View Meg Whitman's report card

When eBay insiders recall the June 1999 computer crash that lasted 22 hours, they still cringe. The downtime cost about $4 million in lost fees and wiped out $5 billion in market value as investors dumped shares throughout the summer.

The "Big One," as the episode has been mythologized, immediately raised questions about Meg Whitman's future as CEO. Critics ranging from frustrated Wall Street analysts to Beanie Baby collectors called for her immediate ouster.

But the Silicon Valley newcomer was a quick study. She committed herself to learning the nitty-gritty of database corruption and hired a lauded technocrat as chief crisis controller. Whitman assigned former Gateway Chief Information Officer Maynard Webb the cubicle adjacent to her own and ordered him to contact her immediately whenever the site hiccupped.

"I woke her up at 3 a.m. more times than I'd like to imagine," said Webb, now eBay's president in charge of technology. "I knew her husband on a first-name basis from phone calls for an entire year before I ever met him."

The outage--one of the costliest software glitches ever for a U.S. company--proved a pivotal period in Whitman's career. With little in the way of a technology background, she realized she had to become fluent in the baffling language of servers and large-scale networks. At the same time, Whitman said, eBay more than any other company taught her the importance of making decisions fast.

The 45-year-old chief executive will rely heavily on these lessons as she attempts to steer eBay around even bigger obstacles in 2002--including the company's most significant technological upgrade--and to create a business strategy that will outlive her tenure.

"There's no substitute for being in the fray," Whitman said. "It's all about the quality and experience of the management team. It really is all about the people who you hire and their abilities, and their ability to make decisions in a rapidly changing environment."

It is also about the people who make up the millions of daily transactions that have made eBay the success it is today. And this is where Whitman faces one of her most difficult challenges: expanding the company into new businesses without alienating its legions of grassroots customers.

To her credit, Whitman has taken steps toward this goal that may seem unexpected for an executive with a distinctly Old Economy corporate background who is No. 2 on Fortune magazine's 2001 list of powerful business women, behind Hewlett-Packard CEO Carly Fiorina. For example, in a sign of humility unthinkable for the majority of Silicon Valley chief executives, Whitman types apologies to chat groups--a trait that has endeared her to many.

"We call her Meg. How many heads of companies of that size does anybody think to call the CEO by the first name?" asked Marsha Collier, a Los Angeles resident who began trading "Star Trek" figures on eBay in 1996 and recently wrote "Starting an eBay Business for Dummies." "She's not afraid to get out in front of problems."

Whitman's attention to the eBay "community," as it is known, is well placed. With its one-to-one sales model, eBay is perhaps the only major Internet company whose core business could not exist offline--and, as such, it cannot be managed like any other.

Even after her attempts to stay in touch with her buyers and sellers, many mom-and-pop franchises continue to complain that Whitman caters increasingly to large companies and high-end customers. Smaller businesses have always been suspicious of her corporate pedigree, especially because it differed so starkly from that of her predecessor, whose experience was based on programming and an outspoken advocacy for a democratic Web.

The company originally grew out of a black-and-white site called Auction Web that was created by Silicon Valley programmer Pierre Omidyar. According to Whitman, the business consisted primarily of an auction site that became eBay--a Web site created by Omidyar's fiancee, who collected Pez candy dispensers. Rivals such as Onsale, First Auction and Auction Universe seemed destined to eclipse tiny eBay.
 

Previously, she had tried to transform FTD, the largest floral company in the world, from a member association to a private company. After slashing bloated overhead, trying to modernize the marketing campaign, and trimming the staff, she resigned within two years because key members opposed the idea.

When an executive recruiter called Whitman about eBay in early 1998, she refused. She was living in the Boston area and didn't want to yank her two sons from school or force her husband, neurosurgeon Griffith Harsh IV, into the job market. But after three weeks of phone conversations with the headhunter, she grudgingly flew to San Jose, Calif.--and changed her opinion.

"So many other concepts being born at the time were basically Internet versions of what you could do in a land-based environment," Whitman said. "This was a whole new concept--allowing people to trade with each other virtually on a 24-7 basis."

