sign in sign up
<<
Home , Amazon (company), EBay

eBay and Case Memo – Student number: 463346

1. Describe the elements of eBay and Amazon's business models as at 2011.

Overview eBay operates mainly as an and facilitates sales of goods between third-party buyers and sellers through its platform. Amazon has adapted quite a different approach as a large portion of its revenue comes from the business. Furthermore, Amazon has a significant portion of its revenue coming from additional sources including commission on third-party sellers on its platform, distribution and other services aimed at third-party merchants. (Investopedia, 2015)

Customer value proposition Both companies’ target groups are consumers looking for items at attractive prices by offering ease of buying with a platform solution. On the selling side, eBay is targeting more individuals consumers (in addition to large retailers and SMEs) compared to Amazon that is more focused on professional third-party merchants. The key job that is to be done through the platforms is providing a marketplace that connects buyers and sellers and Amazon additionally offers goods directly to the consumers.

Both companies’ key value proposition is the ease of buying products with a ‘click of mouse’, convenient and ease of payment. However, Amazon has been better at integrating its payment system as the user does not need to Amazon’s to complete the transaction, whereas eBay’s users are directed to the PayPal platform.

Furthermore, key in both companies’ offering is the reliable supply of goods, which both companies enable through products reviews and a grading system.

Profit formula eBay gains most of its revenue from listing and commission fees from its marketplaces and a significant part from its Payment platform (PayPal), whereas Amazon’s largest source of revenue is reselling items purchased from third-party suppliers. Because Amazon operates more as a retailer than eBay, the two companies’ cost structures differ significantly: In 2010, 81% of Amazon’s operating expenses came from cost of sales, whereas 49% of eBay’s operating expenses were from Sales and , 23% Product development and 27% G&A. (Based on both companies’ annual reports released in 2011, Appendix 1).

Amazon’s Investments in infrastructure, expansion of product categories and fulfilment costs have helped the company to achieve a fast resource velocity with “an impressive cash flow cycle of 27 days between the it received payment and had to pay suppliers.” (eBay, Inc. and Amazon.com (A), 2013)

Key resources Both companies have platforms as their main key resources: the auction marketplace platform for eBay and the retail online (and auction to an extent) platform for Amazon. These platforms are supported with IT and technology infrastructure including eBay’s PayPal payment platform. The delivery network is essential for both companies but more so for Amazon who takes ownership for the goods and is responsible for the delivery of the items. As a result, Amazon has invested significantly in its distribution and warehouse facilities as well as centres including an early investment in 1999 of $1.6 billion.

Other key resources include the sellers and suppliers of the items sold through the companies’ marketplaces. eBay is highly dependent on this revenue source and spends a significant amount (49% of operating expenses) on Sales and Marketing compared to Amazon that operates more with a retail model.

Key processes Both companies are highly reliant on their feedback and product review systems to ensure a good quality of supplied items. Utilising users as a resource to screen the selling side is key in the scalability of the two businesses without requiring increasing expenses. Furthermore, both companies use recommendation algorithms to create incremental businesses.

Whilst eBay has a high focus on maintaining its marketplace platform to scale its business, Amazon has a lot of focus in its distribution and warehousing capabilities to drive process efficiency using for instance centralised warehousing.

2. Compare the platform strategies of eBay and Amazon as at 2011 (you may draw these you want). What are the advantages and disadvantages of each? Include the following in your answer:

Key points of platform strategy comparison

Amazon’s retailing mode enables it to have better control of the customer experience compared to eBay but at the same time eBay has lower operating costs and higher profit margins by being just connecting buyers and sellers. eBay suffers more from negative same-side network effects than Amazon as its platform is more susceptible to an imbalance between buyers and sellers. Both companies have similar pricing strategies in relation to the subsidy side although Amazon’s pricing is slightly more complicated. Both govern the quality of their suppliers using product reviews but Amazon has a better control over the quality of supplies as it operates mainly in a retailer mode. a. Which are the money side(s) and subsidy side(s) in each platform?

Buyers are the subsidy size and sellers the money side for both companies On eBay the sellers are the money side as eBay charges listing and commission fees for sellers. The buyers are the money side as there are no starting fee for buyers, which means a low entry barrier for buyers resulting to higher network effects.

For Amazon the selling-side is the money side as they are charged a fee for selling items. The buyer side is the subsidy side although they have to pay for shipping charges (depending on the level of service) and optional gift wrap fees.

Because the sellers extract more monetary value from the transaction and buyers are price sensitive it makes sense to subsidise the buyer side. b. How does each company govern to their platform?

