Ebay and Amazon(A).doc

eBay, Inc. and A A Its a collision in the making with an impact that could ripple far beyond which pioneer will lead the E-commerce revolution-and which will follow. Business Week, May 1999i More than a decade after BusinessWeek devoted its cover story to eBay vs. Amazon-a competitive battle it labeled a defining moment for e-commerce-Amazon had established itself as the market leader.2 At the end of 2010, the companys share price had grown at a compound annual growth rate (CAGR) of 37% since 2001-more than six times eBays 6% growth over the same period (see Exhibit 1 for a comparison of their stock performance, 2002-2010). Over the past five years in particular, Amazons revenue, operating income, and net income had, on average, grown at robust rates of 32%, 27%, and 26%, respectively (see Exhibit 2 for Amazons summary financial data). On the other hand, eBay had grown these indicators at rates of 15%, 14%, and 21%. Notably, its core Marketplaces business grew its revenue at a CAGR of 10% per year from 2005 to 2010 (see Exhibit 3 for eBays summary financial data). eBay had not always lagged behind its competitor. In 1999, at the time of the BusinessWeek story, eBay offered more than 2 million items for auction daily, expected its annual gross merchandise volume (GMV) to quadruple to nearly $3 billion, and maintained 3.8 million registered users, which had grown 75% from. the prior year.3 Amazon, meanwhile, which touted itself for offering Earths biggest selection at 16 million items for sale, expected annual sales to more than double to $1.4 billion and boasted 8.4 million cumulative customer accounts-up 250% versus the prior year.4 As Business Week summarized: Indeed, the budding behemoths present a fundamental choice for consumers in the Internet Age: Will most people gravitate toward fixed prices at the likes of Amazons clean, well- lighted superstore, with its familiar brand-name retail sheen? Or will the masses take a shine to dynamic pricing, the fluid give-and-take on eBays friendly, funky swap meet cyber charged into a global bazaar? The companies, it seems, did not opt to wait for consumers to make a choice. A few months before the publication of the BusinessWeek article-and one day after eBay announced plans to make a $1.1 billion secondary stock offering-Amazon launched its own auction site to much fanfare, clearly designed as an assault on eBays business model.6 Soon afterward, in 2000, eBay expanded beyond its core auctions business, introducing fixed-price trading with the acquisition of retail site H and adding a Buy-It-Now feature to its traditional business, thereby enabling buyers to instantly win an auction at a sellers pre-established price. A year later, eBay appeared to have the momentum, as its share of online auction spending rose from 58% in 2000 to 64% in 2001, while Amazons share fell from 3% to just 2%.8 While Amazon quietly scaled back its struggling auction business, eBays fixed- price initiatives were contributing more than 19% of its GMV by the end of the year.9 At the end of 2001, eBays shares had risen 749% since its IPO in September 1998, while Amazons shares were down 36% over the same period (see Exhibit 4 for a comparison of their stock price performance, 1998-2001). As the company entered 2011, eBay had to determine which strategy it should pursue to regain the upper hand. Should it maintain its groundbreaking platform business model and attract more buyers and sellers by, for example, cutting prices on fees or improving its search capabilities? Alternatively, should eBay transform its model and expand into areas such as services for its sellers, even including fulfillment and marketing? eBays decision would set the tone for its battle with Amazon into the next decade. eBays Business Model Auctions Marketplace Pierre Omidyar launched eBay in 1995, with the aim of giving the power of the market back to individuals, not just large corporations. The companys stated goal was to pioneer new communities around the world built on commerce, sustained by trust and inspired by opportunity. eBays primary offerings were online marketplaces for the sale of goods and services, supplemented by other e-commerce platforms and online payment solutions. In 2011, eBay operated three primary business segments-Marketplaces, Payments, and Communications-with the core Marketplaces business and PayPal fees earned on eBay sites constituting the majority of the companys overall revenue. At its core, eBay offered a marketplace that connects buyers and sellers. With a stated goal of facilitating communities-not selling them products-the company primarily generated revenue from sellers through fees for listing items and commission fees payable on completed transactions. (See Exhibit 5 for a basic fee schedule for selling on eBay in 1999.) For example, if a seller listed an item in auction format for a starting price of $0.99, he or she would be charged an insertion fee of $0.25 up front. If the auction then sold for a final value of $100, the seller would pay a commission of $3.13. Overall, eBay would earn total of $3.38, and the seller would net $96.62. eBays cost of goods sold primarily consisted of website operations, payment processing, and customer support. In addition, by restricting its operations to the maintenance of a marketplace, eBay was able to scale rapidly into other markets outside the U.S. As of 2011, the company had localized websites in 24 countries, as well partnerships and investments in an additional 15 markets. eBays global scalability also enabled greater cross-border trade throughout the companys platform, as sellers in international markets such as China were able to efficiently source products and offer them on eBays most active websites in the U.S., the U.K., and Germany. Launched