What birthday gift is appropriate for a boisterous 7-year-old? The first idea that springs to mind is probably not the $700 million present John Fairfax Holdings bestowed on Trade Me this week as the online auction website celebrated its seventh birthday.

Welcome to the internet economy, 2006 style. The dot boom is back - but with a difference.

During the first internet goldrush, back in the late 90s, silly money was paid for internet operations with only a hint of a business plan - and usually just a faint promise of future revenues. In the more fiscally-sober 21st century, internet businesses that are actually operational and profitable are those that attract the big dollars.

On a good day, Google is valued at 75 times earnings, eBay a mere 27 times its annual income. In that context, Trade Me's sale price - 15.6 times projected 2007 earnings - looks like a bargain.

So what exactly is Trade Me and how did it become a success?

In its first week of operation in March 1999, the Trade Me site attracted just 155 subscribers. Now, 364 weeks later, the membership body count stands at 1,183,818 and there's a new member joining every minute.

More than 60 per cent of New Zealand internet traffic now goes to Trade Me. To put that in real-world terms, the site attracts more visitors than New Zealand's busiest shopping mall.

How did it all begin?

There's a wonderful company legend that goes something like this: In early 1999, 23-year-old Sam Morgan was looking for a second-hand heater to help him survive a draughty Wellington flat.

Being computer-savvy (he was an IT consultant for Deloittes at the time) Morgan turned to the internet to help with his quest, but couldn't find what he wanted on any New Zealand websites.

The closest was the website for Trade & Exchange, but listings on that site were held back until a week after they'd been published in the paper. By the time Morgan found an appropriate listing and phoned up, everything had been sold. That experience inspired him to create Trade Me.

It's a delightful story, and mostly true, although these days Morgan admits he can't remember exactly what product he was searching for online.

Despite the fact that classifieds and auctions had been flourishing on the internet internationally for a number of years, the online cupboard in New Zealand was still pretty bare in 1999, apart from the occasional corporate megasite.

There was still plenty of room for an entrepreneur (even one on a Kiwi-sized budget).

Morgan takes up the story: "Some time later we were in a backpackers in Sydney and got evicted because it was overbooked. We went up to some backwater because it was the only accommodation we could find. Anyway, there was nothing to do, so that night I started drawing a data model. So it sort of started there really. Then when I came back to Wellington I literally sat on the couch and built the site on a laptop over a five- or six-week period."

Once the site was completed, Morgan scraped together $8000 through overdrafts, credit cards and savings and launched Trade Me into the wilds of cyberspace.

Success wasn't exactly instantaneous. Early adopters of the Trade Me site were mostly friends or relatives. It was a definite cause for celebration when a stranger signed up. Morgan used to drive around Wellington in a beautiful old Holden Belmont carrying Trade Me signage. Then, when he got home, he'd quickly check online to see if anybody had signed up. Usually, no one had.

Morgan persevered - but didn't give up his day job. After a few months, Trade Me started to gain a little bit of traction, signing 5000 members and attracting some 200,000 visitors. At that point, Morgan started getting offers for the fledgling business.

In typically cheeky Kiwi fashion, he listed Trade Me for sale on eBay, with a "buy now" price of about $1 million. He didn't attract any bids before eBay withdrew the auction, but he did lift the profile of Trade Me among those Kiwis who were already getting seriously into online trading.

With the company still only months old, Morgan made what he regards today as one of the most pivotal decisions that determined the future of Trade Me - he sold close to half the company to several former Deloittes colleagues for $75,000.

As a result he was able to start working on the business full-time. Morgan was working longer hours and earning a lot less than when he was a consultant, but there was always the hope that some day it would pay off.

Even with Morgan's full-time attention, the next year was a struggle.

Listings on Trade Me were originally free, and advertising was expected to pay the bills. It wasn't working.

"The common wisdom at the time was that free, advertiser-supported content was the way to go - you could make good ad dollars on the net," says Morgan. "Yahoo! was going pretty well with its free model so I started with the idea of just stick it up and see how it goes - perhaps we'll sell some banners. That turned out not to be the case and by the time we ran out of money we had to turn the charging model on.