Both companies have low governance rules for buyers but higher governance for suppliers Both eBay and Amazon require registration from buyers, which is a low governance barrier. However, both companies govern the quality of sellers using product reviews and feedback systems to ensure the quality of suppliers. Furthermore, eBay screens its suppliers using the ‘Verified Rights Owner Program’ to protect its members from purchasing items that may be or unauthorized. c. Discuss the different network effects in each platform. How did each company enable these?

Cross-side network effects are largely positive for both eBay and Amazon Both eBay and Amazon experience positive cross-side network effects from an increased number of sellers that results to a large selection of items and consequently drawing in more buyers. On the other hand, both benefit from larger number of buyers, which on Amazon’s side draws in more third-party merchants and eBay’s sellers are content about higher competition for items resulting to better prices/margins for sellers. An important contributor of these cross-side network effects is both companies’ pricing strategies: keeping the selling side as the money side through a commission/fee system and the buying side as the subsidy side that does not pay in most cases anything else than the shipping services.

Same-side network effects are more negative for eBay than Amazon Both companies benefit from positive same-side network effects as a larger customer base results into word-of-mouth of the trustworthiness of the sites and into larger number of product reviews, which increases customers’ trust. Both companies have enabled this largely through their extensive product review services and grading system. Both companies suffer also from negative same-side network effects if there is an imbalance between the number of buyers and sellers. A too high ratio of sellers to buyers results into a high competition situation resulting into lower prices meaning lower margins for the sellers. In addition, eBay suffers from negatives network effects if the buyer to seller ratio is too high, which results into higher prices for buyers.

Network effects are largely specific per product category Some people buy only certain types of items from Amazon and eBay such as from Amazon. This results into only product specific network effects but after reaching critical mass both companies gain positive cross-side network effects from large scale as they offer product recommendations for their customers based on their earlier buying and item ratings. Amazon has so far been better at capturing this large scale than eBay by showing recommendations in several areas throughout their store.

3. As it shifted to a retail and platform , how successful was Amazon in overcoming barriers to entry in the third-party seller ? What business choices were critical in altering the competitive dynamic? (6 points)

Since its inception Amazon has made a series of strategic moves to increase its size in the retail and platform business model to alter the competition dynamics. As a result, the company has seen exponential growth in both sales and growth of 3rd party merchandise volume in addition to a steady grow in the customer base as detailed in Figures 1 and 2. Figure 1. Based on figures from the eBay, Inc. and Amazon.com (A), 2013 case. Six key business choices and strategic moves that have contributed to Amazon’s success are the following:

1. They found a niche in the books segment and aimed for a low-price strategy. A Figure 2. Based on figures from the eBay, Inc. and Amazon.com (A), 2013 case. differentiating factor compared to more conventional retailers was the ease of buying books: search for a book online, click ‘buy’ and get it delivered to your door in comparison to having to travel to a book shop and searching for the book in the book shop. This same differentiation principle applied to other item categories equally. 2. They were able to attract users through the niche segment in books, and gain scale through positive cross-side network effects. The result: an installed base of users. A crucial facilitating factor was low capital costs in distribution because they were able to use third-party distributors and manage them without extensive investments as a single supplier filled nearly 60% of Amazon’s orders. 3. Amazon made their business model simple for complementors so that their platform was easy to use by third-party merchants. The result: increased seller interest with positive network effects. 4. Amazon was able to develop highly competitive pricing across their entire product range, and as some analysts estimated “Amazon was price competitive with traditional retail behemoths such as Wal-Mart”. (eBay, Inc. and Amazon.com (A), 2013) The price factor has been essential in Amazon’s strategy to date and contributing to high growth in its user base. 5. From 1998 to 2000, Amazon faced aggressive competition from companies such as Barnes & Nobles and as a response they decided to launch new product lines and features. To execute on this strategy they invested heavily in distribution capabilities, warehousing, customer service centres and technology infrastructure to deliver items in new product categories from a dispersed source of suppliers. The extensive scale-up was a requisite in comparison to their previous situation, when most items were sourced from the same supplier for the books segment. 6. Amazon was able to create additional value for the selling side by adopting a ‘single-store’ strategy and providing merchant services, which consequently led to a larger supplier base. One of the first steps in its platform strategy was to adopt a ‘single-store’ strategy allowing third-party merchants “to sell their products alongside Amazon’s own goods in the primary ‘product-detail’ ” (eBay, Inc. and Amazon.com (A), 2013). Amazon continued to increase value for third-party merchants by providing sellers the opportunity to use Amazon’s distribution and warehousing network to ship and store their products in addition to providing complete payments solutions and advertisement services.

