Ebay Vs Amazon
Introduction Amazon and Ebay are two well-known brands of online shopping sites. They have evolved and grown from small firms to the giants of e-commerce today. In this essay, a comparison would be made between the two firms. Questioning the types of business models Amazon and Ebay’s have employed and how they have evolved over time, the driving factors of change, and finally the future outlook of each firm help distinguish the trails both firms made to become the two leaders in the market of ecommerce.
They are imperative in making a comparison between the two because despite being direct competitors in the same market, Amazon and Ebay’s business models are distinctly different. Both companies have altered business strategies over time due to different reasons as well. The one similarity maybe the size of market share and growth of both companies as well as the large customer base both possesses.
Addressing these issues would help analyze both firms from its inception up til this day as well as give an opportunity for propositions to be made for the firms’ future. 1. Multi-sided Platforms
One common but important feature between both firms is the fact that their business models are centered around being a multi-sided platform. A “Multi-sided Platform brings together two or more distinct but interdependent groups of customers. ” (Ankaruju, 2010). Typically the basic two groups would be buyers and sellers and are together to interact with minimal intervention from the intermediary, maintaining just simple affiliation with the intermediary. However, the success of a multisided platform depends on having a significant size of installed base of all sides of customers.
The larger the number of buyers and sellers, the larger the value of the system as one group needs the other. This creates a “Network Effect”, which comes in forms of direct or indirect effects. Direct effects, also known as “bandwagon effect” (Leibenstein,1950 cited in Besen, n. d. ) arise when number of customers subscribing to the platform increases. Indirect network effects or “inter-network externalities”(Salehnejad, 2012) occur for one group of the platform as the number of the other groups and vice versa. When this effect snowballs, it creates a “positive feedback
loop”, where an increase in number of each group only aids to increase each other’s network effect. These effects help elevate the total value of the platform. 2. 1 Amazon: History and Initial Business Model Amazon began as a bookshop opened by Jeff Bezos in 1995. It opened in Seattle to minimize tax to transactions made in its small town providing a small advantage in Amazon’s initial set up. (Krishnamurthy, 2004) Bezos’s initial vision was accredited to the fact the internet was growing at a very rapid rate and had huge potential for online retailing.
He said “Real estate is the key cost of physical retailers” whereas “technology gets cheaper every year. ” (Krishnamurthy, 2004) Subsequently Bezos mentioned this: “First, you can use computers to sort, search and organize. Second, you can create a super-valuable customer proposition that can only be done online, and that is selection”. (Krishnamurthy, 2004) As such scalability, mass customization and innovation formed Amazon’s initial model. Amazon’s Internet retail model put itself on a different competitive plane than its competitors.
Its strategy’s strength lay in the limitless number of choices available online compared its brick and mortar counterparts; Barnes & Noble and Borders carrying only “175,000 titles”. Amazon’s current sales rate of “$1. 2 billion” far exceeds B & N superstores of “$5 million”. In addition, Amazon has spent a mere “$56 million on fixed assets” while B & N has spent a huge $472 million on expanding its superstores, showing huge economies of scale. (Hof and Himelstein, 1999) 2. 2 Amazon: Evolution of Business Model In 1998 and 1999 Amazon started to intruduce products ranging from Music to Home improvement (Krishnamurthy, 2004).
Its strategy was to “get big fast” and diversify its brand in order to dominate such a market as remaining a bookseller was too small a market. Amazon intended to benefit from cross selling on the basis that it already has a loyal installed base in place. (Krishnamurthy, 2004) Amazon also benefited from economies of scope as its basic infrastructure is already in place and highly scalable. Three building blocks complement this: Amazon’s feedback system, recommendation system and its buy/sell system. Its recommendation system accounts for 35% of Amazon’s
sales as customers are more inclined to buy a product based on the strength of the reviews of other customers. It also brought repeated purchasers that account for 66% of sales. (Salehnejad, 2012) Also, Amazon has emphasized on building “several distribution centers around the world to hasten deliveries”(Hof and Himelstein, 1999). Coupled with its software it provides a “laser-like focus on the buying experience”(IT Business Edge, 2012). Such a system and service is what draws customers towards Amazon and subsequently retains them.
In 1999, Amazon became a merchant platform by introducing zShop, “a new service that allows anyone to sell merchandise through its website”. (Moore, 1999) It not only creates extra revenue from the $9. 99 monthly subscription fee from sellers but also “60 cents per transaction for payments made with 1-Click, as well as 4. 75 percent of the final sale”. (Moore, 1999) The draw for small to medium business to subscribe to Amazon’s zShops would be Amazon’s huge customer base of 8 million. (Hansell, 1999) and also low start up costs to set up businesses.
