eBay Strategies

eBay talk at Goldman - quick notes/observations

Yesterday in SFO, eBay's CEO, John Donahoe (JD) and Bob Swan (SWAN), CFO, presented to the lunch-time audience at the annual Goldman Sachs Technology and Internet Conference in what Goldman calls a 'fireside chat' format.  These are my notes.  It was largely Q+A - with the early Q's coming from analyst James Mitchell and also from the audience.

Summary

There are some interesting tidbits in here to think about: 

• It was crystal clear that eBay is distancing itself from auctions as quickly as possible and even the marketplace to some extent.
• Feels like they would sell Skype if the right buyer came along
• Paypal has room for 20% more on-eBay penetration
• They are feeling really good about BML (BillMeLater)
• They view that they've made big transitions in marketplace biz last year (I disagree on this one as you've seen in the past series)
• eBay is married to the advertising business (high margin crack) and I suspect we'll see lots more banner ads and sponsored listings in 09 (check out UK for what that looks/feels like). 
• They downplayed the risk from the search companies getting into the eBay biz by saying buyers don't want to click on URLs.  Guess they haven't seen Google Product Search lately. 
• 15% of eBay is cross border trade (CBT) (new datapoint I haven't heard, not clear what period of time was discussed or any trend).
• They talked about local more than I have heard before (in context of classifieds)  - mentioned that it's growing 50% y/y.

Fireside chat notes

On with the notes: (I typed these quickly so please don't take this as a transcript. I linked to the audio program above so you can listen to it yourself if you need clarification)

JD started with their top priorities and a little bit of background, citing that many people don't know all about the eBay of today and think of it as more of an auction company.

He mentioned that they have four businesses in the portfolio and threw in some tidbits about each that are largely review:

• eBay - Auction only represents 25-35% of entire business today (50% of marketplace, 25-35% of entire portfolio to clarify)
  
  • Laid foundation for turning around in 08 
  • Heavy lifting left to be done in 09 
• Paypal - 33% of revenue , half of which is off-eBay
  
  • Off-eBay- $1B business - grew at 50% off eBay 
  • BML coming soon 
• Marketing services/alternative formats (classifieds, stubhub) - $1B business
• Skype 

This is a strong portfolio, we will strengthen this year.

Q: Does Skype fit?

A: It's a great standalone business.  When we bought it we thought there were synergies, we were wrong, there aren't.  BUT it's a great business, accelerating metrics - users up 70% in Q4, increasing margins, great management team.  We'll continue to do what it takes to grow the Skype business.

Q: Will you sell skype?

A: As I said, it's a great stand-alone business, that doesn't distract us.  We'll pursue whatever path that allows us to realize the maximum value for shareholders from Skype.

Q: What initiatives are generating the best results? seller-facing of buyer-facing?

A: In a marketplace you have both.  WE MUST IMPROVE TRUST ON EBAY- I'm tired of the user experience being suboptimal,  We are going to continue to improve search.  We have a marketplace now with both auctions and fixed-price.  We're going to do more around category shopping experiences.

Q: On coupons - do you worry that you've trained the consumer to wait for coupons?  With MS funding a big chunk, will you need to take out that slack on the eBay P+L

A: I want to characterize our couponing into two buckets:

1. We are focusing more and more on how to drive greater share of wallet in current user base - coupons went to existing users, to try and reactivate, move into other categories, increase frequency.  Tracking short and medium term impact.
2. In Q4, it was a free-for-all.  We realized that offline retailers were going to be discounting and our small sellers couldn't compete.  We spent $100m on these kinds of coupons and marketing to help our sellers compete in a brutal holiday season.   

Q: Your coupon spend varies a lot intra quarter - what's up with that?!

A: Q4 was unique.  Typically in Q3, it will be driven by buyer-lifecycle.  We have data to now do couponing when it makes sense.

Q: The macro shift from TV to couponing - is that temporary while you fix the site or permanent?

A: Not saying we won't use TV ever again, but our highest short-term growth opportunity is to grow wallet with existing buyers.  Those things will also help attract new buyers so we're really focus on it - trust, ease of use, etc.

(SWAN) - I'll add that more of our marketing is going to expanding buying vs. attracting new users. (JD) so we're reallocating marketing dollars to 

Q: You send out surveys to your sellers, we read them - one thing that you sent out was around eBay offering fulfillment.  Are you going there?

A: (Joking) - since the day I joined eBay, my biggest desire is to have more bricks and mortars.  In this environment, that is a HUGE disadvantage.  What we WILL do is provide tools and incentives for our sellers to provide great shipping.

(SWAN) - To the extent we can, how can we leverage the collective horsepower of $60B goods going through systems.  

Q: If you look at the buyer mix, I assume there are more casual vs. regular.  Is there a risk to eBay that power-buyers move to a service like Prime?

A: Powerbuyers look at the total cost. They aren't fooled by free shipping, they look at total cost.  At eBay we went from 2% free shipping to 34% by encouraging our sellers to offer free shipping.  The casual buyer is more likely to be fooled by free shipping.

Q: PayPal - Rapid growth, some slow-down on ebay marketplace TPV, how do you think about how deep you can go 'on-eBay' and 'off-eBay', funding mix, etc.

A: Last year PayPal grew 9% penetration on eBay.  We think there's another 15-20% penetration potential.  Off-eBay it's really experiencing explosive growth around the world.  Becoming THE way to enable all ecommerce payments.

(SWAN) Funding mix - profitability is driven by:

1. take rate
2. cost of transaction
3. manage fraud loss.

Despite all the growth, margins haven't changed much.  Lots of options for consumers to fund transaction at low cost. BML is great for that.  Fraud loss - how do we get smarter, use data, etc.  We've made huge progress here and reinvesting it into programs to encourage buyers to shop online.

Q: BML is great for the consumer, but eBay has to provide it off the balance sheet, to what extent do you worry about that fact slowing the growth?

A: (SWAN) It helps to have a great balance sheet with strong cash flow.  So BML gives us a unique ability to leverage that.   JD jokes - if that fails, we could always go get TARP money.  I'm kind of joking, but we have an interesting way to offer credit in real-time.  We are not near needing TARP, but we have a lot of potential in this business.  We both feel better about this business than the day we bought it.

Q: Do you worry that BML hasn't been through a downturn that it will assess what the bad-debt levels will be?

A: (SWAN) The team's ability and algorithms have demonstrated the ability to manage credit more effective than anyone else.  Credit is granted on transaction by transaction basis.

Q: If I were an investor new to eBay - I might come away with the impression that you have protected margin in the core business vs. growth.

A: Our focus is in driving value - improving competitive position and growing.  That's not at odds with reducing costs.  Examples: BML will impact PayPal's margin, will bring it down, but it's the right investment to make.  Skype we made a tradeoff in ubiquity and margin.  In core eBay we've funded the investments through efficiencies.  Going forward we'll do what it takes to improve competitive position.

Q: Out of the three businesses - it feels like you have prioritized growth in paypal/skype vs. cash in marketplaces.

A: No, I was clear when I took over that marketplaces needed to make some fundamental changes to improve it's position.  That's what we did last year.  Some would say, you should have gone further.  Our community said, 'you're going to fast'. We'll continue to be aggressive.  

(SWAN) this is a business that's doubled size, cashflow in last three years and yet is more diverse.  We've done this with advertising that is very high margin and helps buyers find things when we don't have the selection they are looking for.

Q: It would be nice to bring that European cash back and do a share buyback.

A: (SWAN) we have a little over $3b in cash, but it all sits off-shore.  We spent $1.6b to strengthen our businesses.  We bought back $2.2b of stock last year.  You can expect that kind of activity from us going forward too.

(JD) no repatriation coming.

Q: (audience) You did buybacks when stock was at $50 - it wasn't very effective with stock under $12.  Skype - when do you really fish or cut bait on this?

A: (JD) Skype biz is getting stronger. We'll maximize its success and value.  No hurry to do anything other than grow.

(SWAN - joking) Thanks for reminding us that we overpaid in the buyback (laughter).

Q: (audience) The next speaker is Microsoft - how do you think eBay survives being usurped from a Google, Microsoft, Y! brand - how can eBay survive with these bigger companies?

A: When we look at the market we see several thing son the 'net:

1. Finding things on the net - microsoft, google investing here.

2. Buying things - search is a bad way to buy things, doesn't give you a great experience.  We see online/ecommerce moving to the offline model.  If you think about wal-mart, they are largest in world and only have 4% share.  So we don't see ecommerce being winner take all.  We will be a winner.

3. Pay - payments will go the way of offline - with only a few networks.  PayPal

4. Entertain - we don't play here.

5. Communicate - Skype is a player, not sure how this plays out, but we have a bet here.

Q: Feels like search+buying are blurring

A: Our job is to make it more fun to shop and have a great buyer experience.  With our unique formats, we have shopping experiences that aren't replicated in search. Buyers don't want to click on a bunch of URLs to search.

Q: When do you think your search engine will be at the level that sellers could list near infinite inventory?

A: We laid important foundation in 08 with Finding 2.0+BestMatch.  Even more importantly we reduced insertion fees on fp30 in-essence down to zero, or minimal.  So now sellers can very cost effectively load ALL of their inventory.  In fact our selection is way up.   We just enabled search to be sorted by popularity.  We'll get better and better at using data to factor in which items to put at the top of results.

Q: Is being close to zero optimal vs. zero?

A: A little bit of skin in the game from a seller is very important to drive quality listings.

Q: Are we at the end point of that, or is the end-point zero, vary by category+country or ?

A: It won't go up, but there's nothing planned this year on this front.

Q: Analyst day is March 11th, should I still come?

A: Yes!

Q: China strategy, will Alibaba compete with you elsewhere - say Japan?

A: Our China strategy is to JV with Tom Online. CBT (cross border trade) from China is exploding, slowing down a little bit now, but Paypal is on-fire.  Jack Ma has done a great job in China, can't speculate on their plans outside of China.  We have the best CBT model around thanks to Paypal and eBay.  15% of eBay is CBT (new metric for me)

Q: (audience) What about local?

A: Online classifieds are growing aggressively.  We own 28% of craigslist in the US. Outside the US we are the leading classifieds player in several countries. Saw 50% growth in the business.  We'll focus a lot more attention on the area of local - natural extension of online.

Q: Do you see the GMV split between auction/fp moving to overwhelmingly fp?

A: As you said, consumers are driving how they want to buy.  The fact we are 50/50 is what consumer drove.  We held it back up until last year.  In order to have best marketplace, we need multi-formats.  What we're seeing more and more is Local.  Our approach is to try and expand the number of formats to give buyers and sellers greatest choice.  The choice will be driven by buyers and sellers.   This is a big change from what was an auction business to a multi-format marketplace.

SeekingAlpha Disclosure: I am long Google and Amazon

eBay / Microsoft Live Cashback is back!?