"We did it in a couple of stages: first we introduced premium fees, for bold print and other enhancements to the basic listings. And we had reasonable usage of that but certainly not enough to pay our bills.

"So in September 2000 we introduced success fees [a percentage of the final price for sold items] and that went pretty well. And so that basically saved us from the cliff."

By September 2001, Trade Me was in full swing and Morgan was burned out.

The constant struggle to stay ahead of Trade Me's runaway growth, where plans made two months before were now hopelessly out of date, had taken its toll.

He left the now-profitable site in the hands of a manager and jumped on a plane bound for Britain. It turned out to be a long journey - the date was September 11 and Morgan's flight was en route to the United States when the World Trade Centre was attacked.

Morgan managed an IT team for a year in London and forgot all about life on this side of the universe.

Finally, though, he was refreshed enough to return and take over, just as Trade Me really started to hit critical mass.

The site had grown to host 100,000 members during Morgan's absence, and thousands of new arrivals every month drove an insatiable thirst for new computer hardware just to keep the auctions flowing.

What attracted all these people to Trade Me? The founder of eBay, Pierre Omidyar, perhaps best defined the appeal of online auctions, describing them as "interesting market mechanisms" that would naturally produce a fair and correct price for anything anyone wanted to sell.

"Instead of posting a classified ad saying I have this object for sale, give me a $100, you post it [online] and say here's a minimum price," he said in the 2002 book The Perfect Store: Inside eBay.

"If there's more than one person interested, let them fight it out."

His conclusion: "The seller would, by definition, get the market price for the item, whatever that might be on a particular day."

THAT notion of a fair market certainly helped fuel Trade Me's success. By 2003 the 100,000 members had become nearly half a million by the end of the year. Numbers continued to grow at breakneck pace during 2004, until finally the One Millionth Member milestone was reached in April 2005. At this time those members were responsible for around $300 million in auction sales.

Some existing businesses have been threatened by the arrival of Trade Me, particularly secondhand dealers and traditional auction houses. A few have evolved into Trade Me sellers, others are battling on or adding online trading capabilities to their own offerings - but some have simply faded away.

So what does it take to run New Zealand's most popular website? A steadily expanding team of technical, customer service and administrative staff, now totalling 52. And they're not in it for the glamour. The Trade Me premises have been described as Stalinesque - concrete floors and five diagonal rows of desks.

The staff who inhabit this open plan environment don't take themselves very seriously but they are intensely passionate about their work.

They're a closeknit family but only one is a blood relation - Sam's sister, Jessi, was his first employee back in 2000, lured fresh from a biochemistry degree to help Sam cope with what was perceived then to be a flood of emails. Now she's head of operations for Trade Me - and emails have exploded to 1000 a day - and that's not counting the junk mail, a hefty 10 million pieces of spam every month.

And amid of all this chaos - no private office, comrade - sits Sam Morgan, now a couple of hundred million dollars richer, but still the same fellow who used to answer customer service emails at three in the morning back in 1999.

So why sell Trade Me now? There are seven hundred million good reasons. Morgan would have been perfectly happy to stick with business as usual - Trade Me is very profitable, thank you, with projected earnings of $26 million in the 2006 financial year, $44.8 million in 2007.

But even with those sorts of earnings, it would still take more than a decade to accumulate $700 million.

Morgan has been dismissive of newspaper companies in the past, observing that they really don't understand the space within which Trade Me operates. Well, the times they are a-changing, print publishers are now moving to embrace the internet - and Fairfax is under new management who do understand it.

It's such a classically Trade Me deal - reluctant seller nominates a high reserve price, but a willing bidder (for whom the inherent strategic value of the purchase is sufficient to justify the outlay) clicks the Buy Now button.

Much has been written about Morgan, especially in the past week. Pocket snapshot: born in 1975, left school after UE, spent his seventh form year in Germany, came back with no idea what to do next. The university dropout had three post-university jobs in quick succession, saw a gap in the market (and a chance to develop his web-building skills) and came up with Trade Me. Took on global giant eBay at its own game - and won. Why did Morgan set up Trade Me in the first place? To quote from an Unlimited magazine interview in February 2000: "I wanted something where I could be a high achiever."

Job done.

* Tomorrow Sam Morgan sits down with Leah Haines for the Big Interview