BUSINESSWEEK ONLINE : MAY 31, 1999 ISSUE
COVER STORY

eBay vs. Amazon.com
Fixed prices or dynamic pricing? Whichever wins biggest will shape the future

Daniel J. Boone buys a lot online, and it's not just because he lives in remote Juneau, Alaska. After finding some antique postcards early last year on auctioneer eBay Inc.'s Web site, the 30-year-old lawyer has returned repeatedly for such items as a shower radio and a computer scanner. Growing far beyond its start as a motley flea market for collectors of Pez dispensers and Beanie Babies, eBay EBAY now has more than 2 million items for auction daily. It's expected to quadruple gross merchandise sales this year, to $3 billion, from which it skims a profitable 6%. For many of its 3.8 million registered members, eBay has become a prime online shopping stop. Says Boone: ''I look there first for just about everything.''

Whoa--isn't Amazon.com Inc. AMZN supposed to be the Web's leading store? Yes, indeed: With 16 million items for sale, Amazon has ''Earth's biggest selection,'' says Chief Executive Jeffrey P. Bezos. Amazon has added music, video, gifts, and greeting cards to the books it offers some 8.4 million customers--plus links to drugstore goods, pet supplies, and more. Despite Bezos' recent warning of higher losses, analysts expect Amazon's sales to top $1.4 billion this year. Says Gajen Kandiah, a vice-president at consultant Cambridge Technology Partners: ''They will become the Wal-Mart of the New Economy.''

Or will they? eBay's surprise rise suddenly reopens the bidding for the E-commerce crown. In the blink of a cursor, the Web's two E-titans have gone from being happy little shopping hangouts whose paths never crossed to being in each other's crosshairs. Since late March, Amazon has begun holding daily auctions, while eBay--gasp!--is mulling fixed prices. Says Accel Partners venture capitalist James Breyer, who funds E-commerce companies that have been courted by both eBay and Amazon: ''Competitive intensity between the two companies is rising dramatically.''

BATTLE ROYAL. It's a collision in the making with an impact that could ripple far beyond which pioneer will lead the E-commerce revolution--and which will follow. Indeed, the budding behemoths present a fundamental choice for consumers in the Internet Age: Will most people gravitate toward fixed prices at the likes of Amazon's clean, well-lighted superstore, with its familiar brand-name retail sheen? Or will the masses take a shine to dynamic pricing, the fluid give-and-take on eBay's friendly, funky swap meet cybercharged into a global bazaar?

Most likely, they'll flock to both--just as they buy at a garage sale in the morning and Macy's in the afternoon. But which approach ends up attracting the most clicks could well determine the fates of thousands of other E-commerce sites all scrambling for the winning approach. While many well-known consumer sites count on a mix of business models at this early stage, they are dividing along much the same lines. Superstore Buy.com, eToys, and computer reseller Cyberian Outpost, for instance, are essentially moving the model of retail stores online, a la Amazon. If Bezos' vision prevails, they could sail along in Amazon's tailwind--at least until Amazon takes a sharp turn into their markets. But if eBay continues its rocket ride, bidding sites like Priceline.com and Onsale.com may jet past more conventional sites.

For the time being, the explosive growth of E-commerce will likely keep cybershoppers coming in droves to both types of emporiums. That's one thing Amazon and eBay agree on. There isn't much evidence that consumers want to ''one-stop shop for every single thing in their life at one company,'' says eBay CEO Margaret C. Whitman (page 134). And Bezos rejects the widely held notion that a handful of megastores will dominate. ''There's going to be tens of thousands of winners,'' he says (page 137).

But each CEO's clear desire to build the Net's premier place to buy and sell is steering the unlikely combatants into an undeniable battle royal. From the consumer's point of view, their goals sound remarkably similar: to be the prime place where people buy and sell the widest range of goods online. Bezos' predictions aside, many experts believe that online, consumers will flock to an even smaller number of major brands than they do traditionally because there are few other cues for building trust. Already, some 101 million U.S. adults recognize the Amazon brand--ranking it No. 1 in E-commerce--and some 63 million recognize eBay, which ranks No. 3, according to a study by Brand Institute. ''First and foremost, consumers look for brand,'' says Robert W. Pittman, president of America Online Inc.

As each tries to build a dominant consumer E-commerce brand, eBay and Amazon will be forced to satisfy the consumer expectations each has helped build. ''Up to now, you had these two big gorillas going their own way,'' says analyst Vernon Keenan of researcher Keenan Vision Inc. ''Now, this is the first time you've had two E-commerce market leaders going directly at each other.''

The battle is getting more intense every day. On Mar. 30, Bezos cranked up Amazon's auctions in direct competition with eBay. Analysts hadn't expected Amazon to announce auctions for several more months, but it did so just one day after eBay announced plans to make a $1.1 billion secondary stock offering. Coincidence? ''No, it was not,'' says Whitman.