Several readers noticed that it appears that the Microsoft Live cashback program is back.  This program was introduced in June of last year and then ramped up significantly during the holiday sales season. Since about December 18th, it's been dormant.  Last year the program started around 10% and then at it's peak ramped as high as 30%.  This caused a veritable feeding frenzy in Q4 with buyers going crazy for the program and we saw material usage of the program in the period from Black Friday through December 18th.

I checked and today it appears like they definitely have turned the program back on at the 8% level. 

Here's a screen shot from today - 2/27/09 that shows a Nintendo wii ad with the 8% offer from eBay (paypal and other restrictions apply as before):

What does this mean for you?

This has several implications:

• Implication for sellers: If you had some Live instructions in your listings you took out, you should re-add those.  At ChannelAdvisor we created a template with detailed instructions that you are free to leverage in your listings.  The template is here.
• Implication for buyers: Time to get re-educated on the various rules and ways the system works.  Personally when buying, I like to 
• Implication for Wall St:  I've talked to many analysts that follow eBay that were concerned that there would be a y/y situation created by the boost eBay enjoyed from the cashback relationship.  Since it looks like the program is back, even if it is at a lower level, that could be viewed as a net positive.  

While 8% isn't as good as 20-30%, in this environment everything helps so personally as a buyer, I know I'll take a look at using the program where it makes sense.

SeekingAlpha disclosure - I am long google and amazon

Episode IV - A New Hope (for eBay) -or- How to Fix eBay? -or- Introducing eBay 2.0

This is the fourth and final (phew!) episode in a four-part series:

Episode I - Q408 in-depth analysis - available here with Q+A covered in an addendum (IA) (link)

Episode II - Introducing the ChannelAdvisor Ecommerce Framework (CEF) (link)

Episode III - eBay, Amazon and the CEF (I had to split it into to parts A (eBay) and B (amazon) )

Episode IV - How to fix eBay (you are here) - A NEW HOPE - Introducing eBay 2.0

Before we get started, I wanted to make a couple of editorial comments as I am alternatively accused of being either an eBay cheerleader/shill or an eBay hater depending on phases of the moon and what-not.  eBay is a small investor in ChannelAdvisor, they have no say/control/input in what we do, what I blog, say, etc..  eBay is very important to our customers as well as represents 10-100% of their ecommerce business.  All of that being said, my goal in writing this is three-fold:

1. Educate the thousands of eBay sellers out there to what's going on with eBay, with real solid data and not speculation or mud-slinging.
2. I've been part of the eBay world since 1997 or earlier -first as a buyer and then as an entrepreneur in the eBay ecosystem with two companies.  For us 'old timers', we know that eBay had something special going and now its painful to watch it fall apart, slipping through everyone's hands like sand.  Some folks in the press have drawn the comparison of the relationship between complaining sellers and eBay to be like that of an abusive relationship.  That may be a fair criticism, but the way I look at it is if you had some ideas to turn this thing around and it was important to you that eBay not crash and burn, you should do something about it. I'm as frustrated as everyone else, because I believe the strategy outlined here has been in front of them for 5yrs and they just don't seem to either get it or be able to execute (or both).  eBay was something special, and can be again.
3. I have a personal policy to never criticize something unless I also have a viable solution.  I am presenting here what I believe is a very viable solution for eBay to solve all of the problems that I harp on.

The fact that if eBay does pull out of the death spiral that it would be good for ChannelAdvisor's business is icing on the cake for me as we're prepared for the worst and we counsel our customers to do the same.  It's also very painful to watch a good chunk of the millions of people that make a living or considerable secondary income go down with the ship in the last year.  I sincerely hope these folks can be brought back into the fold or at least find another way to supplement their income.  Part of eBay 2.0 is bringing them back as you will see.

Finally, the ideas in this post are a mixture of inputs from hundreds of eBay sellers, buyers that I meet in my travels and lots of internal discussions we have at ChannelAdvisor.  I also stay in touch with quite a few ex-eBayers and my thoughts have been shaped by many of the things they reveal about the inner workings and culture of eBay.  Some existing eBayers will talk about these concepts off the record as well and I've bounced many of the ideas off of them, but not the whole enchilada.  This is the first time I've put pen to paper to attempt to amalgamate all of the solutions into a cohesive vision I call eBay 2.0.  I'm excited to hear what everyone thinks and to hear your ideas of where I'm right, where I'm wrong and most importantly if you think this plan would save eBay.  

This eBay 2.0 post is organized into the following sub-sections:

• Background - Some of the rationale for why we need eBay 2.0 and how I got to my approach.  If I were pitching a venture capitalist on eBay 2.0, this would be the 'market opportunity' section.
• The Pitch - eBay 2.0 - Introducing eBay 2.0 - the New Hope.  If I were to meet you for 5 minutes at a trade show, this is the quick 'elevator pitch' I would use to describe eBay 2.0.  Some would call this the executive summary.
• eBay 2.0 - Foundational Changes - Some foundational things eBay would need to do ASAP to start down the path of eBay 2.0 and have a high probability of both doing it quickly and successfully.
• eBay 2.0 - Meat and Potatoes - The details of what eBay 2.0 would look like, fees, etc.
• eBay 2.0 Use Cases - In engineering we always act through a couple of 'use cases' to illustrate who our customer is and how our software will serve them. 
• eBay 2.0 and the CEF - Here we run eBay 2.0 through the CEF quickly to see how it fares. 
• Conclusion - it's a wrap. 

This is a long post. Fixing eBay won't be easy and it's worthy of some verbosity to make sure we get it right ;-)  
  

Background (or Market Opportunity)

If you've been reading along, I hope the following position statements are mostly review for you:

• eBay has large scale, but is declining substantially while ecommerce and competitors like Amazon are growing.  This is due to Amazon's out-execution on 5 important dimensions: selection, value, ease of use, trust and merchandising.
• eBay is in a dire situation. Choose your metaphor - Rome is burning, the Titanic is sinking, death spiral, wings are off the plane, etc.  eBay must do something drastic within the next 6 months or as I showed in Episode I, they not only will be surpassed by Amazon, I believe their only option as a company will be to either split into pieces or sell to Microsoft or (long shot) google, Y!, etc.  Billions of dollars of shareholder value have been lost, more could be on the way if something isn't done.  The time to act is now.  Analysis paralysis is not an option.  Mis-execution is not an option.  
• Ecommerce is a huge market and there is room for a healthy eBay and Amazon.
• Amazon is on the precipice of becoming as powerful in ecommerce as Google is in search.  It's healthy for them to have strong competition and for sellers to have two healthy options. We are not on that path.  
• eBay's strategies of 2008 are not working and if they continue down the path of further 'amazonification', their problems will amplify vs. improving.  In other words, eBay can not beat Amazon at their own game, they will lose this battle.  I'm reminded of a quote from Jack Ma, CEO of TaoBao/Alibaba (eBay's competitor in China who kicked their butt left and right and then kicked them completely out of the country) - "eBay is a shark in Pacific Ocean and Alibaba is a crocodile in the Yangtze River. Competition is not the same as a battle. In battles, one has to die, only must survive."  The eBay shark is heading to the Amazon piranha, and it ain't gonna be pretty.
• Many insiders have told me off the record that eBay wants to fit a niche they see 'in-between' Amazon and Craigslist.  There's even a much talked about secret twitter post that I've gotten multiple verifications is really from a distraught eBay VP.  I'm with this VP - this is a terrible strategy.  Why would you ever want to fit 'in between' something.  eBay should try to crush them?!  WTH?!  In my following eBay 2.0 strategy, eBay competes with Amazon by playing a bigger game, not a smaller game.  This 'in-between' strategy freaks me out because it's like Circuit City trying to fit 'in-between' Wal-mart on the low end of electronics and Bestbuy on the higher end.  That worked really well for them, eh?  This is like saying: "Hey my strategy is to fit between a rock and hard-place - sound good? "

Given these realities, what should the strategy be?  Well, let me walk you through two opportunity areas that I think eBay has a closing window of opportunity to execute on as they are uniquely positioned to do so.  The first is the product lifecycle.

Opportunity - Product Lifecycle

If you recall in Episode I, I reviewed the long tail concept and how it relates to ecommerce and is strategic to driving 'selection'.  Another way to look at ecommerce is the product lifecycle as illustrated in this graphic:

You can pick your favorite product and understand how it goes through this cycle.  I usually use ipods, laptops or digital cameras because most people have gotten caught up in the lifecycle in one of those categories. There are four sections to the product lifecycle:

• Introduction/New - a product is new and just out.  When this happens, it usually pushes the predecessor product into the end of life bucket.
• In-season - the product has been out for a while and is really hitting its stride. This is where most of the margins and sales come from.
• End of life - The product is being replaced by a new product and is not leaving the market for the most part.
• Liquidation/vintage - The product is liquidated or there are some left out there, but they are either kept in new condition, used or refurb because there is still demand for them.

I frequently like to marry the concepts of the product lifecycle and the long-tail. If you envision the back end of the product curve going out for miles, that's really the long-tail.  In other words, there are many more products that have come out in the last 10-30 years than are out right now and 'in-season'.  Also, I think an important part of the lifecycle that is often overlooked is what I call 'local' and what eBay calls 'classifieds'.  At some point and for some categories, there can be a benefit to both buyer and seller to search and transact locally.  Why ship a couch when there's one 2 miles away.  Why buy an old desktop computer from 500 miles away, when there's one from some local business?  As the long-tail goes out, local becomes important.

Today, craigslist owns the local long-tail (for products as well as other stuff), Amazon is well on the way to owning the in-season and introduction buckets while extending into the back half of the curve (you wouldn't believe refurbed iPods our customers sold this holiday on Amazon - trust me they are eating into that part of the curve). This graphically demonstrates to me that eBay's rumored strategy for being 'in-between' Amazon and craigslist is faulty. 

I think the REAL opportunity is to be the only company to cover the entire product lifecycle.  eBay is uniquely positioned to do this and that's the foundation of eBay 2.0.

Each part of the product lifecycle has a natural fit to a couple of buying formats that is also part of the eBay 2.0 thinking:

• Introduction - When items are in short supply, auction is the best format to extract value from that inefficiency.  Fixed price maybe the way to go later on with possibly offers.
• In-season - Very few people want to mess around with auction for in-season products.  Fixed price is the way to go. 
• End of life - Mostly fixed-price here, but potentially some auction if someone is liquidating and a value-consumer could find a good deal by investing some time.
• Liquidation -  Mostly auction as you have no idea what this stuff is worth.  Sometimes you do though, so maybe some fixed-price.  As for local, fixed-price may work if you just want to get rid of something, but have you ever sold something on craigslist and 40 people call you?  Hmmm, auctions would have been nice in that situation wouldn't it?

I also believe each buying format has a natural search order:

• Auction - Auction buyers are driven by serendipity.  Even when they are searching, it is to help them stumble up on something interesting, not because they are specifically looking for widgetX.  They like to see what's new, what's hot, etc.  But most importantly they want to see things in Time Ending Soonest (TES).  Ah TES, how I miss you.  I never thought your simple algorithm would be so sorely missed, but I find myself constantly fighting BestMatch, slogging through ads and featured crap to get you back to no avail.  Auctions are not the same with the vintage 05 TES.
• Fixed-price - recent sales or popularity is important
• Local - Local shoppers like to see what's new - so 'recently listed' is the way to shop.  They also use serendipity, but are very sensitive about getting to the newest stuff before someone else has.  Ever had a garage sale start at 8am and people are at your house at 6am?  

