EbayandAmazonA.docx

EbayandAmazonA.docx

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EbayandAmazonA

eBay,Inc.andAmazon.A

It'sacollisioninthemakingwithanimpactthatcouldripplefarbeyondwhichpioneerwillleadtheE-commercerevolution-andwhichwillfollow.

BusinessWeek,May1999i

MorethanadecadeafterBusinessWeekdevoteditscoverstoryto"eBayvs.Amazon"-acompetitivebattleitlabeled"adefiningmomentfore-commerce"-Amazonhadestablisheditselfasthemarketleader.2Attheendof2010,thecompany'ssharepricehadgrownatacompoundannualgrowthrate（CAGR）of37%since2001-morethansixtimeseBay's6%growthoverthesameperiod（seeExhibit1foracomparisonoftheirstockperformance,2002-2010）.Overthepastfiveyearsinparticular,Amazon'srevenue,operatingincome,andnetincomehad,onaverage,grownatrobustratesof32%,27%,and26%,respectively（seeExhibit2forAmazon'ssummaryfinancialdata）.Ontheotherhand,eBayhadgrowntheseindicatorsatratesof15%,14%,and21%.Notably,itscoreMarketplacesbusinessgrewitsrevenueataCAGRof10%peryearfrom2005to2010（seeExhibit3foreBay'ssummaryfinancialdata）.

eBayhadnotalwayslaggedbehinditscompetitor.In1999,atthetimeoftheBusinessWeekstory,eBayofferedmorethan2millionitemsforauctiondaily,expecteditsannualgrossmerchandisevolume（GMV）toquadrupletonearly$3billion,andmaintained3.8millionregisteredusers,whichhadgrown75%from.theprioryear.3Amazon,meanwhile,whichtouteditselfforoffering"Earth'sbiggestselection"at16millionitemsforsale,expectedannualsalestomorethandoubleto$1.4billionandboasted8.4millioncumulativecustomeraccounts-up250%versustheprioryear.4AsBusinessWeeksummarized:

Indeed,thebuddingbehemothspresentafundamentalchoiceforconsumersintheInternetAge:

WillmostpeoplegravitatetowardfixedpricesatthelikesofAmazon'sclean,well-lightedsuperstore,withitsfamiliarbrand-nameretailsheen?

Orwillthemassestakeashinetodynamicpricing,thefluidgive-and-takeoneBay'sfriendly,funkyswapmeetcyberchargedintoaglobalbazaar?

Thecompanies,itseems,didnotopttowaitforconsumerstomakeachoice.AfewmonthsbeforethepublicationoftheBusinessWeekarticle-andonedayaftereBayannouncedplanstomakea$1.1billionsecondarystockoffering-Amazonlauncheditsownauctionsitetomuchfanfare,clearlydesignedasanassaultoneBay'sbusinessmodel.6Soonafterward,in2000,eBayexpandedbeyonditscoreauctionsbusiness,introducingfixed-pricetradingwiththeacquisitionofretailsiteHalf.andaddinga"Buy-It-Now"featuretoitstraditionalbusiness,therebyenablingbuyerstoinstantlywinanauctionataseller'spre-establishedprice.Ayearlater,eBayappearedtohavethemomentum,asitsshareofonlineauctionspendingrosefrom58%in2000to64%in2001,whileAmazon'ssharefellfrom3%tojust2%.8WhileAmazonquietlyscaledbackitsstrugglingauctionbusiness,eBay'sfixed-priceinitiativeswerecontributingmorethan19%ofitsGMVbytheendoftheyear.9Attheendof2001,eBay'sshareshadrisen749%sinceitsIPOinSeptember1998,whileAmazon'ssharesweredown36%overthesameperiod（seeExhibit4foracomparisonoftheirstockpriceperformance,1998-2001）.

Asthecompanyentered2011,eBayhadtodeterminewhichstrategyitshouldpursuetoregaintheupperhand.Shoulditmaintainitsgroundbreakingplatformbusinessmodelandattractmorebuyersandsellersby,forexample,cuttingpricesonfeesorimprovingitssearchcapabilities?

Alternatively,shouldeBaytransformitsmodelandexpandintoareassuchassforitssellers,evenincludingfulfillmentandmarketing?

eBay'sdecisionwouldsetthetoneforitsbattlewithAmazonintothenextdecade.

eBay'sBusinessModel

AuctionsMarketplace

PierreOmidyarlaunchedeBayin1995,withtheaimof"[giving]thepowerofthemarketbacktoindividuals,notjustlargecorporations."Thecompany'sstatedgoalwasto"pioneernewcommunitiesaroundtheworldbuiltoncommerce,sustainedbytrustandinspiredbyopportunity."eBay'sprimaryofferingswereonlinemarketplacesforthesaleofgoodsands,supplementedbyothere-commerceplatformsandonlinepaymentsolutions.In2011,eBayoperatedthreeprimarybusinesssegments-Marketplaces,Payments,andCommunications-withthecoreMarketplacesbusinessandPayPalfeesearnedoneBaysitesconstitutingthemajorityofthecompany'soverallrevenue.

