EBay.vs.Amazon232343

eBay .vs. Amazon

Analysis of two “first-movers” that lasted, in the E-commerce space

eBay

Summary

Founded by Pierre Omidyar in 1995

His wife needed a better way to lookup and trade collectibles; decided to put his computer science skills to use, never thought it would lead to a multi-billion dollar E-Commerce company

Auction-based online sales of products (and sometimes services) where users try to outbid one another by placing a higher maximum amount; Dutch and Reverse-auction style also recently available in some regions

Transaction fees for listing (regardless of whether item sells or not) and additional fees for Premium Auction features (i.e. extra photos, BuyItNow, Feature It!, etc) or Premium Seller memberships

History

Date Event Stock ($)

1995 Founded by Pierre Omidyar

1997 Menl Park, Calif (VC) 22% stock acquisition

1998 CEO Meg Whitman (July); IPO 1.871

1999 Alliance with AOL 25.016

2000-2006 Global expansion to over 2 dozen countries 12.708

Feb 2002 Withdrew from Japanese market & Hong Kong (where Yahoo! Auctions/Shopping had head start)

20.833

Jul 2002 Acquired PayPal 15.13

2005 Acquired Skype 49.500

Products & Services

• eBay started out selling Collectibles and Antiques

• Has since grown to include incredibly diverse categories of items:

• Collectibles• Antiques • Art• Coins• Toys & Dolls • Memorabilia

• Motor Vehicles • Cars• Boats• Parts

• Electronics• Cameras• Cell phones & PDAs • Computers

• Entertainment• Movies, Music & Games

• DVD• CD• VHS

• Event Tickets• Books• Clothing

• Jewelry• Shoes• Accessories

• Home Improvement• Décor• Crafts• Gardening

eBay: Target Segments

Primary target markets are Online Auction & Shopping communities.

eBay has business strategies to target specific segments of each.

Key segment is “Antiques & Collectibles”. (It was the lack of a good community-based pet collectibles company that inspired Pierre Omidyar to develop eBay. Collectibles still among highest in gross merchandise sales, boasts by far the most veteran sellers.)

Motor lovers: Using credibility of leading car collector Kruse Inc., eBay expanded its categorical offerings with eBay Motors. eBay Motors became one of its most successful target segments with $2,500M Global Gross Merchandise Sales in 2002.

Art lovers: eBay also had a somewhat failed strategic partnership targeting Art Collectors directly.

eBay (profit sites)

Internet value network consists of three major groups and they are users, communication service provider and suppliers. Each subgroup of these three segments are called profit sites. Here we will focus on eBay’s profit sites and its implications .

Market maker: A market maker acts as a neutral intermediary that provides a place to trade and also sets the rules for the market .Thus, eBay is acting as a electronic auction market and brings buyers and sellers together to execute transactions through a win-win strategy. And in this way, eBay is developing new markets.

Brokers and agents: to complete transactions, buyers and sellers depend on some facilitating organizations like, citigroup or charles Schwab to complete transactions. These groups are parts of eBay’s profit sites when eBay gets commission from these organizations for each transaction.

eBay is a market makerActs as an intermediary

Charges commissionBuyers sellers

Business ProcessSeller Account

Creation

Listing an Item

Reserve Dutch Buy-it Now Regular(Auction Type)

Bids Placed

Completing a Sale

After-sales Service

Typically covered by Seller, using eBay’s features.

No bids

Final Value Fee = 5% of the first $25 + 2.5% of remaining amount up to $1,000 + 1.25% of any portion of sale over $1,000

-eBay sends Outbid Notice if needed.-Seller’s feedback rating dictates bidder confidence.

Industry Competitors:

Intense segment of Rivalry

• Newspaper cite on the web• every Internet directory• Every music & video retailer• Every personal homepage

Suppliers Buyers

New Entrants

Substitutes

Porter’s Five-Force Framework

Bargaining Power of Buyers

Threat ofSubstitutes

Bargaining Power of Suppliers

Low

• Fixed rate• mediation• Large number of customer for

longer period of time

High threats of new entrants

Auction UniverseYahoo! Excite Classified 2000

Few substitutes andLow threats because of strong CRM

Since suppliers are large, so threat is low.