These three search orders are immutable to me - meaning that if you mess around with them, you get bit - hard.  BestMatch's attempt to hodge-podge auction TES, seller quality and fixed price recent sales into a jumbly mess has been nothing short of a train-wreck for everyone involved.

Another important point that's part of eBay 2.0 - I don't think that seller performance should factor into search results ordering.  It just doesn't work because it confuses the buyers, kills sellers and tends to reward bad behaviors.  Search is search and performance should be treated separately (more on this later). Search is for helping buyers find stuff.  If you have bad sellers, well, don't put their items in search at all.  Does this seem like common sense to everyone or am I crazy?

In addition to the product lifecycle, brand is an important area eBay can leverage that they haven't done 'right' to-date.

Opportunity - the eBay Brand

Now, I don't have a fancy MBA from an ivy league school and I haven't worked at any of the great brand companies out there like Mattel, P+G, etc. and I sure as heck haven't been at McKinsey or Accenture or Bain.  But I do like to drink soda (or pop for you mid-western readers) and a great case study I want everyone to think about is New Coke.  You can read a fancy MBA paper about it here.

eBay 2009 is New Coke.  They've taken the eBay brand that is 99% known for auctions and they've jammed fixed-price into it so much so that consumers are leaving, spitting out the vile tasting stuff and heading over to Pepsi (Amazon) because at least it hasn't changed and you know what - it's actually pretty good.

This affinity between eBay and auctions (or call it the flea market) with consumers is a core component of the eBay 2.0 strategy and in fact I think they can extend the eBay brand, but not to fixed-price/in-season.

You may recall an experiment eBay had called eBay Express where they tried to extend the brand with a different fixed-price site, but failed.  Ex-eBayer, Adam Nash, had a great eulogy and behind-the-scenes view of what happened that I recommend everyone read to see his perspective.

I always likened eBay Express to diet donuts.  It just isn't an extension and you are admitting that, well, if you have an eBay express, that makes eBay - what- eBay slow and poky?  There were other problems too that Adam details, like they didn't send it any traffic and small things like that.  Also the way the inventory worked was all jacked-up, it was a sub-set of fixed-price items on eBay (what?!).  I've read all of Adams thoughts on eBay Express and chatted with him before on what eBay's doing wrong/right and many of his ideas have found their way into eBay 2.0. (BTW, eBay needs to get this guy back.)

As I've said, eBay is auctions in consumer's minds.  So why fight it?  If eBay is going to be our 'cola', then let's use a different brand, as Coke co does with Sprite, for our new citrusy soda (fixed-price).

While the eBay brand won't extend to fixed-price, I do think eBay has a Coke Zero/ Diet Coke opportunity to extend the brand to local - PLUS this gives us a good reason to put a bullet in Kijiji (the Tab of the family), but I digress.  eBay has always tinkered with local, but never done it right.  By extending eBay into Local, I think they could take this segment back from craigslist (well except for all the sex stuff - craig can keep that).  I speculate one of the reasons they've never done this is craigslist' revenue is very small because it's mostly free to sell things.  While that's a good point, by pulling in the local selection, you have a unique opportunity to out-selection even Amazon.  While you may not make direct revenue from Local, the expanded selection will bring people to the other parts of eBay 2.0. 

With those opportunities in mind (and the New Coke case study), allow me to introduce you to....eBay 2.0

The Pitch - eBay 2.0

(editorial note: I'm going to do this pitch in first person {as if I were eBay} because it helps me think through and articulate the pitch, not because I am eBay.)

Buyers want to shop how they want to shop.  Some like the instant gratification and convenience of fixed-price shopping for new, in-season items, some like auction deals, some prefer local merchandise, some want a combination of fixed-price, auction, local at different times depending on what is available when and where and at what price.  It also could depend on how urgent the buyers need is.  

eBay 2.0 gives buyers what they want - unprecedented buying formats, selection and value across the entire product lifecycle and the long-tail.  

Buyers get to choose the best experience for them through one of three sites:

• eBay classic - Classic auctions that you know and love with some new enhancements and more trust via PayPal.  We hear you loud and clear - we have taken out fixed-price and stores and given you pure auctions, just the way you want.  The New Coke days are over and we're back to Coke Classic.
• Shopping.com 2.0 - Our fixed-price, convenience brand, with buy-it-now items from many of the sellers you already know and love, with some interesting new offers from larger retailers.  If you've ever used the old shopping.com, this is a much different site with an explosion of inventory at great values.
• eBay Local - The eBay experience you know and love, but with the local flavor of a craigslist..  PayPal makes it safe, so you don't have to worry about all the dodgy characters hanging out on a site like craigslist.  

As you shop, we'll surface different items that may help you, but we'll always let you choose how you want to shop based primarily on the site/brand you start with.  We'll never spam you with ads or things that aren't relevant and helpful to what you are looking for.

To improve ease of use, we've enhanced PayPal to be the common payment and trust system for all three sites. With one powerful, yet simple, PayPal account, you have easy access to everything - no need to re-register or enter the same information over and over. Where appropriate, we've also integrated the new 'PayPal Cart' so if you want to add a fixed-price or local item to, say, an auction purchase, we make it easy!  We even have the new 'PayPal FreeShip' where with your $100 subscription, participating retailers offer free 2day shipping at no cost to you!

We realize it's 2009 and we've added tons of 'web 2.0' enhancements that let you leverage your social networks, your mobile devices and the latest technologies to enhance your buying experience and add value.

 

eBay 2.0 - the only solution that brings you massive selection (intro, in-season, end-of-life and liquidation PLUS local), values (because you see everything, not just one site), formats (fp,auction, offers) with PayPal-powered trust and ease of use.

That's the pitch. If you think this sounds good, here's how eBay should go about implementing it.  First with some foundational items and then the meat and 'taters as we say here in NC.

eBay 2.0 Foundational Changes

Before eBay the company can be successful with eBay 2.0 the concept, some foundational changes need to be made ASAP.  I'll try to keep this short so we can get to the details of how I envision eBay 2.0 working.  But I do want to emphasize that I don't think the eBay 2.0 concept would get done or work until these things foundational changes are made:

• Culture change.  eBay has to undertake a massive culture change that includes: 
  • Ditch the corporate jet(s) - In today's world, executives look terrible drinking champagne on their corporate jets while their customers, employees and shareholders suffer.  Ask the CEO of GM how well the corporate jet went over on his last trip to DC.  Plus you always have pictures like this haunting you.   Do you really want to be jetting to Davos while Rome is burning or right after a bad quarter?  And yes sell it/them on eBay.
  • ReOrg - Today eBay is organized around buyer and seller. That is really complicated to me because every buyer interaction touches a seller.  If you want the search engine to do something with say, shoe size.  Guess where that shoe size is going to come from?  Yep, the seller.  I don't know enough about the internal org at eBay to hazard how to org this, but in eBay 2.0, I suspect you would pick out a foundation/core team to build things used by all three sites and then have a eBay classic team, a local team and a shopping.com team.  These would look much different than the teams there are today and be lean and mean so they could execute rapidly.
  • Treat sellers like customers -  There's been lots of lip service to this and not a lot of action.  That needs to be swapped.  Heck, I would ban the word seller and I would make everyone say customer or partner as a reminder of a new world order.
  • Streamline - It takes forever for decisions to be made and executed on at eBay. I don't know why, but it needs to be streamlined
  • Agile - Parts of eBay's engineering team are agile, others use a 1990's waterfall development methodology with all kinds of old-school trains, train cars, seats and junk like that.  All that needs to be ripped out and replaced with Agile/Scrum
  • Variety in the workforce - eBay is a two class system.  There are Harvard, Stanford, Yale, etc. MBAs that call all the shots and then there are worker bees.   Many worker bees end up spending weeks on presentations that the MBAs slam and redo.  Smart people in the ranks without ivy league MBA are passed over while wet-behind-the-ears MBAs that don't know the business are hired and pass over non-MBAs quickly and then leave for VP/CEO gigs.  There are also too many business consultant lineaged people at eBay.  You can't throw a stick without hitting a room full of McKinsey/Bain/Accenture consultants, they have lots of great ideas, but can't seem to execute.  eBay needs more Jeff Jordan, roll up their sleeves, and GSD, execute execute execute type of people right now.
• Mea culpa - Like New Coke, someone at eBay (JD would be first choice), needs to admit it was a mistake to change something everyone liked, and that we all miss eBay classic and are BRINGING IT BACK - HOORAY!
• No ads - period.  eBay should focus on one thing - GMV.  That's the sole driver of revenue, margin and success for buyers and sellers customers.  Ads are a distraction and not in line with that goal.  I'm talking everything folks - the stupid mortgage banner ad, the irrelevant text links, the weird little things low on the page, the ads splatted in emails randomly - all of them need to go.  They take valuable buyers off the site and compete with sellers partners and MOST importantly the erode trust and value of the site.  The only time ads are acceptable are if they are for off-site products, like shopping.com's CPC network or ProductAds from Amazon.
• Nuke or sell lots of stuff that doesn't fit in - Skype, StumbleUpon, Prostores,  Microplace and half.com. These are not a focus. Buy-bye.
• Fees -  eBay doesn't seem to ever understand that their fees are just crazy-high right now and cause the prices on the site to go up.  Thus in eBay 2.0, fees come down substantially and many that are additive, have discounts - like PayPal.  If I sell in the family of eBay 2.0 sites, I should get some benefit vs. someone not doing that.  Lower fees will actually increase revenue (counter intuitive, but it works).  Prices on the site will come down, GMV will accelerate, revenue will follow.  Overall, eBay's take rate of 12% needs to come down to about 8% - You'll see where each sub-site needs to be IMO.
• Consolidate ticket category and make it 100% Stubhub - why haven't they done this yet?! 
• Nuke travel and real estate and partner with someone instead.
• Wall St -  I'd do a speciall call and tell Wall St. they are hitting the reset button on the entire business.  There's risk in doing it, but the risk in not doing it is greater. I'd then outline the eBay 2.0 opportunity and a roadmap for how we're going to deliver it quickly.  Everyone knows this needs to be done, the stock would pop 20-40% on this news alone IMO.
• Become a platform and learn how to partner -  A big win for eBay 2.0 needs to be an open platform.  eBay has messed this up for the last 10 years.  They worry more about 'what if someone builds something big on our platform' vs. 'I hope someone builds something big on our platform'.  eBay's a very hard company to partner with as any CSP will tell you.  They need to set a high quality bar too. If eBay were running the iPhone app store it would all be flatulence applications and other wacky stuff, but they'd turn away someone serious as that could be 'risky'.
• Search - Search is the cornerstone of online shopping and has to be crisp with no advertising.  Things like featured listings also taint the experience and the short-term win of some extra advertising $ do not outweigh the long-term loss of sales by not helping buyers find what they are looking for as quickly and easily as possible.  Featured listings are not analogous to Google sponsored listings, that argument doesn't work for me.
• Sellers are a strategic asset, not a liability (had to do this one twice and use some bold here). Say it with me: Sellers = selection. Selection = winning.  Winning = good.  Therefore sellers = good, not bad.

