Amazon vs. EBay: Looking Beyond E-Commerce

There's a very interesting article via MSN Money about how Amazon (AMZN) is beating up EBay (EBAY).  I  abandoned eBay (EBAY) as an investment many years ago as it's now a "value play" instead of growth, but have always said I'd love to get a piece of the action of PayPal if they ever spun it off in its own entity. It's essentially a Mastercard (MA)/VISA (V) clone. PayPal is now up to 1 of every 4 dollars of revenue for Ebay, and why they don't create value by doing a PayPal IPO is beyond me.

Amazon.com (AMZN) on the other hand has some interesting things going on - they are a player in "cloud computing" and now, a frontal attack on PayPal? Hmm... that makes them quite appealing to me, I just wish the valuation was significantly lower. We were hoping for a miss from Amazon.com last earnings report [Jul 22: Amazon.com for Gamblers] so we could get in far cheaper, but the company "disappointed" us by reporting solid numbers. The charts of the two companies over the past year show the divergence.

• Since the dawn of Internet shopping, bargain hunters have reveled in the thrill of the hunt for deals at eBay, the online equivalent of an auction house. But the thrill is going, going, almost gone. And eBay's losses are Amazon.com's gains in this battle to sell the most stuff on the Internet -- a battle that is about to take a turn for the worse for eBay.
• Busy shoppers are already skipping eBay's time-consuming auctions, which they might lose at the last second when a computerized shopping bot slips in a bid. Instead, they're opting for "everyday low prices" via the Internet and, in particular, at Amazon.
• Amazon, once just an online bookstore, is easy to use, and it offers a range of products along with good prices and cheap shipping. You're more likely to find rare and obscure items via Amazon these days than ever before, as the retailer has opened its site to more than a million outside merchants. Those often small merchants might otherwise be setting up virtual eBay stores.
• Now Amazon is taking aim at eBay's remaining jewel: its PayPal payment system. With Amazon already stealing potential sellers as well as buyers, trouble with PayPal would be another huge hit to eBay. And for investors, that makes Amazon the retailer to buy now.

Here is a comparison of metrics between the 2 companies last quarter

• Amazon's sales jumped 35%, and that's after the impact of currency changes was stripped out. In contrast, eBay's revenue was up just 13%.
• In North America, Amazon's revenue was up 35%, or nearly three times the growth in overall Internet retail sales tallied by comScore. In contrast, eBay's North American revenue grew 12%, simply in line with the market.
• Amazon finished the quarter with more than 81 million active customers, up 18% from a year ago. The number of outside merchants on its site also grew 18%, to 1.42 million. In contrast, active registered users at eBay crept up only 0.7%, to 84.5 million. For the past five quarters, the number of active users at eBay has shrunk or grown by less than 1%.
• Amazon's global page views increased 4% in June, while eBay's were down 11. Visits to eBay's U.S. Web site have been down in nine of the past 11 months.

On to PayPal and the new threat:

• The biggest significant source of growth inside eBay is the payment-services division known as PayPal. It's used by eBay buyers and sellers, and by outside Web sites, to handle payments for purchases.
• PayPal revenue jumped an impressive 34% last quarter, which explains why analysts such as Youssef Squali at Jefferies consider PayPal to be eBay's jewel. PayPal contributed 26.4% of revenue in the quarter, up from 23.7% a year ago.
• But late last month, Amazon began offering its payment technology to outside merchants for use at their own Web sites.
• Can Amazon really take down PayPal, which is deeply embedded in online retailing with more than 62 million users? Skeptics cite the failure of Checkout, a Google payment system, to make any inroads as a reason to write off Amazon's attempt. If Google can't beat it, who can?
• But unlike Google, Amazon already has a relationship with millions of consumers. "We think that the competitive threat to PayPal may be much more serious this time around, given Amazon's e-commerce expertise for more than a decade," Deutsche Bank analyst Jeetil Patel says. "Amazon's customer base is roughly 80 million consumers, the bulk of which enjoy a highly trusted relationship with the company around payments."
• That's not to say millions don't trust Google. But there's a difference between using a search engine to look up old high school buddies and turning your private credit card information over to a company that keeps it on file for future transactions. That second relationship involves a lot more trust.
• Plus Amazon's system is easy and convenient, which should cut down on the number of buyers at partner sites who drop a purchase midway through because they get fed up with filling out forms. Customers can store data such as credit card numbers and addresses with Amazon and retrieve them at any store using their system.
• Goldman Sachs analyst James Mitchell thinks that in time, Amazon may up the ante by offering discounts to merchants for transactions that transfer money from places other than credit cards, such as bank accounts. Those kinds of transactions are cheaper to process. Amazon could pass the savings on to merchants, something PayPal does not do.