Online Auction Industry analysis

Threat ofNew Entrants

eBay’s Business Model

Seller Buyer

Internet property sales format

Network externality social communicationMediation (forums, buyer/seller ratings)Universality Regional sitesInformation asymmetry Trust and safetyVirtual capacity large varietyLow cost Innovative

(Bid-based auctioning systems)

Exchange

Transaction

Community platformFor global person

to person trade

More Profit

DecreasedCosts

Win-win situation

Leads RepeatTransaction

Regional sites vs. Network Externality

eBay created > 24 regional trading sites within countries in order to facilitate the process of buying and selling items of local interest.

This regional focus and network externality are very much consistent because the larger the network size, the more opportunity for buyers and sellers to have a better match of their needs.

Localization and Internationalization of eBay’s services should also help make the site more accessible in a specific region, for speakers of the native language; thus offering the opportunity to gain new members at a faster rate

The only possible downside could be fragmentation and isolation of the individual networks, so each new regional site must “feel” like part of the main eBay network and family

eBay API

Buyers: Get the current list of eBay categories View information about items listed on eBay Display eBay listings on other sites Leave feedback about other users at the

conclusion of a commerce transaction Sellers:

Submit items for listing on eBay Get high bidder information for items you are

selling Retrieve lists of items a particular user is

currently selling through eBay Retrieve lists of items a particular user has

bid on

Internet PropertiesCoordination Commerce Community Content Communicatio

n

Mediation \/ \/ \/ \/ \/

Universality \/ \/ \/ \/ \/

Network Externality \/ \/

Distribution Channel \/ \/ \/

Time Moderator \/ \/ \/ \/

Info. Asymmetry Shrinker \/ \/ \/

Infinite Virtual Capacity \/ \/

Low Cost Standard \/ \/ \/ \/

Creative Destroyer \/ \/

Transaction-Cost Reducer \/ \/ \/ \/ \/

Key Drivers

1. Network externality

The company believes that this critical mass of buyers, sellers, and items listed for sale created a cycle that helped eBay continue to grow its user base. and one thing is very true for this model is its large number of customers stay for longer period of time to complete transactions.

2. Mediation In addition to providing a venue for selling items, eBay provides buyers and sellers a place to socialize, to discuss topics of common interest, and to provide feedback on one another

3. UniversalityOn the Internet, amateurs and collectors from around the world, rather than locations within a reasonable

driving distance, could bid on items. And eBay is applying that latitude by connecting both parties.

4. Time moderation: the property of time moderation assists eBay a lot by tailoring time according to customer’s needs. sometimes it enlarges time period of auction according to needs of a buyer

5. Distribution channel and replacement effect: eBay uses the traditional distribution channel without any sort of disintermediation and it is called the replacement effect, that means, serving the same customers using the existing distribution channel.

6.Information asymmetry shrinking: eBay reduces all sorts of information asymmetry by allowing sellers to provide all related information to buyers to pave the way for successful transaction. So buyers are no more deprived by short of data .

Success Story: Commission Junction

Partnered with eBay in 2001 as the exclusive Affiliate Network for eBay’s affiliate program1

Allows partners to revenue-share by creating links to Auctions, Seller sites and/or eBay pages (such as category listings, etc)

eBay in charge of payouts for specific actions (i.e. 9 cent click-throughs .vs. $13 active user signups .vs. 5% purchases)

Commission Junction gains an even smaller ratio per eBay payout to one of its affiliates, but, which adds up over time

Network externalities for both companies

1 - http://www.cj.com/news/press_releases0102/press_010418.html

2 - http://www.cj.com/news/press_releases0304/press_030918.html

Amazon

Summary Online retailer of millions of products (books, toys, Cookware etc..)

Founded in 1995 by Jeff Bezos, in a computer science and electrical engineering graduate from Princeton University.