Finally, adopt a guiding mission statement that anyone can understand in and outside the company.  Lots of eBayers are confused, not only because eBay is doing a lot of confusing things, but because there's no real mission there.  Let's start with  this: eBay 2.0 - Selection and value for fixed-price, auction and local products.  This helps everyone understand that the top priority is selection and value.  Ease of use and merchandising and trust are up there, but not in front of selection and value.  No Skype isn't part of this mission statement.

Once these items are taken care of, it's time to implement eBay 2.0.

eBay 2.0 - The Meat and Potatoes

In this section, I'll outline each of the four main components of eBay 2.0 and some key points each will bring to the table that stitch together to implement the eBay 2.0 concept.

1. PayPal

In eBay 2.0, PayPal expands from a payment system and adds a unified account system for all the sites as well as the feedback system, cross-site cart (could be extended to any retailer) and possible shipping promotion engine.  While eBay views PayPal as a payment system, I think it has the opportunity to become what I call an 'ecommerce federator' and that's the thinking that drives many of these features that would either move into PayPal or need to be innovated.  In short, Amazon's success isn't going unnoticed by other retailers.  Thus, PayPal has an opportunity with the items I'm suggesting here and more to build some interesting 'cross-ecommerce-site' technologies that give member sites an advantage and take many of the Amazon 'wins' and make them cross-ecommerce which makes them more powerful than an Amazon-only technology.  With that in mind, I use the lingo 'in network' to mean - one of the three eBay 2.0 family sites I'm proposing (eBay classic, shopping.com, eBay Local) and out of network means any other ecommerce site that is integrated with PayPal.

Here's a little more detail about each:

• Common registration/account system - Registration on eBay today is a complete goat rodeo and everyone knows it.  It's been this way for 5+ years and eBay hasn't done anything to resolve it and in fact seems to make it worse over time.  Everyone has to double register for everything (eBay/PayPal) and the worst part is if someone (buyer or seller) is kicked off the site, eBay lets them right back on to continue whatever shenanigans they are up to.  Moving all of the registration/accounts into PayPal solves all of these problems  because you tie it to the payment system which is the single most trackable and lock-out-able datapoint.  It also is convenient for buyers and should pull some non-eBay buyers in as they are automatically 'pre registered and approved' to shop on the eBay 2.0 family of sites!  This would look a lot like Google's account system that lets you access 10-20 various systems/sites/applications with one handy login, but could be even more powerful when you think about the extra-eBay network that PayPal extends to. Oh yeah, BML should be in here too.  The PayPal registration system needs to be like Fort Knox for sellers - requiring a key fob and things like that.  For buyers it needs to be state of the art with some online-banking like security.  PayPal is far behind on this today, eBay is further behind.
• Feedback system - Feedback should be moved from eBay and put into PayPal, thus becoming portable.  Portable feedback creates a more valuable system for everyone involved - buyers, sellers and PayPal/eBay.  Imagine being able to buy from a seller and see their feedback on eBay classic, shopping.com, eBay Local and even their ecommerce site.   
  • By the way, DSRs go away and are replaced with something totally different that isn't a buyer survey, but is a calculated seller performance rating using data collected by PayPal.  PayPal knows when you ship, it knows when buyers aren't happy, it knows if you've been good or bad and thus should be the driver of seller performance.  There should be tough but fair rules put in place that are enforced.  Once you are kicked out, you have one chance to get back in and are in a trial phase with limitations.  If you blow that, you are gone for good - period.  The registration system keeps you out for good - both buyers and sellers.
  • Buyer performance is also monitored here - I don't think we bring back negs for buyers, but a seller can be able to look at some buyer rating and not accept transactions from someone that isn't at the level they want to deal with.  If buyers do anything fraudulent, they are out for good.  Period.  No constant reregistration, re-fraud, that is rampant today.
• Cross-site cart -  By having PayPal at least in brand as the provider of a cross-site cart (eBay classic, shopping, eBay local), you give users some interesting ease of use by being able to mix and match a lot of different types of things they may want to buy.  You could even extend this out of the network for some interesting benefits.
• Returns/customers mitigation - By consolidating all buyer relations here, the seller can have one single place to deal with this both in network and out.
• Wishlist - Cross-site wishlist should live in PayPal. You'd start 'in-network' (eBay classic, shopping, eBay local) and move it to other sites as well.
• Shipping promotion engine -  You could leverage PayPal to first implement an Amazon Prime like program for the eBay family of sites, but later, I think you could extend this to other ecommerce sites.  It doesn't make sense for every ecommerce site to implement this and there's a huge opportunity for someone to come along and federate this.
• Cross-site recommendation engine - I believe PayPal, at least in brand could be an interesting innovative area to think about recommendations.  Amazon can build recos based on what you buy - at Amazon, PayPal has the potential 
• Etc. - I think there's about 10 more things I would add here, but you get the idea. 

In eBay 2.0, PayPal is the glue that holds the whole thing together.

2. eBay Classic - the auction brand is back!

Here are the steps we'll take to bring back the auction business that is currently on a steep decline:

• No more fixed-price listing type (They move to shopping.com)
• No more eBay stores (they move to shopping.com stores) 
• No yellow buttons, no spammy emails. No emails with clickable links. 
• We keep auction listings and all their features like BIN, offers, etc.
• There is no catalog - everything is free-form, even media.  Sellers have total control of merchandising - good and bad. 
• We revert to the 2004 pricing model - but take a point or two off the FVF and look at category-based listing fees.
  • Keep free gallery and make it free supergallery - why did they ever charge for this? 
  • Free subtitle - why charge for something that helps sellers sell stuff? 
• We look at reserve auction fees as that model was broken years ago. 
• We bring TES back as the default search and still offer others, but TES is the default. Welcome back serendipity shopping!
• We nuke all ads (banners too!) and featured listing types. 
• We've nuked DSRs (see PayPal section) - we need to offer amnesty to all sellers  that were kicked off due to DSRs - there needs to be some thought here and data analysis (I don't have the data), but my sense is anyone kicked off for a low "shipping and handling price" should come back.  Others, maybe not.
• We beg Bruce@emovieposter to come back and we treat what I call the 'auction traditionalist' with respect as they add very important and strategic SELECTION to our business. 

Now we're back to a vintage 04/05 eBay and auctions should come back alive and start growing.  Next we'll add several things that have been sorely missing for years:

• Extended auctions option at seller's discretion  - Buyers (except for snipers) hate sniping.  There's nothing worse than getting into an auction to have someone swoop in with 1 second left and defeat you. Thus sellers will have an option to extend auctions for X minutes if a bid comes in for Y minutes, until bidding stops.  This will make bidders happy as they will at least get a shot (they can be notified by SMS, fb, tweet, rss, email, etc. that they have x minutes BTW) at staying in the game.  Snipers will hate this, but that's ok.  They can go over to shopping.com if they want a guaranteed win.
• PayPal benefits - All the chaos caused by bad registration, return and other policies will be cleaned up by PayPal 2.0 above.
• PayPal fee discount - PayPal fees for eBay classic will be half of those on other sites to encourage sellers to price their items as low as possible and pass that value on to consumers.
• UPIs - They have to go away.  Either eBay guarantees the transaction or PayPal or something.  The poor registration control feeds into this. This is a 10% margin drain on sellers and needs to go away. 

Overall, I think the eBay classic take rate should be 7-8%, with another point or two for PayPal.  That will encourage some serious value on the site.  I do think the auction model benefits from listing fees so I would keep them in this site.

I'm sure there are some other things we would want to tweak here, but this is a good start.   As people search and browse on eBay Classic, we will, where appropriate, surface some Shopping.com and eBay Local items, but always in a value added way - not in a spammy way.

You'll know this model is working when Jay Senese's onecentcd auction business makes a come-back and we have a vibrant media category.  If we do that, coins, stamps and all that other great stuff will have come back too.

3. Shopping.com - our fixed-price brand

Here are the steps for Shopping.com:

• We transition away the current CPC model and go to CPA (FVF only in eBay-speak) (shopping is on a 50% y/y decline path anyway, might as well scrub the whole dang model and start over)
• Get rid of all ads - yes even banners. 
• Everyone has to at least take PayPal.  
• You get the benefit of all the PayPal stuff above (cart, common accounts, feedback and what-not)  
• Retailers that join the PayPal registration system may get some added exposure 
• Value wins - items tend to be sorted by lowest price 
• There maybe a recent sales orientation somewhere or an option in the search engine to find 'hot deals'  - maybe a little 'top sellers' box with 2-3 listings max above lowest price sort.
• The shopping.com inventory consists of:
  • What is today called eBay stores moves to Shopping.com stores and is here under this brand 
  • The 30-day fixed price listing lives here. 
  • No GTC to keep the inventory fresh 
  • Any large retailers that want to convert from CPC to CPA (most will, you'll see an explosion of inventory from this if you keep it simple) 
• Fees at shopping.com need to come out in the 10-12% range with PayPal.  8-10% without.  Category pricing with maybe a very little (pennies) listing fee to keep junk off is what I'd start with.
• Maybe some kind of way for trusted/larger fixed price sellers to pay $200/yr or something and get out of listing fees all together.  
• Tons of user generated content - shopping.com is the repository for the entire eBay product catalog and thus you need some very rich content here.  If someone wants to auction off something with an entry in shopping.com's catalog on eBay classic, it's linked to here. 
• This site needs retailers working for it focused on categories with a relentless drive to increase selection.  Shopping.com has to be THE most comprehensive listing of products on the internet. 

In addition to the above, sellers must provide details on their tax rates, shipping and handling options+costs, returns, etc..  Sellers are able to offer a variety of different coupons that would be listed right here and taken automatically at checkout and factored into the search/cart/checkout.  Thus sellers can have lots of flexibility on running promotions without having to nuke a bunch of 30-day listings.

4. eBay Local

Here are the steps for eBay Local:

• The site is very location aware.
  • On the web it uses your IP or a zip code - you can store several locations if you'd like. 
  • On your iPhone or mobile device it uses the GPS
• Integrated maps in the search results (think craigslist married to google maps like this cool mashup)
• eBay Motors local moves into here - it's actually pretty good, but not useful/used/known  as it's brand is hosed by the larger eBay Motors.  It also has very little inventory so that needs to change.
• Fees are free - only fee is if you take PayPal, standard or maybe even some local fees apply. Some categories, Motors, maybe there's a fixed-fee FVF for successful transaction where PayPal doesn't make sense.
• Search is recently posted oriented
• Community oriented policing of the site.
• Seller can opt-out of more national exposure if they wish. 
• Auction format is available - this causes the fees from eBay classic to apply. 
• Did I mention we nuke kijiji? 
• Random idea - Maybe you even loop in large retailers here with an interesting intersection of Shopping and local.  Wouldn't it be neat to see what's available from wal-mart and target near your house too?  This probably needs to live in something called Shopping Local - that's a eBay 3.0 thing though probably.  We did a test with Sears locally on eBay that actually organically did pretty well, but eBay failed to support the effort and it has been discontinued.  Consumers that could find the items got 50% off of appliances with excellent local delivery options too.