These firms get to take advantage of Amazon’s huge network and in turn help bring more products and traffic to Amazon without incurring huge start-up costs. (Hansell, 1999) Such reinforcing mechanisms are an example of direct network effects of using a merchant platform model. Amazon also introduced its Auction system in 1999. This placed it in direct competition with Ebay, already a very established auction house “with a market value of nearly $20billion” (Hansell, 1999). Despite its risk, Amazon intends to have a slice of that market share, hoping to bring its 8 million users on board with this.
(Hansell, 1999) This would create a separate option of its usual fixed pricing as auction provides an outlet for dynamic prices not only helps capture a wider range of consumers and add traffic but also provide a way “to get the most from overstocks and returns” and provide higher “gross margins”. (Hof and Himelstein, 1999) However more importantly, it helped move Amazon into a two-sided platform. It did away with the chicken-and-egg problem having both sellers and buyers already on board its merchant platform. The incentives of this would be the positive feedback loops of indirect network effects.
As sellers and buyers interact and grow, the value of one group to another grows and a by-product of this is Amazon becoming a more valuable platform to each group as well. Amazon then starts to lock in each group of its platform as switching costs become higher. (Salehnejad, 2012) It is not dissimilar to Facebook with its users and advertisers all interdependent on each other. (Salehnejad, 2012) As of now Amazon has extended its platform to consist of “customers, technology, e-commerce expertise, distribution centers, and brand”.
It opened other services such as Cloud Computing, sharing its shipping services, Fulfilment, and its online sales systems to other businesses. (Jopson, 2012) This diversification allowed revenues to flow in from other places. In short, Amazon has created a whole new centralized ecosystem that is tightly controlled and is now inviting other businesses to share in its benefits and aid in its expansion. Amazon is “reinventing the way entrepreneurs can do business” and is trying to “colonise the entire infrastructure of consumption”(Jopson, 2012).
It has moved from a warehouse to a “powerhouse” (Jopson, 2012) that has a huge influence on other firms. somewhat akin to a natural monopoly with natural barriers. Right now in 2012, Amazon has released its “Kindle Fire HD” in a bid to break into the market of mobile devices in order to extend its “shop” beyond the Internet and literally into the hands of consumers. It is a diversification on its business model but does not change its fundamental ecosystem where it is centralized and Amazon retains “pricing control over content” (Gans, 2012).
It charges a much lower price for its Kindle as compared to Apple’s Ipad, intending to make profit out of its services and not its pruduct. 2. 3 Ebay: History and Initial business models Pierre Omidyar founded Ebay in 1995 and was built to sell antiques initially by auctions on the Internet. It was created through the motivations of geographical constraints on trading on antiques of which are rare and prices hard to determine. (Krishnamurthy, 2004) Similar to Amazon, the Internet formed an attractive place to reduce search and transaction costs of items.
This model is however distinctly different from the traditional retail models such as Amazon’s. Omidyar intended it to be a “bazaar”, a place where sellers come to sell independently to buyers. (Krishnamurthy, 2004) The increased interactions created between buyers and sellers help add value to Ebay’s platform, creating indirect network effects. Ebay used a cross subsidization pricing strategy, charging only sellers (“5 percent of the sale price for items below $25, and 2. 5 percent for items more than $25”) (Krishnamurthy, 2004) and attracting buyers on the platform for free to create this two-sided platform.
Ebay is also built on three main building blocks: Feedback system, Recommendation System, and its second price open (English) Auction system. (Salehnejad, 2012) Auctions to create “multilateral competition” as more than one seller bids for the item to aid in price discovery. Such a dynamic pricing strategy is different as compared to Amazon, which concentrates mainly on fixed prices. (Hof and Himelstein, 1999) Unlike Amazon, which invested heavily on physical warehouses, Ebay focused on being a pure two-sided platform, with no control on pricing and delivery.
It remained a virtual intermediary between buyers and sellers (Krishnamurthy, 2004). The advantages of this are two-fold whereby it reduces and frees huge amounts of funds to “scale rapidly and move into foreign markets” (Salehnejad, 2012). Secondly, it does not sour the relationships between Ebay and its sellers as not much intervention is done such as price control or the way products are displayed. It is one of the reasons firms such as Toys R’ Us broke partnership with Amazon. (Jopsen, 2012) 2. 4 Ebay: Evolution of Business Model.