VisionTo build the world’s most customer–centric companyTo establish a place where customers could buy anything

Located in Seattle Close to the largest book wholesalers in Roseburg, OregonThe sales tax rate of small state is cheaper than big state Sites in 6 countries (US, Canada, UK, France, Germany, Japan); ship to > 200 countries

Percentage of sales responsible majority of revenue

Financial Status (Year of 2006)Net Sales:$8,49billionNet Income:$359millionAchieve a surplus since the 4th quarter of 2002

History

1 - http://www.wired.com/wired/archive/7.03/change.html

Date Event Stock ($)

1994-1995 Founded then Launched by Jeff Bezos

May 15, 1997 IPO 3.917

Sep 23, 1997 Collaborative Filter recommendations launched 9.250

Oct 28, 1997 Millionth customer personally receives order from Bezos's hands

9.896

Nov 18, 1997 First holiday-gift center opened 8.833

Mar 2, 1998 Amazon.com Kids launched 12.708

Jun 11, 1998 Music sales launched 20.833

Nov 17, 1998 Video sales launched 49.500

Dec 21, 1998 Acquired IMDB, world’s biggest movie database 54.135

1999-2003 Global growth in key international markets 67.85 (mean)

2003-2007 Merchant strategy; major corporate partners 72.29 (6-6-07)

Industry Competitors:Intensity of

RivalrySuppliers Buyers

New Entrants

Substitutes

Threat ofNew Entrants

Bargaining Power of Buyers

Threat ofSubstitutes

Bargaining Power of Suppliers

Network Externality –(no customer base)Low Cost Standard +Universality +Distribution Channel +Transaction Cost Reducer +Mediation – (no social platform)

Network Externality +(many customers )Mediation +(reviews/community platform)Distribution Channel -(replacement)Info Asymmetry Shrinker +Low cost +

Transaction Cost Reducer –(wholesale/retail)Universality –(regional focus)Distribution Channel +

Distribution Channel –(No control over channel)Info Asymmetry Shrinker +(reduces asymmetry, so no manipulation over data)Universality +(existing suppliers)

Network Externality +(large customer base)Mediation +, –(no social platform for sellers; great platform for buyers)Universality –

Online RetailIndustry analysis

Evolution: From Retailer to Retail Platform

Sales Format

B S

-Communication(Reviews)-Low Cost-Large Variety-Distribution-Trust & Safety(seller ratings)

Sales Format

Transaction

Product fromCatalogue

User choice

LocateSellers

Store 1

Store 2

Store n

“Merchant”

Storefronts

Amazon Web Services (AWS) Amazon E-Commerce Service

Search catalog, retrieve product information, images and customer reviews

Retrieve wish list, wedding registry… Search seller and offer

Alexa Web Information Service Retrieve information such as page rank,

related sites given a target URL Amazon Simple Queue Service

A distributed resource manager to store web services results

5 Benefits of AWS

1. Pay-per use model

2. Instant scalability

3. Reliable/Redundant/Secure

4. Most services accessed via simple REST/SOAP API

5. Superior Technical Support (Experience & Commitment)

S3 in a Nutshell

Client

Idea:

Put/Get objects into bucketsbased on unique keys.

Main Features:

• Public/Private access.• Support for large objects.

Amazon S3

Bucket 1 Bucket N…

Put object Get object

Value Configuration Diagram : _________

Strong CRM

‘1-Click Shopping’

Convenience

Low Costs

Diversification

Partnering

NetworkExternality

Brand Image

Product Review Information

Customer Base

Fixed Merchants

Product Recommendations

Cross-selling

DistributedWeb Services

Money-back Guarantee

Email Marketing

Loyalty & Advocacy

Merchant Advantage: Automatic Re-Ordering, etc

AssociatesProgram

Association

Repeat Purchases

Positioning: Online Shopping

Order Fulfillment

(Buyer)

(Seller)

Business Process The Amazon Business Process

is built around three main operation:

Browsing: User looks for books available at Amazon (searched, recommended, or browsed by category)

Manage Account: check content of user shopping cart, stock of sellers, add and remove products

Shop: First browse to find product(s), place in the shopping basket, then complete a purchase (payment/delivery)

Process Model for Amazon.com

Browse Manage Account

Shop= Browse+Manage Account

Internet PropertiesCoordination Commerce Community Content Communicatio

n

Mediation \/ \/ \/ \/ \/

Universality \/ \/ \/ \/ \/

Network Externality \/ \/ \/

Distribution Channel \/ \/ \/

Time Moderator \/ \/ \/ \/

Info. Asymmetry Shrinker \/ \/ \/ \/

Infinite Virtual Capacity \/ \/ \/ \/

Low Cost Standard \/ \/ \/ \/

Creative Destroyer \/ \/ \/

Transaction-Cost Reducer \/ \/ \/ \/ \/

First-Mover Success

First to move booking retailing online (1994 – Jeff Bezos)

