WHEN the e-commerce giant eBay emerged from the last recession
seven years ago with an aura of invincibility, its chief executive, Meg Whitman,
boasted that “eBay is to some extent recession-proof.”
As the online auctioneer’s revenues and stock price kept climbing, one of its
primary rivals, Amazon.com, just limped along.
How times have changed.
Ms. Whitman, now co-chair of Senator John McCain’s presidential campaign,
retired from eBay earlier this year as the company struggled with stagnation.
Amazon, meanwhile, has emerged as one of the most vibrant and reliable retailers
in the country.
And in an unmistakable sign that Internet companies are indeed exposed to the
gathering economic storm stemming from the credit crisis, Ms. Whitman’s
successor, John J. Donahoe, laid off 10 percent of eBay’s 16,000 employees last
Monday.
Mr. Donahoe noted that eBay was already feeling the effects of the downturn.
“This looks like it is going to be a more typical economic cycle that impacts
consumer spending,” he said. “We are not immune.”
That the economic crisis is washing up on Silicon Valley’s shores shouldn’t,
perhaps, come as a surprise. Most tech companies are defenseless against waning
advertising, business spending and consumer interest in big-ticket items like
computers. Over the last three months, investors have punished tech companies
like Google, Microsoft and Apple, extracting a fifth to a half of their market
value.
E-commerce, though, was once thought to be a refuge from economic storms. People
who stay away from the mall might actually be more tempted to shop online and
hunt for deals, or so the thinking went.
But analysts are now revisiting that assumption. Many consumers, citing an
uncertain economy, say they will clutch their wallets tightly this holiday
season regardless of where they shop: 48 percent surveyed recently by eBillme,
an online payment service, said they planned to delay purchases.
Traditional, brick-and-mortar stores had wrenching, double-digit declines in
September sales and are bracing for a bleak holiday season. No one is certain to
what degree online retailers will feel that same pain, because digital vendors
have never endured a deep, protracted economic slump before.
“We still feel pretty good about this year, but I worry about next year and
beyond,” said Brian J. Pitz, an analyst at Banc of America Securities. “Are
people going to spend when they can’t get home equity lines of credit, a student
loan or a car loan?”
For eBay and Amazon, the twin giants of e-commerce, the financial meltdown has
arrived at a particularly crucial time. After years of claiming that their
businesses were complementary, not competitive, the companies are now on a
collision course.
Amazon has accelerated its courtship of small online vendors, allowing them to
sell on its site — becoming more like eBay. And eBay, desperate to revive
itself, has decided to emphasize traditional, fixed-price sales of both new and
old merchandise — becoming more like Amazon.
AT stake is more than e-commerce bragging rights. On the Internet, size matters.
Larger companies can collect more information about consumers, negotiate better
deals with partners and use that leverage to expand their dominance (for
example, Google versus Yahoo in search).
“This is a pivotal holiday season for eBay,” said Jeffrey Lindsay, a senior
analyst at Bernstein Research who has covered the Internet for a decade. “What
people fear is that Amazon is basically building a bigger sales base than eBay
and will use that knowledge to sell people more and more of the things they want
to buy online.”
Indeed, the balance of power in e-commerce seems to be shifting faster than
anyone expected. Just three years ago, eBay had 30 percent more traffic than
Amazon. Today, its total of 84.5 million active users is barely ahead of the 81
million active customer accounts that Amazon reported in June.
Amazon has exceeded eBay in other measures as well.
EBay’s market capitalization was three times Amazon’s in 2005, back when Wall
Street loved the fact that it carried no inventory and generated huge profits.
This year, eBay’s stock has lost over half its value and, in July, Amazon’s
valuation surpassed eBay’s for the first time.
In a series of interviews, Mr. Donahoe acknowledged that eBay, based in San
Jose, Calif., didn’t adapt fast enough to shifting e-commerce winds. He now
embraces a “turnaround mind-set” and is refocusing its Web marketplace toward
shoppers who don’t want to waste time in online auctions.
“There are times when I wish we can close this store and just open a new store,
but we can’t,” he said. “We need to make bolder, more aggressive changes to the
eBay ecosystem even if they are unpopular.”
Up in Seattle, meanwhile, Amazon’s chief executive, Jeffrey P. Bezos, says that
after years of failed experimentation, third-party vendors — the foundation on
which eBay was built — now account for about 29 percent of sales on Amazon. The
company has endured and outlasted critics who long complained about its high
fixed costs.
Last year, it impressed investors with accelerating growth, and its stock price
revisited the highs of the dot-com boom, before waning euphoria and market
pessimism erased more than half of those gains this year. Mr. Bezos credits
Amazon’s tolerance for risky, expensive bets like the Kindle electronic reading
device.