Atitscore,eBayofferedamarketplacethatconnectsbuyersandsellers.Withastatedgoaloffacilitatingcommunities-notsellingthemproducts-thecompanyprimarilygeneratedrevenuefromsellersthroughfeesforlistingitemsandcommissionfeespayableoncompletedtransactions.（SeeExhibit5forabasicfeescheduleforsellingoneBayin1999.）Forexample,ifasellerlistedaniteminauctionformatforastartingpriceof$0.99,heorshewouldbechargedaninsertionfeeof$0.25upfront.Iftheauctionthensoldforafinalvalueof$100,thesellerwouldpayacommissionof$3.13.Overall,eBaywouldearntotalof$3.38,andthesellerwouldnet$96.62.

eBay'scostofgoodssoldprimarilyconsistedofwebsiteoperations,paymentprocessing,andcustomersupport.Inaddition,byrestrictingitsoperationstothemaintenanceofamarketplace,eBaywasabletoscalerapidlyintoothermarketsoutsidetheU.S.Asof2011,thecompanyhadlocalizedwebsitesin24countries,aswellpartnershipsandinvestmentsinanadditional15markets.eBay'sglobalscalabilityalsoenabledgreatercross-bordertradethroughoutthecompany'splatform,assellersininternationalmarketssuchasChinawereabletoefficientlysourceproductsandofferthemoneBay'smostactivewebsitesintheU.S.,theU.K.,andGermany.

Launchedasapureauctionmarketplace,eBay'sbread-and-butterbusinessinitsearlyyearswasthe"collectibles"category,ultimatelyexpandingintomorethan50,000productcategoriesrangingfromautomobiles,totoys,tosportinggoods.UniqueandusedproductscametoepitomizethekindsofgoodscustomerssoughtoneBay.

ExpandingintoFixed-PriceSales

In2000,eBaygrewbeyonditscoreauctionsbusinessandintroducedfixed-pricetradingwiththeacquisitionofretailsiteHalf.andtheadditionofaBuy-It-Nowfeatureinitstraditionalbusiness,therebyenablingbuyerstoinstantlywinanauctionataseller'spre-establishedprice.13Unlikeauctions,fixed-pricesellingwasmorecommonlyassociatedwithcommodityproductsinwhichlowpricestendedtoprevail.

In2001,eBaylaunchedeBayStores,whichallowedsellers-includinglargeretailerssuchasTheHomeDepot-tooffergoodsthroughfixed-pricestorefrontsonthecompany'splatform.Atthetime,pricingforsellersincludedbothamonthlysubscriptionfeeof$9.95andalistingfeeof$0.05peritem,withfinalvaluefeesrangingfrom1.25%to5%.

ImprovingtheBuyerandSellerExperience

In1996,sixmonthsafterthecompany'sfounding,OmidyarlaunchedtheFeedbackForumwithalettertotheeBaycommunityofseveralhundredmembers,writing:

Mostpeoplearehonest.Andtheymeanwell.Somepeoplegooutoftheirwaytomakethingsright.I'veheardgreatstoriesaboutthehonestyofpeoplehere.Butsomepeoplearedishonest.Ordeceptive.Thisistruehere,inthenewsgroups,intheclassifieds,andrightnextdoor.It'safactoflife.Buthere,thosepeoplecan'thide.We'lldrivethemaway.Protectothersfromthem.Thusgrandhopedependsonyouractiveparticipation.Becomearegistereduser.Useourfeedbackforum.Givepraisewhereitisdue;makecomplaintswhereappropriate.

TheFeedbackForumwasaratingsystemthatallowedbuyersandsellerstogradeeachtransactionas"positive,""negative,"or"neutral"andofferabriefcommentontheexperience.Theratingsbecameapermanentaspectofamember'sprofile.Through2001,eBay'srateoffraudremainedbelow0.01%,andthecompanyinsuredauctionsviaafraud-protectionprogramthatreimbursedbuyersuptoacertainamountforitemseithernotreceivedornotasdescribed.

AseBaygrewandevolved,thecompanyfocusedonofferingmoreefficientandeffectivepaymentmethodsforbuyersandsellers.In1999,whennearlyalloftheauctionsoneBaywereconductedwithpaperchecksormoneyorders,thecompanyboughtBillpoint,whichallowedperson-to-personcreditcardpaymentsovertheInternet.eBaywasslowtointegratethe,however,anddidnotfullylaunchituntilnearlyayearlater.20Meanwhile,PayPal,arivalofBillpoint,hadbeenthefirstmoverinperson-to-personpayments.By2002,PayPalhandledmorethan70%ofelectronicpaymentsexchangedbetweeneBayusers-whichthenaccountedforroughly40%ofalltransactions-comparedtolessthan30%forBillpoint.InJuly2002,acknowledgingthatthe"thecommunityhadvoted,"eBayacquiredPayPalfornearly$1.5billioninstock.22By2011,PayPalmaintainedover100millionactiveaccountsandhandlednearly85%ofeBay'sGMV.In2008,eBaypaid$920millionincashandoptionsforBillMeLater,aneight-year-oldcompanywith4millionusersthatallowedpeopletobuyitemsontheInternetandthensentthemabillwithin30days,atwhichpointtheycouldeitherpaythebilloutrightortakeoutaloan.23

eBayofferedseveralothersforbuyersandsellers,rangingfromits"bestmatch"searchalgorithmthatincorporatedsellerratingsandshippingfeesintoitssortingoflistings,topre-andpost-tradetoolsthatmadethebuyingandsellingprocesssaferandmoreefficient.（SeeExhibit6foradetailedoverviewofeBay'skeysforbuyersandsellers.）

Amazon'sBusinessModel

TheRetailModel

JeffBezosfoundedAmazonin1994,namingthecompanyafterthelongestriverintheWesternHemisphereandcoiningasimple