Brand recognized worldwide, most visited site in USA (2000)

Simple Business Model:

Expensive inventory brick and mortar warehousing not required – Require

WEB to interface with customers and take their orders

Continuous Rapid innovation

“one-click”, search facilities, collaborative filtering, affiliate programs (250,000

partners in 2000), order tracking mechanisms

Established strong brand presence – created psychological switching costs in

consumers (collaborate filtering, privacy policies, builds trust)

Pillars (quality of service, value for money, trust worthiness)

WEB site easy to use, easy to find, and fast

Key Drivers1. Low cost platform for transaction: The Internet is certainly a lower cost platform for any transaction, communication or negotiation than

any other electronic media. Amazon is using this platform successfully to bring buyers and sellers together for transactions, and doing so not by charging an upfront listing or transaction fee, but by charging a percentage of each sales, which in the long-run could be a much larger pie and better approach for Amazon on volume; on the short-term to merchants it appears to be a win-win situation as well as cumulative listing fees can even become prohibitively expensive in some cases.

2.Transaction cost reducer: The Internet is reducing costs of commercial transactions dramatically by matching the right buyers to the right suppliers, for the right product at the right time. Just-in-time (JIT) theory which dominated the late 80s and early 90s, is taken to the extereme in Amzon’s business model. In this model, sellers can learn about buyers’ financial standing, review history and other characteristics of a good customer. Likewise buyers can learn about suppliers’ reputations, product features, and prices.

3. Infinite virtual capacity: Internet infrastructure gives customers the feeling that it has infinite virtual capacity to serve them.

Amazon is taking advantage of their distributed infrastructure through AWS and by bringing a large no. of sellers with large no. of products for transaction. Buyers are confident that just about anything they want must be available on Amazon, and most importantly, the quality and authenticity will be more reliable than eBay.

4.Creative destroyer: The Internet is transforming the traditional retailing distribution structure; business is now conducted

by Amazon to remove the middleman of the brick-and-mortar storefront, playing a role as a creative destroyer. Amazon is paving the way for the digital storefront, which is much more affordable and accessible (does not require large amounts of capital to startup). In this way, it is both a creator and a destroyer, but certainly in terms of the traditonal system it is a creative destroyer.

Success Story : Toys-R-Us

1999 Christmas on-line orders flushed into newly establishe ToysRus.com

Announced a joint-venture with Amazon for online sales in 2000

Used AWS and Amazon site itself for Web operations, order fulfillment, & customer service

Toys-R-us controls buying and managing inventory

Success Story (cont…)

65 million and growing number of visitors every year

Number one site in its category Explosive growth in sales reaching $300

million Posted profit for the fourth quarter of 2002

Side-by-Side

Technology Superior revenue-sharing

plan with Affiliate program

Strategy Enables big and small

sellers/affiliates to earn at roughly the same rate

Business B2C loser C2C winner B2B draw

Transaction fee structure

Technology Superior technology through

AWS, EC2, S3 & catalogue

Strategy Tends to prefer big-name

brands and retailers with strong distribution chains

Business B2C winner C2C loser B2B draw

Percentage of sales structure

Conclusion

Based on my analysis eBay should not put additional resources towards B2C market, due to saturated market and competitors’ near stranglehold on market share

Should instead surprise competitors like Amazon with a strong B2B initiative or campaign(i.e. introducing a new comparison shopping service for wholesalers)

Reinforcing their C2C presence through continued rewards to their loyal seller/buyer base to maintain dominance there would also be a wise strategy, after-all in C2C eventually incentives are needed as parties can communicate offline

Amazon should invest whatever resources necessary to maintain hold of B2C market by continuing to compete on price, convenience & reliability of vendors and continue to bring in new brand-name retailers

Should reward smaller users as the longtail works for network membership as well (strength in #’s, not just big enterprise retailers, because if they leave, sales/catalogue can shrink overnight)

Better position than eBay right now for long-term B2B strategy with AWS, should try new programs(i.e. seller-exchanges, etc)