as a pure auction marketplace, eBays bread-and-butter business in its early years was the collectibles category, ultimately expanding into more than 50,000 product categories ranging from automobiles, to toys, to sporting goods. Unique and used products came to epitomize the kinds of goods customers sought on eBay. Expanding into Fixed-Price Sales In 2000, eBay grew beyond its core auctions business and introduced fixed-price trading with the acquisition of retail site H and the addition of a Buy-It-Now feature in its traditional business, thereby enabling buyers to instantly win an auction at a sellers pre-established price.13 Unlike auctions, fixed-price selling was more commonly associated with commodity products in which low prices tended to prevail. In 2001, eBay launched eBay Stores, which allowed sellers-including large retailers such as The Home Depot-to offer goods through fixed-price storefronts on the companys platform. At the time, pricing for sellers included both a monthly subscription fee of $9.95 and a listing fee of $0.05 per item, with final value fees ranging from 1.25 % to 5 %. Improving the Buyer and Seller Experience In 1996, six months after the companys founding, Omidyar launched the Feedback Forum with a letter to the eBay community of several hundred members, writing: Most people are honest. And they mean well. Some people go out of their way to make things right. Ive heard great stories about the honesty of people here. But some people are dishonest. Or deceptive. This is true here, in the newsgroups, in the classifieds, and right next door. Its a fact of life. But here, those people cant hide. Well drive them away. Protect others from them. Thus grand hope depends on your active participation. Become a registered user. Use our feedback forum. Give praise where it is due; make complaints where appropriate. The Feedback Forum was a rating system that allowed buyers and sellers to grade each transaction as positive, negative, or neutral and offer a brief comment on the experience. The ratings became a permanent aspect of a members profile. Through 2001, eBays rate of fraud remained below 0.01%, and the company insured auctions via a fraud-protection program that reimbursed buyers up to a certain amount for items either not received or not as described. As eBay grew and evolved, the company focused on offering more efficient and effective payment methods for buyers and sellers. In 1999, when nearly all of the auctions on eBay were conducted with paper checks or money orders, the company bought Billpoint, which allowed person-to-person credit card payments over the Internet. eBay was slow to integrate the service, however, and did not fully launch it until nearly a year later.20 Meanwhile, PayPal, a rival of Billpoint, had been the first mover in person-to-person payments. By 2002, PayPal handled more than 70% of electronic payments exchanged between eBay users-which then accounted for roughly 40% of all transactions- compared to less than 30% for Billpoint. In July 2002, acknowledging that the the community had voted, eBay acquired PayPal for nearly $1.5 billion in stock.22 By 2011, PayPal maintained over 100 million active accounts and handled nearly 85% of eBays GMV. In 2008, eBay paid $920 million in cash and options for Bill Me Later, an eight-year-old company with 4 million users that allowed people to buy items on the Internet and then sent them a bill within 30 days, at which point they could either pay the bill outright or take out a loan.23 eBay offered several other services for buyers and sellers, ranging from its best match search algorithm that incorporated seller ratings and shipping fees into its sorting of listings, to pre- and post-trade tools that made the buying and selling process safer and more efficient. (See Exhibit 6 for a detailed overview of eBays key services for buyers and sellers.) Amazons Business Model The Retail Model Jeff Bezos founded Amazon in 1994, naming the company after the longest river in the Western Hemisphere and coining a simple motto for its books business: If its m print, its in stock.24 Launched online in 1995 as Earths Biggest Bookstore, its initial selection of 1 million titles increased to 2.5 million within a few years. In 1998, the company entered the music and video business, extending the retail capabilities it had developed for books. Within two years, the company had launched toys, electronics, and tools (among other categories) and expanded into the U.K., Germany, and Japan.26 The companys stated goal was to be Earths most customer-centric company for three primary customer sets: consumers, sellers, and developers, the latter of which Amazon serves though its Web Services offering-though the retail business aimed at consumers and sellers made up nearly all of Amazons revenue.27 In 1997, in his first letter to shareholders, Bezos committed Amazon to offering low prices across our entire product range.28 Analysts estimated that Amazon was price competitive with traditional retail behemoths such as Wal_Mart.29 From 1998 to 2000, as the company was facing aggressive competition from companies such as Barnes & Noble, Bezos implored his team to get big fast, and Amazon rapidly launched new product lines and features.30 For this expansion, Amazon invested aggressively in its supply chain and distribution network, which improved the companys capabilities in categories where it could not rely on third-party distributors as it did with books- where a single supplier filled nearly 60% of Amazons orders.31 In 1999, the company spent $1.6 billion on capital expenditures and built five U.S. distribution and warehouse facilities as well as customer service centers. Bezos labeled it the fastest expansion of distribution capacity in peacetime history.32 In addition, Amazon