“Our willingness to be misunderstood, our long-term orientation and our
willingness to repeatedly fail are the three parts of our culture that make
doing this kind of thing possible,” he said.
EBay’s recent problems have made Mr. Bezos and his team look like shrewd and
patient stewards of the Amazon franchise. And Amazon’s second wind is making
eBay look as if it has missed one of the greatest opportunities in the
Internet’s short history.
“EBay could have closed the door to Amazon back when Amazon was mostly just a
platform to sell books and music,” said Scott Devitt, an analyst at Stifel,
Nicolaus & Company, the investment bank. “But what eBay did in those days was to
take a very hands-off approach and let the marketplace control itself. And that
ended up being the downfall of the business relative to others that have
succeeded.”
OVER the summer of 2004, at the annual executive retreat that eBay insiders call
“Telluride,” a product strategy team argued that eBay needed to break into the
promising world of digital media. Pointing to the popularity of services like
Napster and the new iTunes music store from Apple, the group predicted that
media like books, music and movies would inevitably be distributed digitally,
over the Web.
EBay, they argued, needed to ride that wave.
That insight — which did catch on at Amazon and is now responsible for
high-profile efforts like the Kindle and Amazon’s MP3 store and video-on-demand
service — went nowhere at eBay.
“Nobody really shut it down. The process shut it down,” says a former eBay
executive who was on the product strategy team but requested anonymity to avoid
alienating former colleagues. “The company was obsessed with making quarterly
numbers.”
Whether passing on digital media was a mistake at eBay is still an open
question. But the anecdote illustrates larger problems. More than a dozen
current and former eBay executives, from all levels of management, say eBay
routinely failed to reorient its core business.
They say eBay avoided fiddling with its auction model because it was wary of
disrupting a long-profitable equilibrium between buyers and sellers.
EBay has known for years that some Web buyers were looking for a different
experience. Surveys suggested that auction participants were alienated by
untrustworthy sellers and hidden shipping fees, and increasingly preferred the
certainty of instantly buying items at a fixed price.
Although eBay executives recognized and routinely acknowledged the problem, they
never took bold, direct steps to address it.
In 2005, the company acquired Shopping.com, a comparative shopping site that
catalogs products for sale elsewhere on the Web. But for years eBay did not
promote the company’s listings, primarily because its vocal community of sellers
— the ones paying fees to eBay — protested whenever eBay sent buyers to other
retailers.
Josh Koppelman, who founded the e-commerce site Half.com and sold it to eBay in
2001, says that there was an understandable cultural reluctance inside eBay to
alienate sellers. “We got paid a fee to provide a service to a community,” he
said. “Hurting members of that community was difficult.”
Instead of imposing critical fixes to its slowing model, eBay searched for
high-growth businesses elsewhere, acquiring Skype, the online calling service;
StubHub, the ticketing site; and a series of classified-advertising Web sites.
The company did create a whole new site, called eBay Express, where it tried to
satisfy buyer interest in a simpler shopping experience. EBay Express
automatically amassed all the fixed-price, non-auction listings on eBay
properties and presented them in an organized way with only one payment system,
PayPal — also owned by eBay.
But in the two-year life of eBay Express, eBay never directed any meaningful
traffic to it, fearing that it would interfere with the more profitable and
popular auction-oriented site. The company shuttered eBay Express this year and
has said it will move some of its innovative features to eBay.com.
Contributing to intransigence, according to several former executives, were deep
divisions and constant hand-wringing among its managers over the most
fundamental question: What is eBay?
One camp believed that eBay was a discount palace and that it had to continually
offer deals to buyers in whatever shopping format they wanted.
But another group, resistant to change even as late as last year when eBay was
clearly losing ground, believed that the brand was tied up in the excitement of
auctions. Emphasizing traditional shopping destroyed what made eBay special,
they argued.
“Today online shopping is mainstream, but it’s also becoming boring,” Bill Cobb,
then the president of eBay North America, wrote in a June 2007 blog entry that
typified this thinking. “We’re investing in the quintessential eBay experience
of buying and selling — person to person — in an auction format.”
Ms. Whitman seemed to moderate this constant debate while never actually
settling it. At times, she also seemed unwilling to leave auctions behind.
In an interview last week, while on a break from traveling with the Republican
vice-presidential candidate Sarah Palin, Ms. Whitman said it was hard for her to
reflect on these kinds of divisions within the company, or on missed
opportunities.
“There was no shortage of realistic looks in the mirror, where we asked
ourselves if we were doing the best job that we could do,” she said.
She also addressed another notion raised by former eBayers, who say executives
were dismissive of Amazon but focused obsessively on Google, the search leader
whose tentative moves into e-commerce were viewed inside eBay as acts of
aggression.
“Google is a disruptive competitor. It’s not a marketplace and it’s not a
retailer but has a different way of marrying buyers and sellers,” she said. “I
don’t think you can overstate any competitive threats.”
