(Part 1.  When finished, you should read Part 2.)

One of the reasons I love working for eBay is that I am constantly surrounded with interesting empirical evidence of how markets for physical goods behave. Today, I thought I’d share with you a single anecdotal example of how eBay creates opportunity from a very mundane retail product.

Yes, the product is a Garth Brooks DVD.

Well, to be more specific, it is the new, 2006, special-edition 5 DVD Garth Brooks “The Entertainer” set that comes in a collectible tin. It’s $19.96 at Wal-Mart, and there are two angles here. One, they are only going to make one million copies. Two, they are only available at Wal-Mart in the US.

There was a lot of press about this release, largely because I guess the 2005 edition had sold out quickly and led to a lot of pent-up demand for the product. On a lark, I dediced to order 10 copies from Walmart.com. Total cost, with tax & shipping was $238.77, so I was basically out $23.88 per DVD set.

When I placed this order, I had checked the completed auctions on eBay.com for “garth brooks the entertainer”, and I had seen sets going for as much as $39.99. So I figured I’d be able to make a few dollars selling these off.

However, by the time I received the DVDs, the average price on eBay.com had dropped to about $26, and I wasn’t sure I would make any money on these, after fees, with that type of price. After all, Walmart.com still hasn’t sold out, so I guess it is somewhat interesting that anyone was basically paying 30% over retail price for something that wasn’t in limited supply.

On a hunch, however, I decided to check out the completed auctions on some of eBay’s international sites. One of the amazing things about the eBay site is that it is integrated globally. With the same eBay account, I can log into any eBay site around the world and list an item. What I found was very interesting:

• “Garth Brooks The Entertainer” completed auctions in the US.
• “Garth Brooks The Entertainer” completed auctions in the UK.
• “Garth Brooks The Entertainer” completed auctions in Germany.
• “Garth Brooks The Entertainer” completed auctions in France.

Now, these are live links, so what you see is going to be different than what I saw two weeks ago. But what I saw was this:

• High volume in the US (over 50 listings), average price about $26
• Medium volume in the UK (20 listings), average price about 35 pounds sterling.
• Low volume in Germany (8 listings), average price about 50 Euro.
• No volume in France. No one cares about Garth Brooks in France, I guess. 🙂

Wow. 35 pounds and 50 Euro are the equivalent of about $60 US. That’s a big difference, and a big markup over the cost of buying these at Wal-Mart.

So I did a little experiment. I put up a single, fixed-price listing with Best Offer on eBay UK for 9 of the DVD sets for 29.99 pounds with free shipping, and a put up a single auction in the US, starting at $0.99.

End Result: I sold all 9 of the sets in the UK in five days… I wish I had more. The US listing closed at $22.01, with $8.95 for shipping because the buyer ironically was from Canada.

Let’s look at the economics in more detail.

If I divide the costs across the 9 sets in the UK, my numbers are as follows:

Sales Revenue £29.99
Shipping Cost $15.75

eBay Fees $4.96
– Listing Fee $0.54
– Feature Fees $1.89
– Final Value Fees $2.53

PayPal Fees $2.52
– Transaction Fees £1.07
– Cross Border Fees £0.30

Pounds -> Dollars $1.8830
Currency Conversion Fee 2.50%

Total $ Revenue $55.06
Total $ Costs $47.10

Total $ Profit $7.95

Wow. Thats a 14.1% profit margin on the sale price. All for something anyone could have purchased on Walmart.com.

Just for completeness, here is the economics for the US sale:

Sales Revenue $30.96
Shipping Cost $6.00

eBay Fees $2.26
– Listing Fee $0.20
– Feature Fees $0.90
– Final Value Fees $1.16

PayPal Fees $1.51
– Transaction Fees $1.51
– Cross Border Fees $-

Total $ Revenue $30.96
Total $ Costs $33.65

Total $ Profit $(2.69)

Yes, that’s right. Lost money on the US sale.

The fact that I lost money on the US sale isn’t surprising… eBay is a pretty efficient market, and the idea that you could make money buying a product at retail and selling it on eBay is dubious at best, and given that the retailer is the biggest retailer in the US, it’s nearly impossible.

However, I’m amazed at how much money was available to be made selling globally. And eBay makes this so incredibly easy:

• Listing. I basically just went to the eBay UK website, clicked Sell, and used exactly the same form that is available in the US to list. Incredibly easy.
• Pricing. The exact same completed auctions functionality is available for the UK site as the US site. Easy.
• Shipping. I just priced out the shipping via USPS Global Priority mail on the usps.com website. $15.75. Easy.
• Payment. PayPal is absolutely amazing. Not only could UK buyers pay me in pounds sterling, but I discovered that PayPal will actually let you maintain an account balance in 19 different currencies! They charge a flat 2.5% to convert the payment to dollars, but you can leave your money in pounds sterling and still earn interest on it! (Not a bad feature financially if you believe in diversifying your currency exposure…)
• Managing your Listings. The UK listing showed up in My eBay and all of my eBay tools the same way every other listing did. Seamless. Painless. Amazing.

I have a few takeaways from this experiment. No, I am not planning to quit my day job to be an import/export eBay seller. But, I do think this example points to some key truths about global e-commerce today:

• Global markets for retail product are very inefficient. This Garth Brooks DVD was only released in the US. Why? Wal-Mart has a presence in other countries. Maybe it wasn’t worth the logistics for relatively low demand in other countries. Maybe there was limited supply, and they figured the US market was sufficient. Who knows. The point is, there are clearly buyers in other countries who were being underserved here, and it also looks like not enough sellers were stepping into the void to help them.
• eBay helps make inefficient markets efficient. Meg & Pierre have been talking about this effect for many years, but this is a direct example of it. eBay significantly lowers the barriers to trade globally, and as a result an individual like myself can quickly step in and create value. That 14.1% profit is value, and it doesn’t even count the additional value that was realized by eBay & PayPal through their fees.
• PayPal is a game changer for international commerce. I knew this academically before doing this experiment, but now I can really feel it viscerally. Being able to handle foreign currency is not something that most businesses, let alone individuals, can handle. But PayPal makes it seamless. Unbelievable. It’s also worth noting that PayPal made a pretty penny here too. My fees on an average UK sale to eBay were about 8.8% of the sale price. The PayPal fees, including currency conversion, were 7%.

As the internet continues to grow, more and more online retailers are going to wake up to the international opportunity. Leveraging PayPal, any webfront store could likely easily collect sales globally (although not with the demand generation of eBay).

To continue the experiment, I’ve ordered 10 more DVD sets… I’m going to try to sell these in Germany, to see if I can overcome the language barrier. To date, I have sold items on eBay to buyers in over 30 different countries, so I’m optimistic that it will work. I’ll post the results to this experiment as well, if people are interested.

P.S. If you are wondering why I take the time to do things like this in my spare time, the answer is pretty simple. I’m a big believer that in technology you have to use your own product, so that you can better understand the experiences of your users. At eBay, it is even more important than at a typical technology company, because the product isn’t just a list of features – it’s the basis for running a business online.

Also, I tend to shop on eBay quite a bit, so making money through selling on eBay helps “fund my habit”, so to speak.

(Please check out Part 2 of this article.)