It was early in 2006, and Matt Carey, the new CTO of eBay , was attending his first focus group about the online shopping site. It was a memorable experience, to say the least. “It’s hard to use,” complained a longtime customer. She had been collecting antique glass on eBay for years. But lately, the treasure hunt was more frustrating than fun. “I get lost,” she said. “I can’t get back to my search results. I have to go all the way out and start over.”

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“This is not good,” Carey thought to himself. This particular buyer was, as he puts it, a “dyed-in-the-wool, right-down-the-center customer.” What she was describing is known by the pejorative “pogo sticking.” To Carey, who had just moved to eBay after 20 years at Wal-Mart , it was the equivalent of “having customers not able to shop in your store because they can’t find the aisles.” It is not news that eBay has lost the magic that made it an Internet darling a few years back. After peaking at $59 a share in late 2004, the company’s stock plunged to $23 two years later. CEO Meg Whitman may boast about the company’s latest stats–record number of users, revenue, and items listed for sale–but the fact is that the rate of growth at the company is slowing. EBay has tried to jolt itself by investing as much as $4 billion in Skype (which has yet to pay off) and $1.5 billion in PayPal (which has been far more successful). Yet 70% of revenue still comes from the core marketplace business. And as Carey recognized, the weakness there has become impossible to ignore. How troubling is the slowdown? Despite the double-digit increase in listings and gross merchandise sales that the company reported last year, both of these key indicators have steadily decelerated over the past three years. In 2006, gross merchandise sales grew by less than 20%, the smallest rate ever. More troubling still, the number of active users–those who bid, bought, or listed at least once in the previous year–rose by only 14%, the slowest rate since 2001. EBay is responding with a whole new strategic gamble–one some company insiders say is its most ambitious ever. The mastermind is John Donahoe, 47, whom Whitman brought aboard three years ago and installed as president of eBay Marketplaces (and as her heir apparent). His bold stroke–what he calls “our number-one strategic priority”–is recasting the site to focus primarily on buyers, not sellers. As obvious as this realignment might seem, it is a sea change for an outfit that long regarded sellers as its main customers; some 1.4 million vendors rely on the operation for their primary or secondary income. Donahoe’s key partner is Carey, 42, who is charged with making the buying experience efficient and fun again. Improving one of the Web’s most heavily trafficked sites without disturbing its global–and vocal–sellers’ network and its millions of loyal buyers is a challenge that Carey compares to a “four-wall expansion” at Wal-Mart: turning a standard store into a supercenter without disrupting day-to-day operations.

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The good news is there are signs of progress. Wall Street has noticed–the stock has gone up by about $10 a share since its low a year ago. Still, shares remain about 40% below their high, and the ultimate outcome of this effort to revive eBay’s growth is in doubt. “This is definitely an inflection point,” says Robert Peck, an analyst with Bear Stearns. As Jeff King, eBay’s senior director of product search (what eBay calls “finding”), puts it: “This is our biggest bet.” Twelve years after a pony-tailed programmer named Pierre Omidyar built an unfussy auction Web site one Labor Day weekend, it’s easy to forget how swiftly and thoroughly eBay changed the online-shopping game. Within four years, customers had listed 130 million items and sold nearly $3 billion worth, giving rise to a new type of entrepreneur, the at-home eBay retailer. The site’s charm lay in the fact that the merchandise was utterly unpredictable, and in the way that auctions introduced an element of competition. The initial hodgepodge of obscure collectibles and discontinued items at bargain prices was joined by hard-to-find new products and pricey cars and jewelry. Part flea market, part Mall of America–eBay chalked up $52.5 billion in total sales last year, more than the sales of Amazon, Apple, and Nike combined. There’s still nothing else like it in size and breadth. From the beginning, the strategy was to amass an unrivaled array of goods that would attract buyers. It worked well. In fact, as Donahoe now admits, it worked too well. The site became bloated and unwieldy. At any given point, it features about 100 million items for sale, with nearly 7 million new listings every day. “EBay’s abundance was one of its attractions,” Donahoe says. “But if you type in ‘BlackBerry’ and get 23,000 search results, it’s not that helpful.” (His offhand math is not far off the mark: A search in September produced 3,911 phones and PDAs, and 17,771 accessories.) Donahoe is sitting in the employee cafeteria at eBay North, one of two corporate campuses in the San Jose area, in early September. It’s just after 8 a.m. The campus is coming to life, the parking lot starting to fill. Donahoe is already in midday form after his 6 a.m. Pilates class in the company gym. In a sense, he’s trying to do for eBay Marketplaces what Pilates does for his lanky 6-foot-5 frame: improve its flexibility. “This is not a one-time project,” he says of the drive to revamp the buyer experience. “We’ll make big changes over the next couple of years and keep iterating and innovating.” Whitman and Donahoe worked together in the 1980s in the San Francisco office of Bain & Co.; Donahoe stayed and eventually became Bain’s worldwide managing director. In many ways, he says, eBay has been going through a natural evolution, from a wildly successful startup to a public company with global reach to, well, a maturing business. “Early on it created a market,” he says. “Now we have competition on all sides.”

