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.
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."
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.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.
