eBay's Outage Sends Shudders, but Solutions Aren't Easy

The day eBay's (EBAY) Web site crashed for 22 hours, rival Onsale's (ONSL) Chief Technology Officer Alan Fisher breathed a sigh of relief. At least it wasn't us, he thought. Fisher had cause to pat himself on the back. Unlike eBay, Onsale had several backup systems for its Web site in place.

Three weeks after eBay's outage, which led investors to shave off almost $6 billion from the company's market capitalization, it's clear that had the online auctioneer deployed a backup system, its crash would have been much less severe. What is less evident is whether eBay has fully absorbed the lessons of the crash.

At first, eBay's reaction was to blame its hardware provider, Sun Microsystems (SUNW). One technology analyst for several prominent hedge funds, which are both long and short eBay, says eBay "always points the finger."

Contrast this approach to Onsale. Fisher, a Bell Labs veteran who holds a master's degree in electrical engineering from Stanford, has backed up Onsale's Web site using four different systems, including one system that continuously replicates data over a high-speed Internet line onto a bunch of computers in his home garage.

"We're pretty anal about this," explains Fisher. "Those data are your family jewels."

Wall Street Gets Wise to Technology

eBay's outage was not only a wake-up call for the world's largest online flea market, it was also a reality check for Wall Street. Since the rise of the Web, analysts have hailed the importance of revenues, margins and marketing for Internet companies. Now analysts are recognizing that they have to pay attention to the technological health of these companies.

The risk that technology glitches represent to the health of e-commerce was recently pointed out in a report by Zona Research. The report estimates that approximately $362 million in e-commerce revenues could be lost each month due to unreasonably long load times, to say nothing of completely unreachable sites. If e-commerce vendors do not pay attention to the "eight-second rule," the standard download time of a Web page, the report says they risk losing customers.

Internet blackouts are nothing new. Some of the earliest blowups, in 1995 and 1996, were at America Online (AOL), which was snagged by persistent crashes as millions of new users overwhelmed the company's network. And just this past February, E*Trade (EGRP) was jolted by a rash of outages when it upgraded its trading software.

One source of the problem seems to be that as fledgling companies rushed to boost their Web presence, they spent much more money on marketing than on technology. Now that strategy is returning to haunt some of them. One way to gauge the technological well-being of a company is to check for product development costs as a percentage of net revenue, available in a company's filings with the Securities and Exchange Commission. Typically, these expenses cover the payroll of engineering staff as well as money allocated for computer and networking infrastructure.

Not Investing Enough in Technology? Product development costs as a percentage of net revenue

Source: Securities and Exchange Commission quarterly filings

This metric provides some clues into eBay's troubles. The company slashed product development costs to 5.7% of revenue in the first quarter of 1999 from 8.7% a year earlier. By contrast, eBay is spending 35% of its revenue on sales and marketing to attract new customers.

Promises Are Hard to Keep

In the days after its crash, eBay made promises of swift action.

"What happened [on June 10 and 11] was a real solid wake-up call that we need to change things," says eBay spokesman Kevin Pursglove. "It's safe to say that these are issues that the senior staff and Meg [Whitman] have been beating around for some time." Meg Whitman became eBay's president and CEO in March 1998.

But making promises is a lot easier than actually delivering on them. Pursglove says creating a backup system is a top priority at the company. He points out that before the crash, eBay was just days away from switching on a backup server. "Had we had a good backup system in place, the site would have been down one-and-a-half to two hours instead of 22 hours," he says.

However, three weeks have passed and Pursglove still says the backup "will be up and operating in a matter of weeks." That means eBay is still operating without a backup system.

The outage has also spurred the company to accelerate hiring new engineers and stocking up its arsenal of computer equipment. Company officials claim that the annual budget had called for increased investment in product development during the third and fourth quarters of this fiscal year, but they have the power to open the purse strings now.

"Everything is moving up a much faster timeline and at a much higher priority," explains Pursglove, but he declined to say how many more engineers the company intends to hire.

That may not be easy. Onsale's Fisher says the single biggest technological challenge for an e-commerce company is to find and hire talent -- an endemic problem plaguing the entire Internet economy.

"The technology is not rocket science," says Fisher. "It's good old-fashioned engineering. Our biggest problem is hiring enough staff to do the projects that we want to do."

And that may not bode well for companies like eBay, which don't exactly have a reputation to make software engineers swoon.

"It's not really sexy," says software consultant Steve Steinberg, speaking of eBay's technology. "They're selling Beanie Babies, for heaven's sake."

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