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Today, the company’s homegrown vendors can sell through their own Web sites, as well as channels such as Amazon.com and Overstock.com. Shoppers have even more online options. A bargain is only a Google search away, and brick-and-mortar retailers have worked hard to upgrade the shopping experience on their sites with virtual assistants, gift registries, product videos, customer reviews, and liberal return policies. Once an e-commerce innovator, eBay fell behind. “We were shackled by our own success,” says Eric Billingsley, who runs the engineering side of the finding operation. “When the company was growing 80% or 120% year over year, the mind-set was, ‘If it’s not broken, don’t fix it.’?” “The buying experience hasn’t changed dramatically since 1999, compared with the rest of the Internet,” says Scot Wingo, president and CEO of ChannelAdvisor, which makes software to automate everything from auctions to shipping for sellers on eBay and other sites. “The highway is now crowded, and others are going faster.” Historically, eBay made sellers the priority for a very good reason: They generate revenue. Sellers are the ones who pay eBay fees for listing an item, posting a photo, even processing a payment through PayPal, which eBay bought in 2002. But Donahoe realized that eBay had to stimulate shopping, and to do that, the company needed technology designed around the buyers’ needs. In late 2005, Donahoe began looking to hire a new CTO. Given the site’s size and complexity, there weren’t many candidates with the appropriate experience. Then he met Matt Carey. Carey didn’t know much about eBay–in fact, he had never used the site–but he had helped build and oversee the technical infrastructure behind the world’s largest retailer, one of the most data-centric businesses on the planet. In two decades at Wal-Mart, he had experienced firsthand both unprecedented growth and the challenges of maturation. A half-hour into the interview, Donahoe excused himself and called a colleague: “We have to have this guy.” Carey inherited a catastrophe. Shortly after he arrived in San Jose in December 2005, the site’s core listings, largely auctions, and those for its 600,000 individual stores were combined for the first time–a blunder no one now takes credit for. Previously when you typed in, say, “Sony PlayStation,” the search engine combed through only the core listings. To see the other merchandise, you had to surf over to the eBay Stores site and do a separate search or browse the stores. The goal of combining the entries was to show a broader mix of inventory on a single search; the effect was to give more exposure to the store products. The new setup was rolled out with no customer testing.

