Last week, at eBay Inc (NASDAQ:EBAY)’s analyst day, CEO John Donahoe told analysts, “The turnaround is behind us, and we are now playing offense.” What does offense look like for eBay Inc (NASDAQ:EBAY)? With $67 billion of gross merchandise volume, or GMV, across its websites in 2012, it moves vastly more products than anyone does on the internet … except Amazon.com, Inc. (NASDAQ:AMZN), which sold approximately $100 billion in merchandise last year (when combining its own inventory with third-party sellers).
But eBay has big plans to grow the company over the next three years, and Amazon.com, Inc. (NASDAQ:AMZN), as the biggest name in e-commerce, is the company’s enemy number 1.
Hitting ‘em where it hurts
eBay Inc (NASDAQ:EBAY) and Amazon.com, Inc. (NASDAQ:AMZN) currently operate primarily in two separate mind-spaces. eBay Inc (NASDAQ:EBAY) dominates the market for second-hand goods, and is often the first place customers look to for used merchandise. Amazon.com, Inc. (NASDAQ:AMZN), on the other hand, is the first stop on the internet for brand-new products. While both companies also operate in the other’s forte, a distinct thought process goes through customer’s minds when they choose either website.
eBay Inc (NASDAQ:EBAY)’s offensive strategy involves encroaching on Amazon.com, Inc. (NASDAQ:AMZN)’s turf by attracting third-party sellers, and their unused products, to eBay’s marketplace. The company overhauled its seller fees last month in an attempt to undercut Amazon.com, Inc. (NASDAQ:AMZN)’s pricing and provide better transparency. Previously, seller fees lacked clarity, making it difficult for merchants to determine if it was more profitable to sell on eBay Inc (NASDAQ:EBAY) or Amazon.
This week, eBay started testing out a service that provides small business loans to sellers. This is just another move to level the playing field as Amazon started offering loans in 2011 with its Amazon Lending service. eBay is well positioned to provide loans to sellers, as its been doing so for buyers since it acquired Bill-Me-Later in 2008.
Interestingly, Amazon doesn’t seem threatened by eBay’s new strategy. In fact, the company decided to raise its third-party seller fees from an average of 7% to 12% across Europe.
Third-party sellers are one of the company’s biggest drivers of growth. Sellers on Amazon Marketplace accounted for 39% of total sales in the fourth quarter of last year, up from 36% of sales in the same period a year ago. It’s also an important profit center for the company, as Amazon keeps profit margins practically non-existent on its own inventory.
Prime
eBay Now, eBay’s same-day shipping service, is a direct shot at Amazon’s Prime service. For $5, customers can have an order from local stores such as Macy’s, GNC, or Urban Outfitters delivered directly to their current location (usually in less than an hour). Comparatively, Amazon Prime provides customers with free 2-day shipping and 1-day shipping for just $3.99 (after the $79 annual fee).
The eBay Now service is currently only available in San Francisco, San Jose, and New York. eBay plans to roll out the service in Chicago and Dallas in the near future. Conversely, Prime is available everywhere Amazon operates.
The reason eBay Now is a significant threat to Amazon is because of the profits Amazon makes on subscribers. Prime members are an integral part of Amazon’s operations, contributing an estimated 36% of the company’s consolidated segment operating income in 2012. Prime members reportedly buy twice as much merchandise as non-Prime customers, and contribute approximately $78 in net profit per subscriber.
As eBay Now expands, Amazon will need to improve its benefits for Prime customers at a similar rate to maintain and grow its most valuable customer base. With its growing number of distribution centers, I believe Amazon has the capabilities of improving free 2-day shipping to 1-day shipping and even same-day shipping in the future.
Mobile
There’s one significant area where eBay is already outperforming Amazon – mobile. Last year, the company enabled $27 billion in mobile commerce through its eBay, PayPal, and other apps. This year, CEO John Donahoe expects mobile transactions to top $40 billion – $20 billion from eBay, $20 billion from PayPal.
Amazon saw significantly less impact from mobile last year, reportedly selling between $3 billion and $5 billion through mobile devices last year. At just 5% to 8% of the company’s inventory sales, this represents a significantly smaller portion compared to eBay. Amazon’s smartphone app, which allows users to scan barcodes in stores to compare pricing, remains the showrooming app of choice for most, but eBay is stepping up the competition in this area as well.
At the analyst day, nearly every presenter emphasized a ‘mobile first’ approach. They demonstrated new app features that make listing new items easier for sellers and signing up for PayPal easier for buyers. Additionally, the company’s 2010 acquisition of RedLaser, another barcode scanning app, is another mobile product eBay has an opportunity to integrate further with its flagship website.
Bringing the boys to the yard
eBay might be playing offense, but Amazon doesn’t appear very defensive yet. Amazon still strongly dominates the mind-space of online shoppers, with nearly one-third of them beginning their research with Amazon according to Forrester Research. Until eBay can change the consumer’s behavior, merchant behavior is unlikely to see a significant shift.
That said, I think eBay is doing excellent work to create that shift, particularly in the mobile space and abroad. As more consumers use mobile internet devices to transact, which is increasingly popular in developing countries, eBay is seeing excellent traction with its ‘mobile first’ focus. This is the first area where Amazon will need to improve in order to maintain its status as the market place of choice for its profitable third-party sellers.
Adam Levy owns shares of Amazon.com. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay.