Other:

• Amazon is a lot more than just a Web site, though that's all it may appear to be for most consumers. It has more than 30 "fulfillment centers" around the world. It collaborates with outside merchants by letting them ship pallets of goods to these Amazon locations, to be sold and shipped through Amazon's network.
• Amazon also has a division that assists outside merchants in developing their own Web sites.
• For its next acts, Amazon is challenging Barnes & Noble (BKS) with its Kindle electronic book gadget and Netflix (NFLX) with its rollout of downloadable movies.

Disclosure: Long MasterCard in fund; no personal position

Comments

[Boaz Berkowitz:]

Great Article!

2008 Aug 18 04:15 AM

[russelltehri:]

Seems like eBay has some serious rethinking to do. Its a good thing that someone is competing with eBay so as not to give them the monopoly of this industry.

I've heard some horrible stories about how they treat customers.

2008 Aug 18 07:58 AM

[Boaz Berkowitz:]

This was a well put together article and I agree completely. One other issue that will be interesting is how eBay recently decided to eliminate its "level playing field" concept which is what made eBay a success in the first place. eBay started out giving the little guys a chance to compete with the big guys. Everyone was charged the same fees to compete evenly in what has become the world’s largest market place. But eBay is now giving the big guys a price advantage in the form of lower fees for high volume inventories (starting with Buy.com). This is a complete about face of the level playing field mantra; it gives a decided advantage to the big players once again in a misguided attempt at making eBay more Amazon Marketplace-esque. This, combined with the ever increasing fee structure does not bode well for the many users who have turned their eBay sales into a small home business and depend on this income for their livelihood. It convinced many eBay users that the company cares more about profits than them. Of course most eBay users were already convinced of that. Without serious changes eBay’s glory days are behind them and the future lies with Amazon . Amazon has time and time again proven its creativity and adaptability in seizing new business opportunities.

2008 Aug 18 09:51 AM

[Et tu, Brute!:]

To Boaz Berkowitz:

Agree with your comments 100%. Many of these same small sellers have gone elsewhere and discovered there are other venues of opportunity. Many, also, of the very same sellers that were with ebay at the start and were responsible for growing the company have already left.

As stated elsewhere, ebay under Donahoe, and inspired by Meg Whitman before him, has opened a door they can never close. Paypal is tarnished and without the dwindling ebay to keep that glory ship afloat will likely also sink. Both companies have eliments of corruption that have now been exposed to light... by their own means.

Amazon is too good at what it does. And ebay never has been.

The rich tapestry that was once ebay is now dull and uninspiring.

2008 Aug 18 10:33 AM

[Et tu, Brute!:]

Forgot to add: this was an excellent article. Well planned and substantiated and balanced.

2008 Aug 18 10:35 AM

[redbaron:]

Good article. As a long time (1996) ebay power seller, the new ebay management has really screwed things up badly. There was a time when I would deplete my precious inventory of extremely hard to find items, in order to get them on ebay and sold as quickly as possible. That trend has completely reversed in the current policy situation, and now when I buy something that I know is rare and valuable, my first reaction is to put it away until I can find a better way to sell it. What ebay fails to understand is how difficult it is to find some of this really valuable stuff. Flooding their site with free listings from other mass merchandisers is not going to provide the traffic and hits that selling rare items would provide. They have taken away the traffic that good sellers and good merchandise provided, and replaced it with mass merchandise that one can find anywhere. And in that process, they have replaced paying customers, with customers who they have to offer free listings to get their numbers back up. Some say the sell-through rate is as low as 2 percent for some of these mass merchandisers, but they managed to keep the listing numbers up in the process.