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Within weeks, nearly every measure of eBay’s business was down. Bids. Return visits. The conversion rate, or percentage of listings sold. Average sales price. In hindsight, it’s hard to understand why no one at eBay foresaw what would happen. Because eBay charges less for store listings than core auction listings, once they all appeared in a single search, many sellers shifted their inventory to save on fees. Suddenly, store merchandise, which tends to be pricier, was crowding out the auctions–and the bargains. Auctions bottomed out at just 17% of total listings, yet they still accounted for 91% of sales. The misstep triggered headlines, a falling stock price, and pointed questions from analysts. Whitman explained repeatedly that the marketplace was out of balance. In March 2006, eBay rolled back the program. Finally, in August the company used its only real lever: It raised fees for store listings. That fiasco became the catalyst for overhauling the buyer experience. Carey asked for a detailed report: When were shoppers abandoning the site? How much were they scrolling through the new search results? He discovered that there was no mechanism to create such a report. It took “many, many, many hours and days and weeks,” he says, to unravel exactly what customers were doing. It turned out that eBay collected all sorts of data about transactions–“It knew that business like the back of its hand,” Carey says–but little related to shopping. “I said, ‘We got gaps in the data. We got holes,'” he recalls. And his mission was to plug them. Carey grew up in Okmulgee, Oklahoma, where his father operated the family’s furniture-and-appliance store. It was located in a four-story building, the tallest in town. As a boy, he dusted furniture in the showroom and rode the elevator for fun. As a teenager, he delivered air-conditioners, sold bedroom suites, repaired TVs. Meanwhile, his mother was working for IBM in information systems. “When we were young, she used to take me and my brother to the data center, and we’d sleep on the floor in her office while she wrote programs on punch cards,” Carey says. After graduating from Oklahoma State University, he went to work for Wal-Mart as a programmer trainee, combining his retail and tech know-how. On his first day, he wrote a program automating a sales report for Sam Walton about the Sam’s Club stores–all 12 of them. The IT department was small enough, with only 300 or so employees, that he met Wal-Mart’s CIO early on. “I think I’m going to want to do your job one day,” Carey told him.

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The CIO invited the 24-year-old to work alongside him for six months and learn the ropes. Carey eventually had a hand in developing virtually all of Wal-Mart’s major systems, from software that analyzed every inch of shelf space to programs that identified inefficiencies in the company’s global supply chain. “The lesson there was, it’s all in the data,” he says. “If you start with the lowest level of detail, you can answer any question about the business.” He’d watched from Bentonville, Arkansas, over the years as colleagues left for tech companies like Amazon and Dell, and when eBay came calling, he was intrigued. Still, leaving the only employer he’d ever had was terrifying. “You’ve got no idea how hard that was,” he drawls. “No idea.” Before moving to San Jose, Carey put the family’s dining room set up for auction on eBay. It sold within days. “A retired couple in Hot Springs drove in with a truck and picked it up,” he says. “I thought, Wow, that’s $1,000, man! This is totally powerful.” He got his first taste of the eBay culture on day one. Everyone works in cubicles, but executives get individual conference rooms, decorated in a theme their colleagues pick out: Blondie for Whitman. Dennis the Menace for Donahoe. And Elmer Fudd for Carey, an avid hunter. Seeing his conference room for the first time–with two double-barrel toy shotguns mounted on the wall, plus a couple of comic-book covers–he remembers thinking, “Okaaay. Am I in the wrong room?” Carey set about creating what he calls a “culture of analytics,” particularly around buyers and product development. More experimenting, more testing, more data. “I want to eliminate feelings and get down to true math,” he says. In just 10 months, his team built a faster and more flexible technology platform. His developers also began testing applications on small randomly selected samples of the eBay population (typically 1% or 2%). In the old eBay, one former engineer had so many failed launches that he had earned the unfortunate nickname the Rollback King. Now, if a new feature doesn’t improve buyer engagement–a new metric, in which return visits, bidding, buying, and other activities are weighted–it doesn’t graduate from trials to reach a broader audience. “In a Darwinian sense,” says Billingsley, one of eBay’s top developers, “to be a survivor, something has to keep producing.”