sprit heavily on Technology and Content, which included its technology infrastructure and expansion of product categories and fulfillment costs. These investments helped Amazon achieve an impressive cash flow cycle of 27 days between the time it received payment and had to pay suppliers. Enhancing Customer Convenience Since the companys launch, Amazon allowed users to post and read product reviews, averaging scores on a five-star scale. Even for best-selling products, only a small portion of Amazons audience opted to write reviews; for example, while Harry Potter and the Deathly Hallows had over 3,500 reviews, the company sold more than 40 million copies worldwide.33 Nevertheless, Amazon helped the best of these reviews float to the top without investing in a large-scale editorial team simply by asking consumers, Was this review helpful to you? and prioritizing those deemed most helpful. Having found that many of its shoppers sought out negative reviews to try to talk them out of buying a product, Amazon implemented a feature making it easier to see more negative reviews together.34 In addition to being a favorite customer feature, the review system was a boon to Amazons top line: one analyst estimated that promoting the most helpful reviews increased sales in those categories by 20%, as one in five customers decided to complete the purchase because of the strength of reviews.35 Similarly, Amazon maintained a recommendation engine for its customers, which it claimed was responsible for generating 35% of product sales. As the company described: We determine your interests by examining the items youve purchased, items youve told us you own, and items youve rated. We then compare your activity on our site with that of other customers. Using this comparison, we are able to recommend other items that may interest you. These recommended items will appear in several areas throughout our store,36 In January 2002, upon announcing its first quarterly profit, Amazon introduced a free shipping policy on orders of $99 or more, lowering the threshold to $25 later in the year.37 In 2005, Amazon launched Prime, a program which gave members free, unlimited two-day shipping for an annual fee of $79.38 One analyst estimated that, as of 2009, there were over 2 milion members of Prime, growing at nearly 25% per year. Each million-member increase added nearly 3% to Amazons revenues as members spent 130% more than non-Prime customers.39 Expanding into a Platform In 1999, Amazon took its first steps toward expanding beyond its retail model into a platform for e-commence. In March, the company launched its auctions business, which was similar in many respects to eBays offering, but also guaranteed purchases up to $250 in the event of fraud. This auction business provided access to Amazons customer service representatives and automatically cross-merchandized auctions across related existing product pages.40 I3ezos said Amazon would use existing customers to provide a ready audience for sellers.41 From 2000 to 2001, while traffic to Amazon Auctions grew 99% to over 5 million unique visitors, eBays base nearly doubled as well, reaching more than 28 million.42 In September 1999, the company launched zShops, an online supermall that offered small- and medium-sized merchants the ability to operate storefronts within Amazons site for a monthly fee and per-sale commissions.43 Amazon visitors would see a zShops label across the top of the page that would take them to a directory organized by product categories, and merchants could pay extra to have their names and logos featured more prominently. (See Exhibit 7 for a basic fee schedule for Amazon Auctions and zShops.) In 1999, Amazons revenue from Auctions, zShops, and other services-related offerings totaled only $13 million, or less than 1% of revenue.44 In January 2000, Bezos and other senior managers decided to adopt a single-store strategy in which third-party merchants would be allowed to sell their products alongside Amazons own goods in the primary product-detail pages.45 For example, a product page for a particular book or DVD would include options to buy the product from Amazon shipped from its distribution centers or from third-party sellers. Bezos said, he idea of the single store was to give marketplace sellers a level of access equal to our own-listing their goods right alongside ours.46 He reorganized the company to support this strategy by making general managers for category stores responsible for income statements reflecting the operations of both Amazon and third-party sellers.47 In 2006, Amazon launched a service known as Fulfillment by Amazon (FBA), which allowed third-party sellers to use Amazons vast distribution and warehousing network to ship and store their products.48 As Bezos noted in 2007: We have this beautiful, elegant, high-I.Q. part of our business that we have been working hard on for many years. Weve gotten good at it. Why not make money off it another way?49 By 2011, Amazon offered a full suite of services to attract merchants to its platform: its WebStore service helped merchants build and operate a direct-to-customer business across multiple channels, its checkout service offered merchants a complete payments solution, and companies could advertise on Amazon product pages. (See Exhibit 8 for a basic fee schedule for third-party selling on Amazon.) If, for example, a third-party individual seller sold an item in the consumer electronics category for $100 that weighed one pound, he or she would pay a $0.99 closing fee, an 8% referral fee ($8.00), and a variable fee of $0.45 plus $0.05 per pound ($0.50), yielding $9.49 in fees. This would be offset by a shipping credit of $4.49 plus $0.50 per pound ($4.99), so in the end the seller would earn $95.50 while Amazon would earn $4.5