We surface these items in both eBay classic and shopping.com where appropriate.  Local sellers have the option to leverage the catalog in shopping.com into a local listing.  Have a collection of 100 CDs? Simply enter the ISBNs (or take pic with your iphone) and we'll pull the info into a listing for you.

When all of these pieces are in place, we'll run a huge online+offline campaign around the power of the new eBay - local, auction, fixed-price.  The internet's broadest selection and best values.

eBay 2.0 - Use Cases

Now you see in broad strokes how our four systems are designed, the following use cases will show you how they work together to drive value for buyers and sellers:

• I am a buyer looking for the hard to find Mario Kart Wii game.  I like eBay classic (auctions) because I hunt for deals and hard to find stuff  I bid like a wild-man and like the thrill of the hunt.  I start at eBay and see 50 results of auctions ranging from $10 to $40.  I notice in a little box in the results that shopping.com has the game for $39.99 BIN and someone in my town has it for $45 via eBay local..  This is helpful as I won't overpay for auctions - I hate it when I do that to later find the same thing is available somewhere else for $10 less.  After looking at the auctions I decide that I'd actually just like it locally so my kid (ok, it's for me, but I can't tell you that, can I?) can be playing a little Kart this afternoon, so I buy that way. By 6pm, I'm home crushing Princess Peach with Luigi.  Talk about instant gratification!
• I live in Columbus, OH and want a bike for my kid.  I go to eBay Local and find a gently used Trek for $100 that is only a mile away and they take PayPal - sweet!  However, I see that shopping.com has a small seller ediscountbike, with a newer model for $50 more and they offer 2 day shipping via PayPal ShipFree (I'm a member - I love that program!).  I decide to go with the newer model and trade-up.
• I am a Star Wars collector (geek!) and want to see the items every day that have over 10 bids (a great indicator of collectible-ness). I don't care about fixed price so I turn that off.  However eBay Local is interesting as me so I can find some things I normally wouldn't see so I set an alert for any Star Wars items within 50 miles over $100 that's newly listed to SMS me the second they are listed.  I love that I don't have to go through 1000s of irrelevant fixed-price listings for stuff not of interest to me.  We make it easy for you to turn 'off' fp.  I RSS to this or create a gadget for my eBay dashboard/homepage thingy (see last bullet) and also put it into my RSS reader, iGoogle or facebook to share with my other Star Wars buddies, or have it tweet you.  I can even put it on my starwars blog and make 10% of sales..  If something gets 40 bids, I want an SMS alert.
• I am a busy professional with no time for auctions or local (blech) and want a good deal, but it doesn't have to be 'the best'.  I use shopping.com because of its huge selection - it always seems to have what I want and it looks all over the internet so I don't have to.  I like the product reviews too because I don't have time to do a ton of research. I love the facebook integration as I can ask my friends what they think - I trust them more than some random reviewer.  Sometimes shopping.com recommends buy.com, others 1busyman, I don't care because PayPal makes it easy and safe.  This site has more selection than even Amazon, so I check here first or at least second, just in case. The S+H is clearly defined for me and I understand the return policies.  Shopping.com even identifies the best deal for me!  I can set price alerts if I want a better deal.
• I am a shoe shopper that wants only retailers that have free return shipping and a 6 month+ timeframe. I go to shopping.com, select that option and am only seen those choices.  I end up buying from shoebuy.com vs. Zappos because they have the shoe for 10%, less, but the same generous return policies.
• I'm a third party developer for seller software. I want to create an 'in demand' application.  eBay gives me all of the search data, wishlist, cart-adds, zero search results, etc so I can build this.
• I am a startup with a great idea. I want to integrate google maps, eBay local and eBay's sales data to show a map where products are selling over the USA and show pricing trends and tie it to weather.  eBay makes this easy through an array of APIs.
• I travel to my cousin's house in Columbia, SC and want to buy their kid a new stroller.  I whip out my iPhone, pull up eBay Local.  It shows me there's a stroller within 2 miles for $100.  It also shows me some other great deals further away, but I opt for the local option.  I go right to the buyer using the map and my GPS. 
• I am a powerbuyer.  We give you the 'eBay dashboard' where you can create a variety of saved searches, product alerts, deal alerts.  You can mix and match all the different formats.  I love that PayPal shipping and feedback works on all sites and elsewhere on the internet.

I was going to have some of our graphic wizards mock up some treatments of these use cases, but they are really busy and I think you guys get the idea.  Once you take ads off the site you get plenty of real estate to serve up relevant offers from other in-network sites and there are lots of great web 2.0 ways to do these kinds of things in an unobtrusive way.

eBay 2.0 and the CEF

Let's quickly run the new eBay 2.0 through the CEF and see how it does.

1. Selection - By leveraging a massive fixed-price site with low take-rate, auctions and local - eBay 2.0 has unprecedented selection.  While Amazon is good for non-local, primarily in-season items, eBay 2.0 gives me some really good items I never would have seen without auction and local.  eBay 2.0 is the only site in the internet that spans the entire lifecycle of products - even down to local!
2. Value - If you really want value, you can look at auctions and invest the time to win a great deal there. However, if you want to get something fast, shopping.com has done the work to find the lowest fixed-price item for you.  PayPal's shipping promotion is a huge benefit as you can use it on a Dell computer or anywhere on the internet!
3. Ease of Use - While not as easy to use as an Amazon, I do like that all three sites have many things in common - you don't have to re-register a zillion times, they have a unified shopping cart and checkout.  PayPal keeps all of your information so you don't have to re-add it all the time.  It's not Amazon, but it's light years ahead of eBay 1.0.   The search engine matched to the shopping experience is really handy. It's like it is thinking for me and helping me find stuff versus getting in my way.
4. Trust - By clamping down on re-registering bad guys, getting rid of spam-ads , you feel a lot safer shopping with eBay 2.0.  It's comforting that you can see a seller's feedback on all three sites, that makes me feel better.  I know PayPal has tough standards and kicks sellers out of ALL sites, for good. PayPal tells me how fast a seller ships which I find handy too.  The PayPal guarantee is air-tight and easy to use if I get in trouble. If I call the 800 number, I get a human.
5. Merchandising - After eBay 2.0, I think the PayPal federator model could be used to do some really creative things in merchandising that would have cross-internet implications.  That would probably need to wait for eBay 3.0 as our primary focus is on  Selection and Value - if we win those battles, we can start to fight work on merchandising.

Conclusion - If eBay builds eBay 2.0, will you come?

eBay needs to dump this New Coke and go to back to eBay Classic.  They also need to bring out a Sprite (fixed price/shopping.com) and extend the eBay brand to local (diet coke).  In addition they need to leverage the federation capabilities of PayPal to enhance trust and usability.  If they can execute on these pieces, I 100% know they will start growing as fast as ecommerce again, and maybe give Amazon a run for the money.  As a buyer, eBay 2.0 is the site I would use as the starting point for all my purchases.  There is nothing like it available today (yet). Yes, I'd check Amazon, but it eBay 2.0 would be in the consideration set for almost anything I purchased online.

But eBay must start down this path quickly.  Amazon could jump into this space quickly and Google has some great technologies for local that eBay can't match yet.  The window is closing, eBay needs to move...now.

eBay Strategies readers what do you think - will this concept of eBay 2.0 work?  Would you shop there?  Would you sell there? What have I missed?

SeekingAlpha disclosure - I am long Amazon and Google.

Episode IIIB - Amazon and the CEF

This is Episode 3B in a 4 part series.  Here is the outline for the series:

Episode I - Q408 in-depth analysis - available here with Q+A covered in an addendum (IA) (link)

Episode II - Introducing the ChannelAdvisor Ecommerce Framework (CEF) (link)

Episode III - eBay, Amazon and the CEF (you are here - I have split into to parts A (ebay) and B (amazon) )

Episode IV - How to fix eBay (coming soon)

The CEF looks at ecommerce across five strategic pillars:

1. Selection

2. Value

3. Ease of use

4. Trust

5. Merchandising

Amazon and the CEF

Here is a chart that shows the growth of amazon vs. ecommerce (more detail on this in ep1).  You can clearly see that in mid-06, a big change occurred.  Before that point, Amazon was growing 2-4% slower y/y than ecommerce and then from mid-06 forward, their growth materially accelerated to 20% faster than ecommerce and has kept up that pace for the last two years.  This is a really important point in the recent history to dig into for a second to understand what Amazon did and why it's working.

In 2006, Amazon really started to execute on two major initiatives that I believe are what has driven their acceleration since that time.

1. Amazon Prime (launched in 05, but really started consumer adoption in 06) - this is a 'free/discounted shipping subscription' where you pay $79 and you get free 2 day shipping on everything or can upgrade to overnight for $3.99
2. Amazon's seller business (sometimes called 3P or third-party) - Prior to 2006, Amazon's seller business was primarily focused on heavier, top internet retailer relationships like their current Target relationship - Amazon provided not only ecommerce, but also fulfillment, call-center, etc.  

The push into the seller business is counter intuitive.  Why would you as a retailer, not only allow, but encourage competitors to essentially I'm told this diagram is how Jeff Bezos got everyone at Amazon to get on board with the diagram.  Internally at Amazon it's called the Bezos napkin diagram:

At the center you have the fly-wheel of growth.  Growth goes faster when more consumers (traffic in the diagram) come to the site.  Consumers come to the site for three things - selection, value and customer experience.  By partnering with high-quality sellers, Amazon is able to drive selection at a good level of customer service, increase value, which in turn, drives growth.  Traffic brings sellers, and the wheel goes around faster and faster.  As the wheel turns, Amazon is able to benefit from a lower cost structure which is passed on to consumers in the form of lower prices, and THAT also accelerates the wheel.

To say Amazon 'gets' the CEF concepts is an understatement.  In fact they easily have a three year lead in deep thinking around these aspects of ecommerce.  Many people believe that Amazon is doing well simply because of eBay's mistakes. If you are reading along with our story here, you will recall in the last episode that around February of 06, eBay made a fundamental error that I don't think they have recovered from.  To be sure, eBay has 'helped' Amazon here with their missteps, but I do think most of the credit goes to Amazon and the eBay flubs have just put extra wind in their sails.  Put another way, if I were to guess (you could never know this), eBay is responsible for 2-5% of the 20% growth above ecommerce that Amazon is enjoying.  Amazon is an equal opportunity share-grabber and probably is taking the most from eBay, but others are losing share to Amazon too.

With that bit of foundational background, let's dig into Amazon and how they rank in the five pillars of the CEF.