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The evolution of the eBay search engine is continuing, driven by the need to boost browsing and sales. One step is to give shoppers more relevant information, more rapidly. Until recently, the search engine relied on sellers’ product descriptions. When you typed in the name of a product or brand, the software looked for those words in the sellers’ 55-word listings. The results were then ranked according to the closing date of the auctions. If you entered “John Deere,” you could get a listing for a John Deere tractor or a set of John Deere sheets. By eBay’s definition, both were equally relevant. Playing catch-up with other consumer-oriented sites, the company is now applying the “wisdom of crowds” to create a new feature called “best match.” Every click on the site is measured; the outcome of every one of the 2,600 searches per second is tracked to determine what leads shoppers to bid or to buy. If you submit “John Deere” today, you’ll see the John Deere products that most previous shoppers purchased. “We get flack that we’re trying to control search, but we’re letting the buyers vote with their clicks and say what’s relevant,” says search-meister King. “It’s a big, big, big change for us.” Narrowing even the most relevant search by price or brand or size has been a particular problem for eBay. Unlike other retail sites that sell a set inventory, eBay has to index and classify a constantly changing universe of whatever people are selling. So where Apple.com or Bananarepublic.com has you pick from predetermined price options, for example, one new eBay feature lets you set your own price range. The site also steers buyers to those sellers with the most positive feedback. EBay is launching a “snapshot view” in certain categories in time for the holidays; instead of the usual prominent text and thumbnail images, a larger image pops up as you scroll over the picture of a sweater or a vase. It’s the sort of functionality online shoppers have come to expect. “If they’re shopping for clothes,” says King, “they’re comparing us to Nordstrom now.” What about serendipity–that item you weren’t looking for but are delighted to discover? EBay staffers talk about serendipity all the time. So at the bottom of the list of matches are a few outliers. “If we got rid of cheetah iPod covers, we’d lose a little of eBay,” King says. What does all this mean for the sellers? Chris Hinze, who turned to eBay when asthma made him abandon his auto-mechanic business, is enthusiastic. Working out of his home in Portland, Connecticut, the 46-year-old refurbishes fixtures bought wholesale into what he calls “power showerheads” with dramatically more water flow. He’s an eBay PowerSeller, meaning his sales amount to at least $1,000 a month and buyers give him high feedback scores.

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Hinze attended eBay Live, the annual gathering of thousands of sellers, for the first time this past summer. After one session, he approached King and mentioned that searches for “shower heads” and “showerheads” produced significantly different results. Back in San Jose, King had his team add the terms to their “stemming” project, which combines related words in the finding system. The result: a flood of customers for Hinze’s Superpowershower. He sold three months’ worth of merchandise in three weeks. “Crazy, huh?” he says. It’s a good example of the power of eBay’s algorithms, both to steer shoppers toward what they’re looking for and to boost a small business 3,000 miles away. In essence, that was Omidyar’s original vision: linking strangers through a virtual transaction that served both parties well. An honest, efficient marketplace, he called it. But tinkering with the search engine creates new winners and losers; some sellers bubble up, others disappear. No matter what, somebody’s unhappy, suspicious of favoritism, accusing eBay of tilting its playing field. Even minor tweaks can disrupt business for sellers who rely on automated software to manage hundreds or thousands of auctions. It’s all there in the often vitriolic discussion boards on the site. The biggest question facing eBay today is whether the totality of the changes that Donahoe and Carey are implementing can do for eBay and its millions of sellers what the “showerhead”/”shower head” fix has done for Hinze. Therein lies eBay’s central conundrum. “We don’t pretend to have all the answers,” says Donahoe. “We’re doing things that will upset some people. But we’re not just listening to the average noise. We’re sharply focused on what our buyers want and need.” Ultimately, the new strategy is a risk, but it’s one that eBay can’t afford not to take. Faced with the classic growth-company problem, it’s betting that it can regain momentum by becoming more like mainstream retailers while still offering stuff you can’t find anywhere else (Michael Vick’s purported handwritten notes for his televised apology in August: $10,200). The buyers will decide if eBay made the right move. If they shop the site more regularly and purchase more Nintendo Wii consoles and Coach bags and iPhones and Elmer Fudd comics and antique glass, the sellers will applaud the changes. At eBay, there’s little doubt what’s at stake. “If we don’t change, we get marginalized,” says Carey. “We can’t let that happen.”

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Employees, who seem to take pride in running a global democratic marketplace, profess a greater sense of mission. “We haven’t even released an eighth of what we’ve done,” says Billingsley. “That’s what excites me. It hasn’t even begun.” Customized pages are in the works. More social-commerce features. An eBay to Go widget with your favorite auction listings to post on your Web site or your MySpace page, complete with a clock to remind you to bid before it’s too late. It all sounds good. But is it enough? Even eBay’s revamped search engine can’t find the answer.