''OWN THE WORLD.'' Then, on Apr. 12, Amazon announced plans to acquire LiveBid.com Inc.--after eBay also approached the company about a possible buyout. Bezos even sent a reporter 97 pages of discussions on the auction-monitoring site called AuctionWatch showing how Amazon's auctions had improved over time--sometimes besting eBay. Says venture capitalist Timothy M. Haley of Institutional Venture Partners: ''Clearly, Jeff has an 'I'm going to own the world' mentality.''

eBay's Whitman is no less a voracious competitor. A Harvard MBA with previous experience at Hasbro Inc. and Walt Disney Co., she has expansion plans, too. On May 18, she spent $275 million in stock on two acquisitions. Kruse International, a collector-automobile auction house, will add a big-ticket product line. Billpoint Inc. will let buyers and sellers use credit cards, ending an obstacle to smooth commerce.

And eBay recently polled members on whether they'd like to see ''fixed-price auctions'' (many said yes) and dealer storefronts. These would look a lot like retail stores to consumers. Already, some 20% of eBay sellers account for 80% of transaction volume--an indication that most selling is by businesses. And those businesses, some of which are selling new items, such as factory-sealed WebTV Plus devices and Epson printer cartridges, often steer buyers to their own retail Web sites.

Whitman concedes that competition--especially from Amazon--has forced eBay to beef up quickly. In April, several months ahead of schedule, eBay launched its first local auctions in Los Angeles. Since the start of the year, eBay has constantly made buying and selling easier--an Amazon hallmark. The auction site now offers 300 new categories of products, a Personal Shopper program that searches out specified products, and a gift program. And eBay will soon launch a new national marketing campaign ahead of schedule. ''The entrance of competitors has made us move faster,'' says Whitman.

So far, Amazon has been the crown prince of consumer E-commerce, favored to rule over an expanding E-empire. And despite eBay's guerrilla gains, Bezos' army still has the high ground. With good reason: So far, it has quickly dominated every market it has entered. The first quarter after Amazon opened its music store, it became the Web's largest CD merchant, outselling veterans CDnow Inc. and Music Boulevard--which later merged. Indeed, potential rivals fret about how to avoid ''getting Amazoned.''

Bezos credits Amazon's success to a deceptively simple goal: He wants it to be the most customer-focused company ever--both online and off. That's why Amazon has spent heavily to build several distribution centers around the world to hasten deliveries. It's why the company has spent countless hours tweaking its Web pages to remove every possible obstacle to purchasing. It invented one-click ordering, which lets buyers store credit cards and addresses after the first purchase, and it installed software that assesses what people have bought and suggests other purchases. The result: Repeat purchasers account for 66% of sales.

RUNAWAY TRAIN. eBay has zoomed to prominence with an even more innovative E-commerce model--one that, in a rare feat, is actually profitable. Because eBay doesn't take possession of the goods--it acts as a broker for buyers and sellers and takes 6% off the top--it incurs none of Amazon's hefty distribution costs. It has only 198 employees to Amazon's 3,000. As a result, its gross profit margins are a Microsoft-like 85%--on gross merchandise that ballooned from $95 million in 1997 to $746 million in 1998. ''Dollar for dollar, eBay has a better revenue and bottom-line model,'' says analyst Mitchell Bartlett of Minneapolis investment bank Dain Rauscher Wessels.

Thanks to choosing auctions as its selling vehicle, eBay is riding a runaway train of growth. The bidding and close interaction between buyers and sellers promotes a sense of community--a near addiction that keeps them coming back. eBay denizens spend 130 minutes a month at the site--more than 10 times the amount on Amazon, says researcher Media Metrix.

Such success makes some experts think auctions and dynamic pricing will spread far beyond their traditional realm of one-of-a-kind and excess goods. Already, some 15% of all consumer E-commerce spending in 1998--$1.42 billion, more than from books and music--came through auctions, according to Gomez Advisors in Concord, Mass. ''Fixed prices are only a 100-year-old phenomenon,'' says Patti Maes, an associate professor at Massachusetts Institute of Technology's Media Lab. ''I think they will disappear online, simply because it is possible--cheap and easy--to vary prices online.''

Moreover, eBay could even turn the nation's 18 million small businesses into a virtual selling force that could rival that of conventional retail. ''It could be the destination for all these businesses to sell online,'' says Steven R. Mitgang, a senior vice-president for Sitematic Corp., a San Diego software company that has helped several dozen small businesses list their inventory on eBay. Beyond auctions, says Mitgang, ''it has a huge opportunity to become the destination for consumers to buy stuff, period.''

