eBay’s CEO on Growth, Acquisitions, and Going Mobile

ADI IGNATIUS: Welcome to the HBR IdeaCast. I’m Adi Ignatius, editor-in-chief of the Harvard Business Review. And today, our guest is John Donahoe, the CEO of eBay. John, welcome.

JOHN DONAHOE: Thank you.

ADI IGNATIUS: It surprised me, eBay’s 15 years old and it really changed the way the world does business when it began. But now, you’ve been around for a while. So I guess this a management question. How do you deal with the challenge of avoiding becoming an aging growth company now?

JOHN DONAHOE: Well, we don’t have the luxury of becoming an aging growth company just because innovation is so fundamental to the industry in which we’re competing. E-commerce is still in its early days. We talk about it being 15 years old. But, if you think about each five year phase of the Internet, they’ve been significantly different about what’s been the key driving forces, what companies are the key driving forces.

And we’re entering a phase in the next five years where I think they’ll be more change in how consumers shop and pay, driven by technology. More change in the next five years then there’s been in the last 10. And so, we’re very focused on capitalizing on this period of– I would almost call it an inflection point– but this period of dynamic change in how consumers behave.

ADI IGNATIUS: But in some ways, I think it’s fair to say eBay is still in its original incarnation. And as new competitors pop up, eBay is more like a traditional merchant as the new guys, the IndieGoGos and others, come up. And I wonder, do you feel like you’re missing innovation opportunities or you need to scramble to come up with some?

JOHN DONAHOE: Well, no. Let me take an example. I think one of the most fundamental forces that’s changing how we operate is mobile, right. And the smartphone. We were just talking about the iPhone. We launched our iPhone application last year. In its first year, it did $700 million in volume. This year, it’ll do between $1.5 billion and $2 billion of volume. 12 million people have downloaded eBay’s iPhone application. It’s by far the largest m-commerce application in the world.

And what we’re finding is, what mobile’s really doing is it’s bringing the Internet to you seven days a week, 24 hours a day, on your time, at your convenience, where you want to be. So we’re finding people are shopping now– they’re sitting in a line at Starbucks and they start browsing on eBay. They see something they want to buy and they’re buying it. And people are buying cars. They’re buying clothing. They’re buying consumer electronics.

The other thing mobile technology is doing is it’s lowering the boundary or blurring the boundary between online and offline. We bought this little mobile company called RedLaser. I don’t know if you’re familiar with it. But you take your iPhone camera or your Android camera or your Blackberry camera. And you’re in any offline merchant. You look at an item, you scan the UPC code, and it instantly tells you the price of that exact item on eBay, on Amazon, on Walmart.com, on BestBuy.com all across the web. So you can immediately price compare or get information.

And now last week, we bought a company called Milo, which is bringing local inventory in the local stores around you on-line. So again, we integrated that into RedLaser. So here’s what consumers can now do. If you are walking down the street here in Boston and you want to buy a pair of Nike shoes, you walk into a shoe store and you enter the pair of shoes you want and scan it, and you can see the price right in front of you, the price all across online, and the price of those exact same shoes that are available on merchants in five, 10 miles around you. And so it’s bringing the world’s inventory to you. And we are absolutely out in front in innovation around mobile, innovation around local shopping, and a marketplace model’s a very attractive model to do that.

ADI IGNATIUS: In terms of company culture, are you gradually becoming a PayPal company more than an eBay company?

JOHN DONAHOE: We’re a consumer company. Our core mission is to connect buyers and sellers. And eBay’s a way to connect buyers and sellers. StubHub’s a way to connect a buyer and seller. Our classified sites around the world are a way to connect a buyer and seller. And PayPal’s a way to connect a buyer and seller.

ADI IGNATIUS: Let me ask you about– you’ve been in the top job for about 2.5 years now, but I think some people still identify Meg Whitman with the company. But just, if you could talk a little bit about the advantages and the burdens of following a high-profile CEO like her.

JOHN DONAHOE: Meg helped build eBay into what it is and did a phenomenal job in doing it. And so, I stand on the shoulders of what she created. But my job is not to try to be like Meg Whitman. I never could be. Plus, I never want to run for governor. I’ll go on record. I never want to run for governor, having watched Mitt Romney and Meg.

ADI IGNATIUS: Careful what you say.

