eBay and Amazon 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 auction house 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 retail 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 delivery and ease of payment. However, Amazon has been better at integrating its payment system as the user does not need to leave Amazon’s website 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 Marketing, 23% Product development and 27% G&A. (Based on both companies’ annual reports released in 2011, see Appendix 1). Amazon’s Investments in technology 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 time 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 customer service 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 if 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 access 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 counterfeit 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 books 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 habits and item ratings. Amazon has so far been better at capturing this large scale network effect than eBay by showing recommendations in several areas throughout their store. 3. As it shifted to a retail and platform business model, how successful was Amazon in overcoming barriers to entry in the third-party seller market? 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 net 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 book retailers was the ease of buying books: search for a book online, click ‘buy’ and get it delivered to your home 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.