That's far from a lock, though. For one thing, buying is still quite cumbersome on eBay. Even with automated bidding, it's more work than buying fixed-price goods, and once it's done, most buyers have to send a check or money order, wait for it to clear, and get the merchandise up to two weeks later. More important, a few cases of apparent fraud on eBay prompted New York's Consumer Affairs Dept. to investigate. Although eBay reached agreement with New York thanks to instituting new antifraud protections, the potential for being swindled scares off some potential buyers.

Meanwhile, Amazon's business model has yummy aspects that are not fully appreciated--especially vs. physical retailers. Morgan Stanley Dean Witter analyst Mary G. Meeker estimates that Amazon's current $1.2 billion annual sales rate is the equivalent of 235 Barnes & Noble Inc. superstores that generate about $5 million in annual sales apiece. But Amazon has spent only $56 million on fixed assets, such as computers, so far, while B&N has spent about $472 million to build its superstores. And because Amazon gets paid immediately by credit card and doesn't have to pay suppliers for up to 45 days, it essentially funds its growth with its suppliers' cash.

So why is Amazon losing so much money--$125 million last year? Because it's spending to acquire and build for a much larger customer base down the road. Once Amazon's basic infrastructure is built, those operating profits should start falling to the bottom line, perhaps by 2002.

Amazon's move into auctions provides several boosts to its retail business. As its inventory grows, auctions offer a way to get the most from overstocks and returns. And because auctions provide high gross margins, even a relatively small portion of auction sales should give an outsize boost to the bottom line. And Amazon's willingness to encourage business-to-consumer auctions could give it a leg up on eBay. Such auctions are expected to become 66% of total auction sales of $13 billion in 2003. ''eBay is making potentially a huge mistake,'' says Forrester Research Inc. analyst Evelyn Black Dykema.

FEARSOME FORCE. So who's most likely to become the king of consumer E-commerce? For now, despite eBay's fast rise and vast potential, Amazon remains the one to beat. At more than 8 million, its customer base is double eBay's. Many more people recognize Amazon's name, and its retail style of shopping may be more reassuring to the waves of newbies coming online.

Also, by most accounts, Amazon has a deeper management bench. Analysts universally admire Bezos' potent vision of the E-commerce future. And he has hired several former Wal-Mart Stores Inc. employees, including two execs who know the giant's innards so well that Wal-Mart WMT sued Amazon for allegedly stealing trade secrets. (The case was settled recently.)

More than anything, it's Bezos' aggressiveness that many people think makes Amazon the more fearsome force. A perennial overachiever, Bezos appeared to be headed for a nerdy career in computer science. But after landing at hedge fund D.E. Shaw & Co. in New York, he quickly latched on to the Net and soon was driving across the country to start Amazon, tapping out a business plan on a laptop and calling investors as his wife drove. ''Any business with Jeff Bezos in it has a 10 times better chance of success than one without him,'' says former Shaw colleague Charles Ardai, now president of free Web service Juno.

eBay's execs are no slouches, either. Despite Whitman's low-key personality and conservative business pedigree--she started at Procter & Gamble fresh out of Harvard B-school--Whitman gets results, too. Before eBay, she helped return Hasbro's preschool division to profitability. And her management team includes Senior Vice-President for Marketing Brian Swette, who helped develop Pepsi-Cola Co.'s popular ads.

Regardless of who runs the tightest ship, Amazon may hold the edge. After all, it has done the hard part: To provide bulletproof customer service, it has built warehouses and developed software to target individual customer needs with pinpoint accuracy. If seamless buying, quick delivery, and ultrapersonalized stores prove to be what customers want, it will be too late for eBay to catch up. Says Kenneth J. Orton, chief strategist at market researcher Cognitiative Inc.: ''Amazon has a better shot at winning eBay's game than eBay does at Amazon's game.''

That's not to say eBay can't quickly vault into the lead. There are no signs that competitors--Amazon included--are slowing eBay down. Its gross merchandise sales growth has been accelerating for the past four quarters, to 76% in 1999's first quarter. ''There isn't another company on the planet that grew that fast,'' says Whitman.

And there is evidence that investors may be getting impatient with companies that show no sign of profit, such as Amazon. Its stock has dropped from more than $200 a share in April to around $135 today, while eBay's has only eased from a high of $234 in late April to around $195. If investor confidence continues to flag, Amazon could find itself gasping for capital just when it needs more to compete with a surging eBay. Bezos says he isn't worried. ''There will always be enough smart investors who believe in our strategy,'' he says. With plenty of believers in eBay's strategy out there, too, the battle of the E-titans has just begun.

By Robert D. Hof in San Mateo, Calif., and Linda Himelstein in San Jose, Calif.

To read a letter to the editor about this story, click here.

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