JOHN DONAHOE: But my job is to take this incredible company and its core values that Pierre Omidyar, our founder, created, and the business that Meg and that first generation team helped build, and ensure that we’re positioned to succeed in today’s world and in tomorrow’s world. And consumers, as we discussed earlier, are changing how they shop and pay. The pace of change on the Internet and the pace of change in consumer behavior is enormous. And so, we come to it with a great set of core values, which are real important in our company, and a strong business.

So my job’s to ensure that we make the changes necessary, both in our business strategies and our business models and in our culture, to compete and win in today’s and tomorrow’s environment. And that’s what inspires me and that’s what I do every day.

ADI IGNATIUS: Let me talk about acquisitions a little bit. You mentioned a couple that are core parts of the business now. But first, tell me about Skype. What happened and what was the thinking and why didn’t that pan out exactly?

JOHN DONAHOE: Well Skype was an acquisition that eBay made under Meg’s leadership in 2005. And again, our core mission was connecting buyers and sellers. And at the time, we thought Skype might be another way to connect buyers and sellers. And in particular, that it could have led to a lead generation model which was pay per call. So at the time, you remember there was CPC. Right? Pay per click.

And at the time, we thought services or higher SP items, what advertisers or sellers really want is a phone call, not just a click to the website, and that Skype might be an enabling technology to do that. That didn’t turn out to be the case. What Skype did turn out to be is an enormously successful way to connect people, but not through commerce.

And so, when I became CEO, I felt that focus was a really important element in the Internet today and in our company. You can’t compete and succeed on multiple fronts. And so Skype was a fantastic business, but one that didn’t have synergy with eBay and PayPal. And so, I made the decision early on in my tenure to divest Skype and we sold 70% of it. We still retained 30. I love the business, still sit on the board.

But what this allows us to do is, Skype’s getting its focus from its board and it’s competing in its arena. And I’m focused now. 120% of my energy’s on eBay and PayPal, our two core businesses that do have strong synergies with one another. It’s allowing us to really focus on the markets we know well, commerce and payments, at a time of extraordinary change in the industry.

ADI IGNATIUS: And then, with the earlier acquisitions, tell me about what you’ve learned about how to make them work, how to bring in these companies into the culture? What have you learned about that?

JOHN DONAHOE: Sure, well we think about acquisitions in three categories. Acquisitions that strengthen our core, adjacent acquisitions, and capability acquisitions. So the easiest, in many ways, are acquisitions that strengthen our core. And our acquisition two years ago of Gmarket would be an example of that. We had a strong business in Korea. This was another– the leaders in Korea in the same business we bought them were now integrating and merging those two businesses. They’re under one leader. And it’s very clear they’re to serve Korean consumers. That’s a more classic integration.

Then we make adjacent acquisitions. So StubHub would be an acquisition that was adjacent to the core eBay platform. And StubHub, we’re letting run relatively independently. I don’t know if you’ve ever bought tickets on StubHub, but it’s a great experience. And it’s very much tied to tickets versus other commerce formats.

Bill Me Later would be another adjacent acquisition. This one adjacent to PayPal. And again, we’re letting Bill Me Later run separate. But in this case, we’ve integrated the Bill Me Later capabilities into the core PayPal flows and into the core eBay flows. We’ve also taken many of the leaders from the Bill Me Later entity and they’re now major leaders in the PayPal business.

So the guy that runs all of Risk for PayPal is a former Bill Me Later guy. The guy that runs all the salesforce, the combined PayPal and Bill Me Later’s salesforce is a Bill Me Later guy. The head of Corporate Development and Strategies is a Bill Me Later guy. The former CEO of Bill Me Later is now running all Risk for us. So we’ve were really taken advantage of the executives that we’ve acquired in some of these acquisitions.

And last category, capability acquisitions. So Fraud Sciences was an Israeli risk detection acquisition. Positronics, we bought, which was a small search company, and again, we were buying the people. And the guy, Chris Payne, who’s running eBay North America now, was the founder of Positronics. Dane Glasgow, who was a key product guy is now running all The product for eBay.

So we make acquisitions to buy capabilities and to buy people in that third category, and that helps us innovate faster and helps us acquire and recruit great talent.

ADI IGNATIUS: So what do you find is your biggest challenge now? Execution, innovation.

JOHN DONAHOE: Oh, I think it’s the intersection of the two. We have to keep innovating. But we have to execute at scale. And the challenge is how you balance the pace of change in the eyes of the consumer. So we’re making a lot of change to the eBay experience. And the funny part is existing users often don’t like it initially because they’re used to a certain way of shopping. And yet, new users like many of the changes that we’re making. And so it’s balancing what’s the pace of change when it gets translated to the core user experience for our customers.

