How Amazon is beating up eBay

By Michael Brush

Since the dawn of Internet shopping, bargain hunters have reveled in the thrill of the hunt for deals at eBay (EBAY, news, msgs), the online equivalent of an auction house.

But the thrill is going, going, almost gone. And eBay's losses are Amazon.com's (AMZN, news, msgs) 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.

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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.

If you have any doubt that Amazon is beating up eBay in the battle of the Internet retailing behemoths, let me update you on the status of the fight.

Amazon's growth story

Consider the numbers from the most recent 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%, according to Deutsche Bank (DB, news, msgs). Visits to eBay's U.S. Web site have been down in nine of the past 11 months.

All of this helps explain why Amazon generates nearly twice as much revenue as eBay does and why its stock has advanced more than 16% in the past year while eBay's has fallen more than 25%. Amazon shares were trading recently at $88; eBay's shares were at $26.75.

Laying siege to PayPal

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.

"Amazon.com is clearly launching a new broadside against eBay's business," says Darren Chervitz, a co-portfolio manager of the Jacobs Internet Fund (JAMFX), which holds shares of eBay but not Amazon. "And because PayPal is the diamond within eBay, (the attack) is a threat."

Google tried and failed

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 (GOOG, news, msgs) payment system, to make any inroads as a reason to write off Amazon's attempt. If Google can't beat it, who can?

"Bring it on," scoffs one eBay fan in an online forum.

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."

Continued: Issues of trust

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