4. Discuss the strategic reasons for eBay's 2011 acquisition of GSI Commerce.

Scope Scale Get core-enhancing Strategic/Transformational Pursue customer adjacencies capabilities eBay is able to gain eBay is able to further The deal gives eBay access to a Finally, the acquisition creates an economies of scale from develop its commerce large network of brands and opportunity for eBay to develop the acquisition, which services portfolio through retailers, which helps them to its business model by expanding allows it to reduce G&A platform integration. expand merchant presence on its suit of merchant services by and payment processing its platforms. Furthermore, this leveraging GSI Commerce’s costs leading to cost access helps them to reach a capabilities in fulfillment & synergies. range of retailers from large freight services, customer care merchants and SMEs to sole and interactive marketing. proprietors with a total estimated revenue synergies of $208B from incremental business.

5. What would you recommend for eBay going forward, and why?

Incremental improvements in eBay’s current business model would not yield enough growth

Should eBay maintain its existing business model? eBay has seen stagnated growth in the last few years, which has mostly come from the payments segment as can be seen from eBay’s 2010 annual report whilst their biggest segment ‘marketplaces’ grew only 6,7% from 2007 to 2010 compared to Amazon’s net sales that grew over 50% in the same period. By maintaining eBay’s existing business model, they could only create incremental improvements in their core business with moderate revenue growth as there are no visible signs of external trends that would increase the size of eBay’s business in its current core segments in ‘marketplaces’ and ‘payments’.

Due to eBay’s stagnated revenue growth in their core marketplaces business, the key strategy for them should be to find growth eBay would benefit from expanding into merchant services by creating additional value to their current customers whilst at the same time leveraging their acquisition of GSI Commerce. As Page (2015) describes it Amazon does a better job at making a buyer feel like she is buying directly from Amazon. Furthermore, buyers can complete their payments without leaving the Amazon site and sellers can have their items stored and shipped from Amazon’s warehouses. Amazon is also better at providing third-party sellers a large distribution and warehousing network, which many companies and individuals would not otherwise be able to afford: Amazon offers them a low barrier to entry into market with low initial capital costs that are normally related to warehousing and distribution. Because of eBay’s large installed customer base, they would benefit from economies of scale in warehousing and distribution. Finally, they could leverage the GSI Commerce capabilities in ‘Fulfillment & Freight Services’ with their “world-class warehouse management systems to provide customised direct-to-consumer fulfillment solutions, including order management, real-time order status updates, and reverse logistics services”. Additionally, GSI Commerce has capabilities in merchant services that eBay could provide including customer care, interactive marketing and transaction capabilities. As a conclusion eBay should foray into merchant services to expand their business and create additional value for their current customers.

Appendix 1

Question 1

Amazon’s operating expenses

MUSD % Cost of sales 26561 81 % Fulfilment 2808 9 % Marketing 1002 3 % Technology and Content 1511 5 % General and administrative 386 1 % Other 530 2 % Total operating expenses 32798 100 % (Amazon, 2011) eBay’s operating expenses

kUSD % Sales and marketing 1946815 49 % Product development 908434 23 % G&A 1079383 27 % Total 3934632 100 % (eBay, 2011)

Question 5

Figure 3. (eBay, 2011)

Growth in marketplaces: (5,721 - 5,364) / 5,364 = 6,7%

References Amazon, 2011. Annual report 2010. [Online] Available at: http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual [Accessed 7 October 2015]. eBay, Inc. and Amazon.com (A) (2013) Harvard Business Review. eBay, 2011. Annual report 2010. [Online] Available at: https://investors.ebayinc.com/annuals.cfm [Accessed 06 October 2015].

Investopedia, 2015. How Are eBay and Amazon Different?. [Online] Available at: http://www.investopedia.com/articles/investing/061215/how-are-ebay-and-amazon-different.asp [Accessed 12 October 2015].

Page, V., 2015. eBay Vs. Amazon Business Model. [Online] Available at: http://www.investopedia.com/articles/investing/052615/ebay-vs-amazon-business-model.asp [Accessed 7 October 2015].

Tita, B., 2015. Terex to Merge With Finnish Crane-Maker Konecranes. [Online] Available at: http://www.wsj.com/articles/terex-to-merge-with-finnish-crane-maker-konecranes-1439328100