Industrial Engineer, Billionaire and
Owner of Dedicated Digital Technology
NEW YORK - Industrial engineer Danny Rail turned to eBay last year out of necessity. His design firm had landed a huge order for robotic food-manufacturing equipment, but the machine shops that do his manufacturing couldn't get this job done in time.
Rail considered building his own shop--a proposition he estimates would have run him $750,000 and a hefty bank loan. On a whim, he looked on eBay (nasdaq: EBAY - news - people ) for equipment. He ended up outfitting an entire machine shop for $100,000.
"I can buy things off of eBay used that are still in great shape for 10 cents on the dollar," says Rail, owner of the Gainsville, Ga., business Dedicated Digital Technology. "I don't even think of going to a retail store now before I check out eBay." He boasts of scoring $100,000 worth of metalworking equipment for just $1,500 from a shop that was going out of business, and says he once bought a robotic motor worth $12,000 for $500.
"It's all about saving an ungodly amount of money," adds Rail's partner, Greg Smith.
EBay formally launched its business and industrial marketplace site in January, creating a central location where enterprises can buy or sell anything from drill bits to dump trucks. On an annualized basis the site is already selling $1 billion worth of goods, according to eBay Business general manager Jordan Glazier. About 7% of the $14.8 billion worth of merchandise sold on eBay as a whole in 2002 was accounted for by business-to-business sales, half as big a share again as two years ago.
Big manufacturers like Motorola (nyse: MOT - news - people ) and Silicon Graphics (nyse: SGI - news - people ) have been using eBay for some time as a low-cost means of selling overstocked or obsolete inventory, but it is small- and medium-sized businesses that eBay sees as the growth engine for eBay Business.
Hundreds of thousands of companies large and small already use eBay for business transactions. While the increase in the number of small and medium-size businesses that sell to individual consumers has been key to driving eBay's growth, says Salomon Smith Barney analyst Lanny Baker, "if they can turn those small-business sellers into buyers on the site, that's a lot of purchasing power".
Unlike many of the now-defunct business-to-business brainstorms dating back to the dot-com era, eBay didn't establish its business marketplace and then try to recruit users. Instead, management began to notice a critical mass of business activity on eBay last year and decided to consolidate it at one place on the site.
EBay's colorful logo and graphics are hardly businesslike, and Glazier admits that most eBay business users stumble across business items when looking for something else--often a PC. EBay sold 1 million PC's last year--from used personal units to new ones from manufacturing giants like Dell (nasdaq: DELL - news - people ), IBM (nyse: IBM - news - people ), Hewlett-Packard (nyse: HPQ - news - people ) and Sun Microsystems (nasdaq: SUNW - news - people ).
Rather than relying on small-business owners in search of cheap PCs stumbling upon the business marketplaces, eBay is starting to promote its business marketplace systematically. It is running ads in trade magazines and visiting trade shows to get to know distributors--and with good reason.
"The average price point on eBay Business is several times that of the rest of the site," Glazier says. A piece of equipment for a physical-therapy practice can list at $25,995, while one piece of equipment in the pumps category lists at $150,000. Industrial sales have the same inexpensive listing fees that apply to items on the rest of the site, excluding cars and real estate. Posting a sale costs between 30 cents and $3.30.
But eBay also takes a cut of each business sale that ranges from 1.5% to 2.75% or 5.25%, correlating inversely to the final value of each item. If its $1 billion a year in business-to-business sales is realized, that alone could add roughly $33 million in commissions to the company's annual revenue ($1.2 billion in 2002).*
That number could mushroom. Some small companies are transformed once they start to do business on eBay. John Stack runs Peach Trader, which sells restaurant equipment. When he experimented with selling coffee makers online in 1999, he was a local Altanta-based business with $500,000 in sales. He has since closed his shop to do most of his business on eBay, selling to customers as far away as Belize and Alaska. He expects to do $3 million in sales this year, and much more profitably. EBay's commissions have potentially jumped from a few thousand dollars to $150,000.
Likewise, Dedicated Digital Technology partners Rail and Smith want to expand beyond just using eBay to save on supplies. They say their business plan this year calls for opening an eBay store of their own. "We don't know what we'll sell," Rail says. "We could sell machine tools, but we also have connections in the gold industry. There's too much money out there to not do it."
Repeat those stories just a few hundred times and the millions start rolling into eBay's coffers.
*An earlier version of this story incorrectly said that eBay takes a cut of at least 5.25% on each sale. The sentence should have said the site takes a cut of up to 5.25%.