1. Selection - excellent execution

Amazon clearly understands the importance of selection in driving not only customer acquisition, but  Amazon has an interesting three pronged strategy that has significantly increased their selection since 2006:

• Retail business - Some call it the Amazon 'first party business', or 1P.  Amazon is first and foremost a retailer. They have teams of people that are organized by category that know the category well and focus on buying products, working with vendors and expanding their selection.
• Seller business - Amazon's retail business if of a scale that it makes sense for them to focus on the 'hits' - top sellers of products that are in the 'head' of the long-tail curve.  The seller business is where third parties, 3P's, help amazon by filling out the long-tail.  Amazon has category managers that work with the retail buyers and understand where they plan to be retail and where they want sellers in the category. They then actively recruit sellers that can fill strategic selection 'holes'.
• Product ads - In certain categories when Amazon wants to further augment the selection, they have offsite product advertising with what they call ProductAds.  You'll frequently see these in categories where there are complex items that are hard to ship.  Furniture is a good category to explore if you want to see ProductAds as seen here:

These three systems give Amazon unprecedented selection in a wide variety of categories.  But it's important to note there are still many categories that Amazon doesn't participate in that are multi-billion dollar categories  that amazon doesn't participate in at all such as:

• collectibles
• tickets
• travel
• autos
• real estate 

2. Value - driven by scale and seller business

In 2007, Amazon started experimenting with a novel concept.  Prior to then, seller products were listed down a link from the product page in a link called 'X available new and used'.  The seller listings are ordered from least to most expensive, thus creating a strong incentive for sellers to list their products at the best value possible.

In 2007, Amazon started to experiment with bringing the seller listings up, first listing the top three in a box under the buy button called 'more buying choices'.  Then in late 2007, Amazon took it two steps further.  The first step was that instead of the buy box 'disappearing' leaving the 'more buying choices', when Amazon's retail stock was gone, Amazon would keep the buy box, and the top seller offer (lowest price) would then 'own the buy box'. 

The second step brings us up to where things are today.  Now the lowest price offer from highly rated sellers, even if Amazon offers the product, wins the buy box.  Why am I mentioning this in value?  Well when a product owns the buy box, the seller moves 10-100X from when you don't own the buy box.  This creates a VERY strong volume incentive for sellers to drive their lowest price possible.  For buyers, this means they don't have to go to anywhere but one site to find everything they are looking for at the best possible price.

For Amazon this is genius because:

• It keeps them honest - by allowing 'competitors' to compete, Amazon must itself drive the hardest bargains and pass them on to consumers.
• Amazon is able to manage unit margin - If Amazon's margin on a product would be too low to be the best price on the internet, they can hold steady and let a seller sell the product.  Once sold out, Amazon can then own the buy box and maintain margin. 
• Buyers feel like they don't have to shop anywhere else - amazon has already found the best price for them and has even given them a competitor's best price.  This is a lot like the progressive insurance model and I don't think a lot of industry folks understand just how powerful this is.  The number one reason for shopping cart abandonment and lack of conversions is price checking.  Buyers don't feel like they need to price check amazon, because amazon has done it for them.
• Last but not least, while amazon states they are neutral on the margin between retail and seller businesses, the seller business has got to be extremely lucrative for them.  They don't have to buy, store, ship the product, just deliver some bits.  Bits are cheap, warehouses aren't.

Some analysts speculate that while 33% of Amazon's unit volume is from sellers, a much larger part of their profit is from this line of business.  The seller business allows Amazon to drive value, increase conversions and improves their margins.  It's a very powerful triple-win for them, but was very risky and counter-intuitive in the beginning.  Most big ideas are.

3. Ease of use - ecommerce leader, always room to improve though

Every aspect of amazon is easy to use.  One-click allows you to checkout, well, with one click.  Amazon stores all of your credit card information and remembers all of your addresses.  The cart is very intuitive and powerful.  Wishlists help you remember things you are interested in to save for later.  The returns center makes returning products a breeze.  Amazon's help system is very comprehensive.

There are only two negatives on ease of use I can think of with Amazon:

1. Front page - The amazon front page has gotten too busy for my tastes.  Above the fold is good, but one scroll below and you have some weird ads and irrelevant recommendations/content (I have something right now about Easter egg baskets through the ages - wha!?)
2. Search Engine - The Amazon search engine is powerful, but occasionally, I have to help it help me.  Usually when I'm searching for a non-book item, it can get off track and show too many books or dump me in there.  Also with my Kindle, I sometimes have a hard time forcing it to show me Kindle only items.  Some categories don't have a category-centric search that would be helpful like shoes for example.

4. Trust - a-to-z - they brand it AND make it easy to find and use.

This is an easy one, Amazon backs you up 100%.  They call it the a-to-z guarantee and it really works.  You can call and get a human on the phone easily.  They help you.  If it's a seller business, they steer you through the seller's process and if that doesn't work. They still make you whole.

There are never any shenanigans with Amazon.  Their emails are useful so I don't opt-out.  If I do opt-out, they don't email me.  They ship stuff when they are say they will.  It arrives well packaged with a smile on it. 

You can trust Amazon - period.

5. Merchandising - they set the bar that all others try to reach

Wow, I could go on and on here.  Amazon's merchandising is spectacular.  The recommendation engine is wonderful and I personally purchase 2-3 things a month off of recos alone.  There are some great social merchandising elements that Amazon has too.  The reviews, the lists, the 'frequently bought with X' upsells, product tags, tell a friend, submit a video, phew the list is too long to detail here.

If you want to learn more about Amazon and social, here's a cool screen shot and blog post on the topic that goes into more detail than I have room for here.

Is Amazon beatable?

I realize that reading this you might be left with the thought that Amazon is unbeatable.  They have that flywheel spinning faster and faster.  eBay's in a death spiral.  Walmart.com and others aren't at near the scale Amazon is.  So, yes, Amazon does have a considerable advantage.  However, they are 'beatable'.  If you recall in episode II when I introduced the CEF, I showed Zappos and how they have really grabbed the shoe category and out customer serviced' and 'selectioned' (yes I just made that word up) Amazon and have done well.  There are plenty of other companies out there doing this such as:

• Newegg - Over 1B in GMV from the computer/ce category - focusing on the enthusiast/hobbiest as a core, and branching out from there.
• social/customized sites - CustomInk, Zazzle,  BustedTees are making major growth in the areas of customization and social ecommerce.  Amazon does very little in this category.
• sporting goods vertical - The GSI family of sporting goods sites (fogdog, sportsauthority, dicks) are all doing very well by leveraging a common infrastructure across three brands - two of which tie to 
• B+M - bestbuy - Bestbuy.com is a major force in ecommerce thanks to their tightly integrated on and offline presences.
• B+M - JCpenney - Believe it or not, JCP is doing very well online. They've managed to bring their demographic from the offline world to the online world and keep them loyal to the brand.

That's a short list.  If you are an Amazon fan, the good news is that while Amazon is beatable, it's only by a select few that have some interesting angles (brick and mortar) and vertical focus (zappos/newegg).  As far as being the best 'ecommerce department store' with the broadest offering across 20 macro categories, yes I do think right now Amazon has a near insurmountable lead.

They aren't perfect though. This holiday I was shopping for some Dora items and noticed this glitch. 

Amazon was recommending this $95 item with $12 shipping over their own $20+free product.  See, here you have real proof that Amazon isn't perfect.  But this is probably the first in thousands of products I've looked at on Amazon to have any kind of error.  So in a way, it's darn impressive.  Think about how many weird things you've seen on eBay for comparison.  The Amazon Dora glitch was fixed the next day.

Conclusion

Amazon's relentless focus on value and selection along with their innovations around shipping and handling cost reductions, ease of use and merchandising built on the foundation of trust from the a-to-z guarantee have given them the most enviable position in ecommerce. 

In fact, I think eBay's current strategy to 'amazonize' eBay is a deathtrap - but we'll get to that in the next and final episode shortly.  Thanks for coming along on the journey so far and keep those comments coming, I'll follow-up episode 4 with a post that addresses some frequently asked questions I'm seeing.

SeekingAlpha disclosure - I am long google and amazon

Episode IIIA - eBay and the CEF **Updated

***I updated this to reflect some comments where readers pointed out some typos and a paragraph I didn't quite end.  Also, I neglected to mention the FVF discounts that eBay gives on free shipping and wanted to make sure I wasn't being unfair on the free shipping topic (that section is in italics under value).

This is Episode 3A in a 4 part series.  Here is the outline for the series:

Episode I - Q408 in-depth analysis - available here with Q+A covered in an addendum (IA) (link)

Episode II - Introducing the ChannelAdvisor Ecommerce Framework (CEF) (link)

Episode III - eBay, Amazon and the CEF (you are here - I have split it into to parts A (ebay) and B (amazon) )

Episode IV - How to fix eBay (coming soon)

It is strongly encouraged that you read them in order as they assume the reader has been following along as they build on each other.

In the last episode we took a break from anything specifically dealing with eBay and Amazon to look at a general framework for evaluating any ecommerce site.  We looked at a couple of interesting examples - Zappos that focuses on selection and ease of use and Ideeli which focuses on value at the exclusion of selection.  In this episode, we'll use that framework to evaluate what's going on at eBay and Amazon to cause the near 50% growth rate benefit Amazon is enjoying over eBay.  Finally, in the next and final episode, we'll look at some suggestions for eBay to get back into the fight.

The CEF looks at ecommerce through five pillars:

1. Selection

2. Value

3. Ease of use

4. Trust

5. Merchandising

eBay and the CEF

One of eBay's biggest challenges to this day is that they do not think like a retailer.  In other words, they don't look at elements like the CEF as a retailer would.  In the early days when competition was slow to move, this didn't matter, but today it clearly does as the challenges the company faces illustrate.  That being said, in eBay's Q408 presentation to shareholders, they offered the following slide that shows they are starting to catch on, but as we'll illustrate later that they are substantially missing the mark on each of these.

We'll reference this graphic a good bit in the CEF review of eBay and it shows a very interesting window into how eBay is thinking and the challenges they will continue to face with that mindset.

1. Selection - Declining since 2006.

In February 2006, eBay made the fateful decision, seemingly without any forethought, analysis or testing to introduce what is commonly known as SIF in core. What they did is took Store Inventory Format (SIF or store listings as we call them) and put them right into the core search engine.  Thus, a seller paying $2 for an auction listing had the same exposure as a seller that paid back in that time .05 or less for a store listing.  You can imagine what happened - sellers left the auction format and bulked up on store listings.  By March, eBay turned this off, but they had started in motion a severe debalancing of the marketplace that their subsequent actions to rectify actually amplified to the downside as far as selection is involved.

It's my belief that the SIF in core event, even today, has dramatically lowered the selection on eBay to the point that the site is no longer competitive.  As we'll explore in the next episode, subsequent policies (such as the DSR system) rolled out in 2008 have accelerated the decline as an unintended consequence.