Taking advantage of Ebay’s scalability, Ebay set up Ebay International, expanding its reach into the global markets to fully utilize its online features of selling antiques and extend its installed base. Having a bigger installed base in an auction market helped Ebay gain first mover advantage as well creating bigger barriers of entry and indirect network effects. (Salehnejad, 2012). This may be the reason why Yahoo and Amazon’s own auction services did not flourish as much as Ebay’s. Driven by Amazon’s introduction of its own auctions, eBay “forged a $75 million deal with America Online on March 25 199 to promote its eBay auctions on AOL”.
(Krishnamurthy, 2004) With its basic infrastructure in place, Ebay expanded into other markets, becoming a multi-sided platform. Economies of scope also were realized here as much as economies of scale. In a bid to increase its services, Ebay bought PayPay for “1. 5 billion” in “July 2002” (Salehnejad, 2012). This helped increase efficiency for payments to be made. However this coupled with the fact Ebay withholding control over distribution causes a lack of control over consumer experience. This formed the difference between Amazon’s centralized ecosystem compared to Ebay’s decentralized one.
(Dixon, 2012). Ebay’s model could be argued to contribute more attention towards the sellers and less towards its sellers. As far as dynamic prices is concerned, Ebay did not solely concentrate on this alone as it opened Ebay Stores in 2001 where sellers including retailers could sell their products based on fixed prices on Ebay’s site. (Salehnejad, 2012). It is a build on Ebay’s initial auction model and could be due to the fact that increased competition between other online platforms and similar products cause prices to go down as with profit margins.
It also became easier to place a price on products and therefore reduces the attractiveness of auctions. (Salehnejad, 20123). Auctions are also more cumbersome and time consuming as compared to fixed pricing where Amazon’s innovation of “one click buying” further exacerbates this. Thus the need for Ebay’s extension into fixed price selling. (Hof and Himelstein, 1999) Other services that Ebay develop include Ebay Motors, Ebay Professional Service, Ebay Local Trading. However its main business model does not change as much, remaining an e-community and not just a online retail service like Amazon.
( Krishnamurthy, 2004) 3. Propositions for the future 3. 1 Ebay Ebay could expand its dominance in the future and maintain competition by breaking into the mobile app market. By spreading its services through handheld devices similar to Amazon’s Kindle Fire, it could further extend its ecosystem, adding value to its platform and attract and retain its installed base, Due to its decentralized nature of business, Ebay could put more emphasis on creating a more cohesive and efficient system between its acquisitions and its customer service as well.
Being more buyer orientated would help increase customer satisfaction and increase switching costs between its competitors such as Amazon. It could create more innovative site designs and buying methods, comparable to Amazon’s “one-click buying” (Hof and Himelstein, 1999) method. More radical methods would be for Ebay to further differentiate its platform by perhaps moving into the offline markets, opening physical stores where its a “$10tn” market compared to $5bn commerce market” especially since online commerce only contributes to “5%” of total retail sales. (Dembosysky, 2012) If it could work and partner with
brick and mortar retail shops, it would further extend its platform and perhaps easier distribution of its products. 3. 2 Amazon Likewise Amazon could work on moving onto the offline markets as well, investing physical stores. With its many warehouses and distribution centres in place it could take advantage of this to set up its own physical stores near the vicinity instead of just working in partnerships. It adds on to its centralized ecosystem and customer satisfaction can be ensured better, especially since Amazon prides itself on being a customer-centric firm.
In addition to this, Amazon could perhaps partner with the fast growing markets of social media, creating an extra medium in which it could extend its services. If it could tap into social media platforms such as Facebook or Twitter and its vast consumer base, it could greatly extend its installed base. The internetwork effects would be huge as well as being part of a social media and Amazon would greatly add value and lock in consumers as switching costs become extremely high.
This would also be a form differentiating its platform. Conclusion Both Amazon and Ebay consist of multi-sided platforms but their business models are vastly different. Despite being the giants in e-commerce, their paths are different in many ways despite being direct competitors. Amazon’s centralized ecosystem for one is distinct form Ebay’s decentralized one. As Amazon moves its attention to wards its sellers and firms, it also strives to cut into the market of mobile apps.
This is compared to Ebay who has intentions on breaking into the offline markets. Although it is said that multi-sided platforms and its strategies are a “winner-takes-all” platform, both firms still retain a substantial consumer base and a share in the market. In conclusion it can be said that despites both firms growing ecosystems, it could be possible to for both firms to profit and expand further. In other words, the world of e-commerce is not a “zero-sum game” (Dembosky, 2012). Both Amazon and Ebay can be winners. References