But paranoia about Google, these former executives say, fueled strategic
missteps like the Skype acquisition, which Google had also pursued. Ms. Whitman
and other eBay managers spent considerable energy trying to integrate Skype, and
last year eBay wrote down $1.4 billion of the $3.1 billion acquisition.
As eBay obsessed about Google, the online retailer from Seattle was encroaching
on its turf.
CONVERSATIONS with Jeff Bezos of Amazon inevitably provoke two kinds of
outbursts. One is that famous, barking laugh that punctuates even seemingly
mundane sentences. The other is his paean to the wisdom of long-term thinking.
“We are willing to plant seeds that take five to seven years to grow into
reasonable things,” he said in an interview. “You can’t do big, clean-sheet
invention unless you are willing to invest for long periods of time.”
Mr. Bezos has delivered these kinds of odes to patience and risk tolerance for
nearly a decade. The company’s appetite for enduring short-term pain for
long-term gain is clearest when comparing it with its rival, eBay.
While eBay was buying into classified advertising, online payments and Internet
telephony, Amazon spent hundreds of millions of dollars building its brand as a
trusted retailer — hiring customer service representatives and returning money
to customers when transactions went awry.
As eBay took a pass on digital media, Amazon dove in and frustrated investors
for years with margins that were diminished by a bulky R.& D. budget — but
produced promising businesses like the MP3 store.
Compensation at the two companies also reflects core differences. Amazon
evaluates its executives annually and gives performance-based stock grants.
Until this year, when Mr. Donahoe became chief executive, eBay gave cash and
stock bonuses based on quarterly performance, rewarding managers for meeting
Wall Street’s short-term expectations.
Similarly, Amazon’s push to recruit the small sellers who orbited eBay was
marked, at first, by patience and often-embarrassing experimentation.
In 1999, five years after Mr. Bezos first plunged his stake into the ground as
an online bookseller, Amazon invaded eBay’s territory, introducing Amazon
Auctions and a way for retailers to set up stores on the site, called zShops.
The efforts tanked.
The problem then “was that nobody came,” Mr. Bezos said. “Actually, sellers
came, but the customers didn’t care and didn’t shop there.”
Amazon tried to promote this siloed merchandise on its site by linking to it on
its more popular product pages. These so-called “smart links” were hotly
controversial inside Amazon and became the subject of a rivalry between its
retail and technology groups.
Fearful that sending visitors to other pages would cut into their sales,
retailing executives at Amazon took to removing them from the page at every
opportunity, according to one senior Amazon executive who was there at the time.
SEVERAL years ago, the company introduced Amazon Marketplace, laying the
groundwork for its current path by listing new and used items from third-party
sellers alongside its own merchandise.
If Amazon didn’t stock a particular item, or if independent sellers could offer
better prices, they would become the featured retailer on the page.
Amazon settled internal tensions by giving its retail managers credit for any
products sold on their pages, even by third-party sellers. But Mr. Bezos says
the arrangement still produces anxiety.
“Put yourself in place of our retail buyers,” he said. “You just purchased
10,000 units of a particular digital camera and you are told, if any third party
anywhere in the world can offer a better price, we are going to give them the
buy box and you are going to get stuck with the inventory. That causes some
angst.”
Over the last five years, Amazon has lowered hurdles for independent vendors to
sell on its site and recruited new groups of merchants as it has expanded into
other countries and product categories — automotive parts in 2006 and office
supplies this year, for example.
Amazon executives say they don’t specifically pursue top eBay sellers, but some
merchants suggest otherwise.
David Duong, founder of Shoe Metro, a Web retailer based in San Diego, says
Amazon representatives called him shortly after Amazon.com introduced a shoe
category in 2005 and asked him to begin selling on the site.
“I guess they found us on eBay,” he said. “We were actually going to talk to
them, but they beat us to the punch.”
Lately, small merchants and their trade organizations say, the outreach has
become even more direct. The Professional EBay Sellers Alliance said that Amazon
recently offered to waive some fees for the 800 members of the group, an
organization of eBay power sellers, to woo them to its platform.
Because Amazon also sells many of the same products as its merchants, executives
at eBay predict that competitive tensions will emerge as the Amazon Marketplace
grows. Maybe so. It’s happened before.
Amazon once ran the Web operations of large traditional retailers like Borders,
Circuit City and Toys “R” Us. One by one, those retailers concluded that
outsourcing such a crucial feature of 21st-century retailing to a competitor was
a bad idea.
But some of its newer deals with sellers indicate that Amazon is finding ways
around those tensions, at least with small merchants.