Prior to 2/06, the eBay marketplace was 'working' pretty well.  Prices on auctions were a little on the high side, but manageable and the balance between auction listings (high insertion, lower fvf and store/fp listings - low insertion, higher fvf) was beneficial to buyers.  If you were looking for something commonly available (ipod), you found a LOT of options to buy at different value/service points.  If you were looking for something 'long-tail' (a back to the future II DVD), you found that too as sellers were able to list literally millions of items in the $.02 

Media sellers are a group I'm very familiar with and I believe they are eBay's canary in the coal mine primarily for selection, but also for value and other elements.  Most media sellers operate in a long-tail world where selection is king to drive margins and repeat business.  Since 2006 and the subsequent hikes in the store listing format, media sellers have been leaving the platform at an alarming rate and thus taking millions of items with them.

Where did they go?  Many have a happy new home at Amazon, but just as many have setup shop online and are doing very well with their own websites, leveraged with smart SEO, comparison shopping and search.

Here you have a category that with a < $20 ASP should be a slam-dunk for eBay, that is in shambles.  This category is essential because it is the single best way to activate a new buyer on a 'safe' transaction.  After dabbling in media, buyer s then move on to higher ticket items once they get the feel of eBay.

If sellers can't survive and thrive in that category, then sellers in categories like shoes, auto parts, etc. will go down the same path, not far behind media sellers.

On last concerning trend I've noticed on selection is due to the unintended impact on cross border trade (CBT in eBay-speak) that the DSR (detailed seller rating) system has caused.  The short version of the story is that in order for sellers to maintain their DSRs, many sellers have stopped selling internationally.  Personally, I've always found interesting hard to find items from international sellers.  That inventory is now noticeably gone from the US site and folks in the UK report the same.  The DSR impact on CBT is another contributor to the decline in selection.

Since 2006, I have been saying that eBay has chopped off their long tail, and I believe that is still the case, and if anything, it is worsening.

Listings are not selection

Before putting eBay through the rest of the CEF framework, I wanted to make an important distinction.  If you look back at the Q408 graphic, you will see that counter to what I'm saying here, eBay believes selection is dramatically increasing (first chart on the left - 'new listings in millions'.  In the chart you see the listings on eBay go from 550m to over 750m.  eBay is totally off on this metric as each popular or relatively common product on eBay has been flooded with listings since the 2008 price changes, yet the long tail is not flushing out as it was prior to 2006.  Here's a great example - as I write this there are 4506 Nintendo Wii systems available on eBay.  so that is a 5000:1 listing:sku ratio.  This is an extreme example, but if you take the 750m listings, if they all had that ratio, you would be 150,000 actual products.  Also, on eBay there is no facility for listing products with size and color differences together.  Thus a shoe or shirt SKU on any other ecommerce site that would be 1 sku mushrooms into as many as 50-75 'listings'.

Why doesn't eBay report on the number of products or SKUs available?  Well  I don't think they a) think that way and b) even know.  I can guarantee you Amazon knows exactly how many SKUs are available on any given day, in every category.

2. Value - declining

Since 2006, eBay has considerably raised fees, sellers have reflected the fees in their product prices and thus value on eBay has declined as item prices have increased.  Also as other channels have opened for sellers, sellers have realized that eBay is one of their most expensive channels and have started to raise prices accordingly.

In 2008, this has gotten even worse as eBay has become obsessed with free shipping.  Certainly free shipping seems like it would decrease the price of goods and thus increase the value of goods on the site, right?  Here's where unintended consequences have hit eBay again.  Let me illustrate with an example.

Let's say it's 2007 and you have an item that is $50 and your cost on shipping is $5.  You may mark up the shipping for a little margin - maybe it becomes $8 - total price $58.  Your margin is let's say $5 on the core price and $1 on the shipping for a total of $6.  Your eBay fees for this item (assuming 100% sell) is $3.07 for FVF plus $1 for insertion or $4.07.

Now it's 2008.  eBay 'turns' the search engine, DSRs and other 'dials' to 'advantage' you to have free shipping or not sell anything as you are either a) invisible to shoppers or b) kicked off the site or c) both a+b.

So you implement free shipping, but want to keep your margin of $6.  You can't price the item at $58 because now your eBay fees go up as they effectively include S+H. Now your eBay fees are $2 for insertion and $3.35 for FVF or $5.35 vs. the $4.07 you paid before the wonders of free shipping.  At this point, you may be saying, "Scot this doesn't matter, it's $1.28 - so what?" well, this is effectively a 31.4% fee increase to the seller.  Here's where it hits the Value pillar of the CEF. As a seller you want to keep your $6 margin, so you raise your price $1.28 right?  Nope, you can't because everything you add to the price, eBay takes their FVF of at about a 10% clip, so to get to the $6 point, you have to 'gross up' to more like the $60 mark.

Now your eBay fees have gone up 31%, your price has gone up effectively 3.5%, and in today's competitive market that will chop your conversions dramatically.

***Updated after original post.  To help sellers with free shipping and to encourage investment in DSRs, eBay does offer FVF discounts for powersellers.  If a seller has 4.8 or higher, they receive at least 15% off their FVF fee component.  When offering free shipping, the number doubles to 30%.  So in the example above, much of the effective fee increase would be covered for those sellers that receive the discounts.

My point is many of these policies make sense on the surface, but if you scratch just a little bit below you will see that they negatively impact things like value on the site.

The bottom line is that today in early 2009 as eBay faces unprecedented competition, I believe most of eBay's prices are a good 5-10% higher than anywhere on the internet due to their near obsessive push into free shipping (passing the cost to the seller, who passes to the buyer) as well as due to the very high direct and indirect costs for selling on the site.  Several stock analysts have done studies (citigroup and Merrill that I'm aware of) that have also shown this price discrepancy.

If you look back at the first graphic, you'll see that eBay defines value as the '% of listings with free shipping'.  This is really scary as not only does it have little to no relevance to value (prices), the metric has gone from 5% to 25% - or a 5X increase on free shipping, which I believe is actually a negative that implies there is a 5X growth in overpriced products on the site.  A 'real' value metric would be 'SKus we have the lowest price on'. Like selection, this is a metric I don't think eBay understands or tracks appropriately.

3. Ease of use - declining

I could spend pages and pages talking about how eBay continues to be too hard to use.  Many of the changes made of the last year have intended to improve the ease of use, but similar to DSR, free shipping, etc. have actually made things worse.   Anyone who has shopped at eBay is pretty familiar with how hard the site is to use, so here is a brief summary along the different subsystems we introduced with the CEF.

• On-site search (eBay calls it Finding) - In the last year, eBay has rolled out Finding 2.0 with BestMatch that is pretty universally considered a step back.  BestMatch now mixes auction and fixed price listings into a hodge podge of items that makes it hard to find things.  Additionally, eBay has started putting copious sponsored listings above the search page navigation as shown here. 

In the above example, I did a search for golf clubs, and here you see five very large and highly relevant sponsored listings for timeshares, the Thunder Gun, an mp3 player, some foreclosed real estate and last but not least the Cellerciser.  After these value-add advertisements, I can then scroll waaaaay down and figure out how to get to page 2 of my golf clubs.  How many people do you think have the patience to go to page 2?

Finding 2's implementation of featured also 'locks' featured items on the screen, so even if you select 'show me the products from most to least expensive, you get some really messed up results like this:

Notice how the prices go down from $5k to $40, and then back up to $100k right after the $40.  Can you imagine using a search engine like google and having it not show you the results in the order you asked for?

I could go on and on here, but you get the picture - eBay's finding system is very very broken right now and is going backwards instead of forewords.  Ok, one more.  Let's say you ask eBay to sort things by "Least to most expensive." and the 'store discoverability' kicks in where they show you store listings after core.  The store listings flip to be most to least expensive.  Here's an example:

In the above undoctored screen shot, as a buyer, I specifically wanted to see lowest to highest, which eBay does for core, then when the store listings come up, it inverts to highest to lowest or maybe it's BestMatch - heck I can't even tell it's so chaotic.

• Cart - eBay unfortunately doesn't have a cart. eBay Express had a good start on a multi-seller cart that I think was a good direction, but eBay put a bullet in that.

• Checkout system - One of the downsides of Paypal and its virtual monopoly on eBay is in order to buy anything on eBay, buyers effectively have to double register - once for eBay and once for Paypal.  If you don't remember how challenging and confusing this is, you should try it as a new buyer sometime.  Can you imagine going to retailerX.com and having to register once to buy something and then a second time to pay?

eBay's checkout system is so limited that most large sellers can not grow due to its restrictions and thus third parties such as ChannelAdvisor augment the checkout by an open platform (this is actually smart and eBay needs to do more of this as it allows third parties to innovate around the platform) called checkout redirect.

• Order tracking - eBay has an exclusive deal with UPS and thus only UPS items can be tracked 'on-site'.  Thus most sellers avoid this system and implement their own order tracking outside of eBay.

• Returns processing - eBay just asks that seller list a return policy and does not provide any common area or process for buyers to process returns.  Both eBay and Paypal do have various systems for disputing a transaction which are complex for both the buyer and seller.

4. Trust - eBay - declining

In 2008, eBay implemented the much maligned DSR system along with several major changes to the rickety feedback system.  I've been very vocal on the DSR system's numerous flaws, so won't go into it in detail here.  Suffice it to say that the DSR system is driving sellers to free shipping which destroys the value part of the CEF equation on eBay

• Increasing the customer support costs on eBay which were already higher than anywhere else
• Driving lots of great sellers out of business
• Slightly increasing the quality of sellers.

I'll offer an alternative to both DSRs and the trust issue in the next episode, but basically DSRs have caused much more harm than good and eBay still hasn't addressed the basic trust issues.

The first figure shows that eBay has gone from 5% of GMV from 4.8+ sellers to today's 30%.  The bulk of the sellers that achieve that level of DSRs will have had to turn off CBT as well as implement free shipping, thus while eBay may have improved the trust some, they have done it at the expense of two very important pillars of the CEF (value and selection).

Here's a summary of trust problems on eBay:

• It's hard to understand if you are a buyer, how and how much are you protected.  The protection comes from Paypal, what's that mean when you buy on eBay? 
• Who do you call if you've been ripped off?
• Which emails from eBay are valid, which ones are phishing (yellow button)
• eBay allows anyone to register and re-register - thus bad buyers AND sellers are never really kicked off the site
• eBay to this day has the worst password authentication, testing and resetting of any site dealing with money that I'm familiar with.  Yes, you can have your userID as your password.  Thus account takeovers on the site are still rampant.

In the CEF episode, we talked about other indirect elements that can erode trust.  I believe that eBay's trust problem is contributed to by irrelevant advertising, too much emailing and shenanigans that sellers employ within the grey areas of the site.

In conclusion, eBay still has a huge trust problem and isn't moving fast enough to fix it. In fact many of the changes they are making in this area have negative unintended consequences.  Buyers are confused about the relationship of eBay/Paypal and how it relates to trust as well.

5. Merchandising - eBay - never has left the starting blocks

eBay knows a lot about its users - what they search, buy, etc., but for some unknown reason, eBay has never been able to leverage that data to do effective merchandising.  eBay's merchandising is so off the mark that it's probably best if it was turned off IMO.