ADI IGNATIUS: And how do you cultivate and sustain a sense of risk taking as the company expands, grows?

JOHN DONAHOE: Talking about it. Celebrating failure. Celebrating examples where we took bold risk, where it may not have worked out exactly as we imagined, but that we recognize that and we adjusted. So a good example of that would be, this year we made the largest pricing change in eBay’s history in the US. And we had made this change in Europe 18 months ago and had worked through some of the kinks. It was sort of the last major change to make our marketplace truly indifferent in balance between auctions and fixed price.

But we knew doing it North America, it had four times the volume. It was going to have a major impact. We were to go from 20 million items going through core search results to 80 million items overnight. And we were as prepared as possible. We made the change. And six, eight weeks in, I knew something wasn’t just right. There was something that was a little bit off. There was some second order effect or some dynamic in the marketplace that was just holding it down a little bit. And so, over the summer, we really drilled down to understand what was going on and what was causing this.

And that was a period where there was a great deal of anxiety because clearly there was something that wasn’t working as we had hoped. And yet, we’d made a bold change. I had no regrets. It was one of those changes that you either flipped the switch and go for or you don’t do it. There’s no stepping your way into it. And we diagnosed what the issues were and we’ve make those adjustments and we’ve benefited from that in the fourth quarter. But it was an important organizational lesson that says, I don’t regret the bold action. It was one we had to take. Sometimes actions have second order consequences. What’s important is you recognize them and you adjust. And that’s a lot of what business is today.

It’s the old ready, fire, aim– is you’re better off acting, moving, and if you don’t get exactly right, making an adjustment. That’s the only way to compete on the Internet today and certainly in our environment because it’s moving so fast.

ADI IGNATIUS: So you’re a guy who has an MBA. You were at Bain for many years. Now you’re in the CEO’s seat. A lot of what we write about these days is that there’s a problem with the economy, the stock price, pressure, the earnings guidance, the pressure for short-term results, may not be in the long-term best interest of a company. From where you sit now, do you feel that and do you wish the system was different?

JOHN DONAHOE: Well the thing that I got drilled into me at Bain, you had no choice in that business but to be incredibly customer focused. Because in that business, you had no product other than yourself. And if you weren’t customer focused, you weren’t going to be successful. Really deeply understanding your customers’ needs, your customers’ challenges, and finding ways to help address those needs.

I bring that to eBay. If there was one mark of my tenure at eBay, it would be making us a more customer focused company. And so, I think when you think short-tem, long-term, those words can get very confusing. If you really focus on what do I need to do to serve our customers’ needs today and in the future, some of those distinctions short-term, long-term fall down.

So, we’re making some enormous changes to our business to try to better meet customer needs. They’re changes we feel a huge sense of urgency to make in the short-term, but they take time. They take time to implement. And they’re changes we’ll stick with and we’ll stay with. And so I stood up at our Analyst Day and told the investing world, March of 2008, this is going to take time. It’s going to take three years to get through the first phase of this, and here’s what you can expect each step along the way. And by and large, investors have responded to that.

I think the market understands if you create clear expectations of what you’re trying to accomplish and what’s achievable by when, then the challenge of leadership, whether you’re CEO or part of my leadership team, is to execute against those commitments. And that’s what we’ve tried to do. So, I try to stay customer focused, drive innovation off those customer needs, and be very clear about the pace with which we can make progress.

ADI IGNATIUS: What’s the biggest difference being an important guy at a company and then suddenly becoming the CEO of a company like eBay?

JOHN DONAHOE: Oh, it’s just the glare of being a public company CEO. I ran Bain and that was being, a private company, in essence, CEO. And that was wonderful. And then, when I was number two behind Meg, that was a different experience. And then becoming the CEO, it’s just that you are in the public eye. And the environment around you really reflects the successes and failures of the company. And so it takes a little bit of getting used to, but once you get used to it, it’s not that different.

ADI IGNATIUS: I’ve always thought it’s easier to be the number one than the number two.

JOHN DONAHOE: Sure, it’s just different. It’s just different. For me, they’re both learning experiences. And I like being number one.

ADI IGNATIUS: Well, John. Thanks very much for meeting with us.

JOHN DONAHOE: Thank you.

ADI IGNATIUS: That was John Donahoe, the CEO of eBay.