How Amazon is beating up eBay

That's not to say millions don't trust Google. But there's a difference between using a search engine to look up old high school buddies and turning your private credit card information over to a company that keeps it on file for future transactions. That second relationship involves a lot more trust.

Plus Amazon's system is easy and convenient, which should cut down on the number of buyers at partner sites who drop a purchase midway through because they get fed up with filling out forms. Customers can store data such as credit card numbers and addresses with Amazon and retrieve them at any store using their system.

Merchants will be thinking about all of these advantages when they consider using Amazon payment systems on their sites.

Goldman Sachs (GS, news, msgs) analyst James Mitchell thinks that in time Amazon may up the ante by offering discounts to merchants for transactions that transfer money from places other than credit cards, such as bank accounts. Those kinds of transactions are cheaper to process. Amazon could pass the savings on to merchants, something PayPal does not do.

"I'd be surprised if they didn't undercut them, because when you are starting a business as the upstart, you have to be aggressive on pricing," the Jacobs fund's Chervitz says.

Behind-the-scenes advantages

Amazon says offering its payment system to off-site merchants is really just part of a continuing strategy of exposing more of its "infrastructure and technology abilities" to third parties, in the words of Mark Stabingas, an Amazon vice president in charge of Amazon Payments.

He's alluding to another reason that Amazon is winning the battle against eBay: Amazon is a lot more than just a Web site, though that's all it may appear to be for most consumers.

It has more than 30 "fulfillment centers" around the world. It collaborates with outside merchants by letting them ship pallets of goods to these Amazon locations, to be sold and shipped through Amazon's network.

"This is a very big advantage for sellers because it increases their sales," chief Jeff Bezos said in Amazon's most recent conference call. It also gives merchants access to lower shipping rates.

Amazon also has a division that assists outside merchants in developing their own Web sites.

Here's why all this matters in the battle against eBay:

• First, Amazon develops ties with merchants on many levels, so merchants may be more likely to adopt its new payment system.

• Amazon's big infrastructure gives the company more control over the customer experience.

In contrast, eBay is really just a Web site that brings buyers and sellers together. Overhead costs are lower, but eBay has less say in how well customers are treated by merchants.

Unlike Amazon, eBay doesn't touch, price or ship products, says Lehman Bros. (LEH, news, msgs) analyst Douglas Anmuth. "Therefore, it is difficult to manage parts of the buyer experience, a fundamental challenge of their marketplace model."

Relying on the merchants

Instead, eBay relies on outside merchants to do the job well. It has been encouraging them to do it better with reforms this year, such as discounts on fees for big merchants who get the best ratings for selling goods through virtual stores on eBay's site.

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But the discounts have alienated eBay's original base of small sellers, who find it hard to compete for ratings on things such as shipping costs.

Even worse, eBay's system of rewards for large, outside merchants might not be enough to ensure that eBay customers get treated well, Deutsche Bank's Patel says. He thinks eBay's lack of control over pricing, delivery times and the overall quality of the customer experience "represent major hurdles that eBay may never be able to overcome."

No one is suggesting this is the end of the road for eBay, which declined to comment for this column.

The real danger in the PayPal challenge is that Amazon may erode eBay's only big source of revenue growth while it continues to beat the company in the bigger battle for online retail sales.

For its next acts, Amazon is challenging Barnes & Noble (BKS, news, msgs) with its Kindle electronic book gadget and Netflix (NFLX, news, msgs) with its rollout of downloadable movies.

Yes, Amazon stock appears expensive right now, and eBay looks like a bargain -- at least when you look at forward price-earnings ratios, which compare stock prices to expected profits. But I'd bid for Amazon anyway and leave the online auctioneer for others.

At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.

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