It is not yet too late to reverse this trend, as ebay power sellers are on-line and watching, but as more and more of them find new homes, and get their own sites, the time to make significant changes is getting critically late. Ebay management is too stubborn to admit what they have done, and I don't see any hint that they would reverse some of these policy decisions. The first thing that would be needed would be management admitting they made a mistake, and I see nothing that would lead one to think that was the case. They are going to 'fiddle, while Rome burns', it looks like to me.

Sell Ebay, buy Amazon, is the right trade, it looks like to me. Or short ebay, long amazon, as one might prefer to play it. Certainly not long ebay.

2008 Aug 18 12:02 PM

[gonefergood:]

One of the cruelest things eBay has done to its buyers is change the feeling of opportunity and productivity to one of anxiety and the spectre of failure. I stopped competing in that marketplace because getting ahead through my own efforts was no longer possible, and every day was filled with uncertainty. . . eBay, while maintaining its "just a venue" stance, has managed to micro-manage the businesses of small sellers clear out of the competition. It's no longer a crap shoot - it's a rout. All without explanation or any hope of regaining the level playing field enjoyed by all eBayers for so long while the company was thriving.
John Donohoe and his crowd gave every indication at first that they knew what they were doing. The blunders since then, the constant fiddling around with rules and policies has eroded trust with sellers as well as buyers. It projects a sense that eBay has lost its direction entirely and is floundering around.

2008 Aug 18 12:10 PM

[Et tu, Brute!:]

A few months ago I told my family and friends I would no longer sell on ebay (Powerseller, 100 % FB) but would only be a buyer. But there is no longer anything I want... there's nothing special.

Following was the witness of how truly awful ebay was to their sellers and I closed out my ebay account altogether.

I won't do business with a company that is so lacking in character and integrity.

2008 Aug 18 12:40 PM

[leapingcat:]

I agree with everyone else that that is a very well-written article, and shows just where the two companies are heading.
Amazon charge lower final fees to large sellers (pro-merchants), charge higher fees than Ebay (although Paypal fees can level this out to a certain extent) and have drop-shippers listing hundreds of thousands of books that they don't have in stock and with feedback ratings in the low 90s. So, Ebay should have no trouble in seeing off Amazon as a competitor, yet they flounder while Amazon go from strength to strength. Perhaps ease of use and reputation count for more than meaningless figures when valuing a company; if so then investors are starting to get it right.

2008 Aug 18 12:55 PM

[Dinah Balk:]

Great article Trader Mark!

I suspect if the shareholders don't get off their complacent behinds & pull the plug on Donahoe and his entourage of mba's by the end of the year there won't be an eBay left to save.

Dinah

2008 Aug 18 02:57 PM

[Avi Pollock:]

Something I've been saying for a long time. I have no doubt Ebay will spin off PayPal at some point in the future or possibly even rebrand itself with PayPal as the lead brand and Ebay being the supporting one.
Not sure if Amazon will be able to pull off beating PayPal any better than Google. Outside of frequent reviewers I'm not sure buying stuff from Amazon constitutes a "relationship". I think they have a shot but it's a long one.

2008 Aug 18 09:59 PM

[Cashless:]

America is becoming a cashless society. These days, our transactions consist more of electronic payments than they do with cash payments. The invention of the debit card no doubt had a lot to do with taking our society cashless. The cashless movement has given rise to virtual economies, and new crimes involving identity and credit card fraud. Credit card frauds are on the rise- many Americans became a victim of this. In fact, in 2003, more than 500, 000 experienced credit fraud and more than $5 billion stolen in their names. Websites such as eBay and Amazon sell millions of items per day – eBay is technically the world’s 26th largest economy – and the number of frauds is increasing. Eventually, the lines of communication will have linked all economies and currencies. We will likely see a day in the near future where the world has gone cashless.

Mar 06 12:13 AM