorized use of PayPal’s infrastructure components. Finally, we store all PayPal data we deem private or sensitive only in encrypted form in our PayPal database. PayPal decrypts data only on an as-needed basis, using a specially designated component of our PayPal system that requires authentication before fulfilling a decryption request.
 

Competition
 
We encounter vigorous competition in our business from numerous sources. Our users can buy and sell similar items through a variety of competing channels, including online and offline retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies, virtually all online and offline commerce participants (consumer-to-consumer, business-to-consumer and business-to-business) and online and offline shopping channels and networks. For our PayPal service, our users may choose to pay through a variety of competing channels, including other online payment services, payment methods (e.g. cash, money order), and traditional online or offline merchant accounts. As our product offering continues to broaden into new categories of items, we expect our competition to continue to broaden to include other online and offline channels for those new offerings. We also compete on the basis of price, product selection, and services, which are derived from our abundant and diverse user community and the quality of the eBay user experience. To compete effectively, we may need to expend significant resources in technology and marketing. These efforts may be expensive and could reduce our margins and have a material adverse effect on our business, financial position, operating results, cash flows and reduce the value of our stock. We believe that we will be able to maintain profitability by preserving and expanding the abundance and diversity of our user community and enhancing our user experience, but there can be no assurance that we will be able to continue to manage our operating expenses to mitigate a decline in net income.
 

Ticker

EBAY