Andrew and Deb Mowery of Fort Collins, Colo., who started selling home, garden
and pet supplies on eBay in 1999, now make 60 percent of their sales on Amazon
and about 20 percent on eBay. In addition to listing items for sale on the
Amazon Marketplace, they are also a wholesale supplier to Amazon, providing it
with products like heated pet beds.
Mr. Mowery is essentially competing with himself, but the arrangement works. “If
they run out, I’ve got their back,” he said. “If I run out, they’ve got my
back.”
Amazon wants to forge these kinds of close ties with other small sellers. A
program called Fulfillment by Amazon, introduced in 2006, allows retailers to
store their inventory in Amazon’s warehouses. When someone buys an item from
that seller, Amazon ships it out of its warehouse in an Amazon box.
Integrating small merchants into its operations also allows Amazon to learn more
about whom it can trust to sell on its site. Compared with eBay, the company
says it exerts a far greater measure of control over its marketplace, calling
certain vendors “featured sellers” and vetting others in product categories that
are sensitive to fraud.
“At the end of the day, we believe it’s good for all of our sellers to make sure
we are protecting the consumer experience first,” Mr. Bezos said. “Our first and
foremost goal is to earn trust with consumers. If there are no consumers buying,
nothing else matters.”
DESPITE Amazon’s success in courting independent sellers, its selection is still
just a fraction of what eBay offers, and in some cases its prices are higher.
For example, there are hundreds of new, used and refurbished Trek racing bikes
on eBay; as of last week, Amazon had three for sale. Acquisitive parents can buy
a $90 Deux Par Deux baby sweater dress on eBay for under $30. But only a few of
this French designer’s items are listed on Amazon, and for close to full price.
And that Lehman Brothers 150th-anniversary collectible tote bag, which every
irony-obsessed stock market fan wants under the Christmas tree? It is available
for purchase only on eBay, in auctions.
This is where Mr. Donahoe talks about a vision to fix eBay, and to create a Web
discount store that offers a wide variety of new and old merchandise in auction
and fixed-price formats. To get there, he must administer the sweeping, painful
fixes that eBay has previously shunned.
“It was increasingly clear to me in 2007 that what felt like bold changes, and
to the community felt like bold changes, were not bold enough,” he said.
His attempted fixes have started internally. In addition to making executive
bonuses annual instead of quarterly, to keep employees from leaving and reward
longer-term thinking, he moved the company’s focus to buyers instead of sellers.
He canceled the annual eBay Live conference next year with merchants — this
year, it turned into an unwieldy complaint session — and began making eBay
executives read weekly surveys that ask shoppers whether they would recommend
eBay to a friend.
THE eBay facade is also undergoing its most significant renovation in its
14-year history as Mr. Donahoe tries to adjust eBay fees to tempt sellers to
list more of their products at fixed prices.
EBay has also added a new 30-day listing at a fixed price that is more
economical to many sellers than auctions. It has also disabled the feedback
mechanism that allowed sellers to rank buyers and introduced a new “best match”
search engine that promotes trusted sellers and good deals.
In another controversial change, eBay has struck special deals with large
merchants like Buy.com, which pays no listing fees and offers more than half a
million products on eBay.com.
The point of the arrangement is to ensure that eBay stays fully stocked in
basics like batteries and printer cartridges. Other eBay sellers are enraged,
though, arguing that the deal violates the sacred eBay tenet of the “level
playing field.”
These sellers have vented their frustrations online about eBay’s changes. It’s
hard to gauge whether the vitriol represents the majority view, but some less
vocal, larger sellers on eBay say they have actually benefited.
“EBay has told all bad sellers to shape up,” said Jordan Insley, an electronics
merchant who lives near Seattle. “I’ve seen a lot of sellers that used to sell a
lot of product fall off the charts.”
Although he worries that buyer traffic on eBay is slowing, Mr. Insley says he
will sell $13 million in gadgets this year on eBay alone. “I think eBay is
moving in the right direction. We are sticking around.”
Still, Mr. Donahoe can’t count on that sentiment to carry the day. Few of his
changes are expected to deliver any immediate results, other than alienating
certain sellers.
Yet for eBay, the changes may be a matter of survival. The company need only
look across Silicon Valley at Yahoo to see what can happen to wounded Internet
companies with depressed stock prices.
In the meantime, he faces tough choices. He is weighing a possible sale of Skype
by next year, and analysts think he will almost certainly make that move, since
the company now acknowledges that Skype has little synergy with eBay’s other
businesses.
That would free eBay to focus on its core marketplace, on getting through the
torrential economic downpour, and on combating a challenger that is making
greater incursions every day.
“I respect Jeff Bezos a lot as a leader and Amazon and what they’ve done,” Mr.
Donahoe said. “But it is still early days in this industry. E-commerce is 7
percent of retail. I don’t think anyone thinks it’s going to end there. We think
there is plenty of room for both Amazon and eBay to be successful.”