She joined eBay in May 1998 and vowed to spend several months on "basic blocking and tackling"--building a management team, switching financial systems, creating a marketing strategy, and streamlining e-mail systems. She also thought she'd be consumed with preparing Wall Street for eBay's initial public offering in September 1998.

Instead, on her first day on the job, eBay's site crashed for eight hours--a recurring theme that would plague Whitman and the company for more than a year, making site reliability her top priority. When eBay blamed Sun Microsystems software for corrupting a database, Whitman began sitting in on technical meetings between the two companies, and she personally called Sun CEO Scott McNealy to ask for more help.

Webb says eBay now averages unplanned downtime of 4 seconds per month--a respectable ratio considering that the site gets 260 million page views per day (from 65 million in 1998) and sends 1.3 gigabits of data per second (from 180 megabits per second in 1998).

But Whitman can't rest on her laurels. The company will undergo one of its most significant technological upgrades in 2002, and Wall Street will scrutinize the CEO and "Meg's boys"--her 10 direct reports--to see if they can get a handle on technology this time around.

She will oversee the tricky installation of eBay's "V3" next-generation shopping technology, which will include real-time updates for eBay's data warehouse (now updated only once per day). Listings will also be updated minute by minute, up from once per hour. Also in the first half of 2002, eBay will launch new search and licensing technology.

At the same time, Whitman is busy crafting a long-term strategy so eBay can thrive "post-Meg."

"I want my legacy to be that we have built a global online trading platform that empowers all kinds of users to be successful doing what they love," Whitman said.

Gray markets and gangbuster growth
Several obstacles stand in the way of that goal. One nagging issue is the eBay gray market--groups of buyers and sellers who use the site as advertising but conduct transactions privately. According to Salomon Smith Barney, eBay loses 10 percent to 25 percent of gross merchandise sales this way. eBay must find a way to capture some of these sales.

The company also continues to face complaints by vocal members of the eBay selling community who say that, in an effort to maintain revenue growth, Whitman is starting to ignore the small players who still form the backbone of the company's business.

Their fears escalated in April 1999, when eBay acquired upscale auction house Butterfield & Butterfield for $260 million--a move many customers said was an attempt to move eBay away from its humble roots as a site for Pez aficionados and Beanie Baby collectors. They also lamented eBay Motors, which partners with General Motors and other Old Economy giants, and eBay's efforts to sell multimillion-dollar homes and crack the online real estate market.
Whitman also takes heat for PowerSellers, a program that gives extra support to large partners such as Sun, IBM and the U.S. Postal Service. PowerSellers must sell $2,000 a month and maintain a 98 percent positive feedback rating. They may buy ads linking to their sites--a loophole that allows them to legally participate in the gray market, infuriating small sellers, who are penalized for doing so.

Despite the challenges, eBay can point to a rate of growth that has eluded most Internet companies. Net revenue in 2002 is expected to be at least $1.05 billion on gross merchandise sales of $13 billion, up from about $730 million in net revenue and $9 billion in gross merchandise sales in 2001.

Momentum will come through international expansion. Three years ago, the company had operations in five countries; the goal is to be in 30 countries by 2005. International operations brought in $110 million in 2001. Chief Financial Officer Rajiv Dutta projects they'll bring in more than $800 million in 2005.

Wall Street likes eBay because the company doesn't have any warehouse costs and is notorious for keeping a lean payroll. Employee costs have been declining since 1999 and were expected to make up just 4 percent of total revenue at the end of 2001.

"To the extent they can successfully execute on that plan and increase their revenue as a percentage of the gross value of the transaction, they'll do very, very well," said Tom Underwood, vice president of technology research for Legg Mason. "But the key is the user base--keeping them happy."

Whitman herself says she is happy at eBay and has no immediate plans to resign. She has, however, said she would like to become more involved in her undergraduate alma mater, Princeton University, and eventually try new roles outside daily management in corporate America.

"It's more manageable than it was in the earlier days, but the CEO position in any company is a lot of work," Whitman said. "This will be my last corporate job for sure."
 

Fifth profile: Terry Semel