Here are some (painful) examples.  In my personal eBay account, I largely buy star wars collectibles.  Whenever I login, eBay forces me through a 'message from eBay' with their first merchandising, illustrated here:

It's odd enough that they push me through this 1990's style interstitial page, but I've found the items that are recommended here are never, ever relevant to anything I am either looking for or have ever purchased.

Now as I go to the homepage, I am presented with these sections:

• Cool stuff for you - seemingly random, I have no interest in these items.
• My ebay at a glance - this is the only thing useful here, but it's stuff I've added to my watch list, so eBay isn't really predicting what I want, I've already told it.
• Want great buys? - doesn't seem relevant to anything I've ever bought or searched
• More fun finds - also not relevant or helpful
• Shop your favorite categories  -  a long list of categories that doesn't seem to be organized for me at all.
• From our sellers - this is always the best to look at, there is the wackiest, most random stuff you will ever find here.  

Here are examples from the site today of some of these sections:

Bottom line - here's a site where I have 300+ transactions and the best they can do is show me stuff i've added to my watch list that is relevant.  eBay clearly isn't thinking about how to put relevant products in front of me based on my purchase history and based on the advertising, my search terms either.

Conclusion

The CEF has given us a framework for evaluating ecommerce sites and also helps illustrate the areas eBay is losing ground in as the rest of the ecommerce world moves forward.  If eBay is the laggard in the market, then Amazon is the clear leader.  In the next post (3B), we'll see how they do in each of the five categories.

SeekingAlpha disclosure - I am long Google and Amazon.

Episode II - Introducing the ChannelAdvisor Ecommerce Framework (CEF)

This is Episode 2 in a 4 part series.  Here is the outline for the series:

Episode I - Q408 in-depth analysis - available here with Q+A covered in an addendum (IA) here.

Episode II - Introducing the ChannelAdvisor Ecommerce Framework (CEF) (we are here)

Episode III - eBay, Amazon and the CEF (coming soon)

Episode IV - How to fix eBay (coming soon)

It is strongly encouraged that you read them in order as they assume the reader has been following along as they build on each other.

The ChannelAdvisor Ecommerce Framework

ChannelAdvisor is a software company whose customers are online retailers of all sizes.  We have over 6,000 customers and on a daily basis interact with literally hundreds of retailers from the big top 100 retailers all the way to very entrepreneurial businesses carving out their niche online.

Through the years you start to notice some trends (or patterns as we call them in the software world).  What you start to notice is that retailers think about there strategies in different, yet in a way similar, ways.  What products are you going to offer? What is your pricing strategy? What kind of buyers do you want to attract? Does your brand stand for great deals, great service or ?

Internally we've codified the five core areas of ecommerce that we've found and call that systematic way of thinking about an ecommerce business the ChannelAdvisor Ecommerce Framework.  The CEF gives us the ability to talk to customers and prospects in a coherent fashion and understand rapidly where they are today and what their goals are going forward.

In this episode, we'll introduce readers to the CEF and then use the CEF to think about a couple of internet retailers (specifically NOT eBay and Amazon yet) to get a feel for how this framework works and how it helps you think about the various aspects of internet retailing.

The CEF - Five Pillars of Ecommerce

When thinking about an online retailer's overall strategy, positioning and business model (and thus their brand) there are five pillars of ecommerce that make up the CEF:

1. Selection
   
2. Value
   
3. Ease of use
   
4. Trust
   
5. Merchandising

It's important to note that not every retailer has to excel at all five dimensions to be successful as you'll see in the case studies.  However, I have observed that for a retailer of any size to be successful, they need to decide what their strategy is for each of these areas, stick to the strategy and let buyers know what that strategy is.  In many ways these decisions embody the retailers brand and how they are perceived by their customers.

Let's first dig into each of the five parts of the framework and then go into some very specific case studies to see where various internet retailers sit within the framework and you can see how the CEF can guide how you analyze internet retailers.

Selection

First, and most importantly, consumers love selection.  If they are going to spend their time looking for something online, they have an expectation they will find it (seems simple right?).  How many times have you driven to 2+ stores on a weekend looking for a product to not find it.

Brick and mortar retailers are constrained by the physical shelf space which is extremely expensive and therefore has to hold 'top sellers' to achieve the necessary monetization rates to support that expensive retail space.  Online retailers move that physical aspect from an expensive store front to the substantially cheaper warehouse or distribution center (DC).  

Thus online retailers are able to offer orders of magnitude broader selection.  A very important concept called the long-tail, comes into play.  There's an excellent book by Chris Anderson available here, that I always recommend everyone in ecommerce make sure they read. Chris also has a great blog I recommend you follow as well here.  In a nutshell, this is a way of thinking about the 80/20 rule.  20% of your products will drive 80% of sales, but what about the other 80% of products?  With the offline model, you focus on the 20%, maybe even 15% because of the space constraint.  But online, with virtual inventory nearly costless, you can look at trying to approach 100% selection and thus address that last 80% long-tail products.  In many markets, the 80% long-tail is big enough to be a multi-billion dollar opportunity.

Even with the internet model, selection can get expensive on the DC-side. For example, can you afford to have something in your warehouse  that you only sell one of a day?  a week?  a month? a year?  As you go down the long-tail, the volume decreases and thus inventory 'turns' decrease along with selection and inventory costs and locked-up cash go up.  

When discussing selection, most retailers think about the products you are offering, or SKUs which can include a variety of sizes, colors and other attributes (styles).  But it's important to note that selection can also mean different conditions (new, used, refurb) or even pricing models (auction, fixed price, negotiate/offer, mark-down).  In today's world, consumers want options and that means not only product options, but 'purchasing options' as well.

For some products, 'delivery method' can also be part of selection.  For example, is the software/music/book/movie available via shipping, or download?

Value

The concept of Value ties directly to an internet retailer's business model.  Do you want to be a Nordstroms - high service, with high gross margins without discounting or do you want to be wal-mart - have the best prices and focus on volume vs. gross margins?

In today's ecommerce world, consumers are very savvy.  They know how to price shop, they know where to find coupons, they understand the implications of free shipping and yes, they are smart enough to add the core price and shipping price and compare that to other offers on the internet.

Value is sometimes at odds with both selection and trust/customer service.

Ease of use

Ease of use is a broad category and for most ecommerce sites includes the following major sub-systems:

• On-site search (one company calls it Finding) - As a consumer can I find what I'm looking for with one search and a couple of clicks or do I have to go through pages of items to find what I'm looking for?  
• Cart - Does the system allow me to easily shop and keep track of what's in my cart, edit, etc.
• Checkout system - Do I have to go through an hour long process, or is it fast and easy?   Do I have a number of shipping options to match my timing needs?  Does the system correctly remember my settings from past transactions so I can minimize the data re-entry?
• Order tracking - Once I've ordered with you, can I track my order, cancel, change?  Can I look at what I ordered in June of 2006?
• Returns processing - After the purchase how hard is it to return an item or get questions answered about the item?
• Product descriptions - Are the products available clearly described with all the relevant information you need to 
• Click and Mortar - For click and mortar companies (offline with online capabilities) - Many consumers want to see some interaction between the two such as online catalogs, circulars, in-store-pick up, shared registry, click and mortar royalty programs, etc.  

Trust

Trust is hard to describe, because it's the culmination of many things that together give a consumer confidence to essentially turn over their credit card or other payment information.  Some of the key elements that can build (or destroy) trust with an internet retailer:

• Customer service - Does the company take care of you before and after the transaction.  If you email, do they respond quickly?  If you call, does someone with product knowledge answer your question?
• Security - Does the site have good password security? Does the site use the latest and greatest technologies to protect your information?
• Returns - Unlike ease of use, the Trust/returns category is more around policy.  Does the site have a policy that makes it hard to return defective products?
• Privacy - Is the site trying to sell your information to others, or protect your information?  Is the privacy policy clear and easy to read and understand?
• Spam - Does the site email me incessantly or does it only email me when needed.  If the site has a newsletter, can I subscribe/unsubscribe easily?
• Ads - Are the sites trying to throw irrelevant ads in your face so they make money vs. helping you find the products you are looking for?
• Shipping and handling performance - How quickly do your products get to you?  Do you get exactly what you ordered, when they said you would get it?
• Shenanigans - Are there any shenanigans like forced up-selling ("don't you want a filter kit with that camera?!"), or anything that makes you feel uncomfortable?

Merchandising

The newest addition to the framework, merchandising, used to be something we discussed in the 'ease of use' category as something to keep an eye on. Since 2007, merchandising has become a 'must have' that consumers are looking for.  Full disclosure, ChannelAdvisor acquired a firm in this field, RichFX, last year, so we're eating our own dogfood on this one. 

Examples of merchandising (not comprehensive) are:

• Advanced imaging - For most product categories, consumers want to be able to rotate the product, see many images, zoom, pan, etc.
• Recommendations - Technology has come along to the point where ecommerce sites can offer very rich and relevant recommendations that add a lot of value to the buying experience. This topic is worth of a series of blog posts, but suffice it to say that smart recommendations are a) hard and b) a 'must have' now.  
• Product reviews - There are many studies that show that one of the top considerations for someone buying something online (that most times they haven't seen or touched) is product reviews from peers.
• On-site price/product comparisons - Advanced ecommerce sites are offering some really interesting ways to compare products, go through some guided selling utilities or even help you make sure you are getting the best price possible.  This functionality substantially lowers shopping cart abandonment rates.
• Wish/register lists - For many categories, consumers may want to save an item for later in a wish list, or provide it externally via a registry.
• Social features - share a product, recommend to a friend, who else is buying this?, 

At the end of the day, one of the most important metrics for an internet retailer is conversion rate - the % of visitors that turn into buyers.  Merchandising is one of the single best ways to move the needle on conversions and also helps increase average order value (AOV).

Now let's look at some case studies to examine how three very different retailers fit into the framework.

Case study I - Zappos - "Powered by Service"

I first became a fan of Zappos thanks to my wife.  After about the second or third package that came with the colorful Zappos logo many years ago, obviously my curiosity was piqued.  Why was she ordering from this company I never heard of?  The answer was: "because with shoes, I want a great selection and great service."  To her, service meant that in the unusual case if a shoe didn't fit or match something, she was able to return it hassle free - actually with less effort than an offline store.  She came across Zappos via word-of-mouth.

Since then, I have to confess, I've been somewhat fascinated, bordering on obsessed with the company, simply because they are so different and it appears to be working.

If you'd like some background on Zappos, here are some things I would recommend:

• The CEO (Tony Hsieh) and the COO (Andrew Lin) have a blog here
• Learn about the company's philosophy and culture here and make sure to order the culture book - a great read.
• If you can't get to an industry event where these guys are speaking, several of their talks are available on youtube here 

Most importantly, Zappos started in one of the toughest categories (shoes) and has generated these results:

• Revenues/GMV rumored to be around $1b in 2008
• 9.7m purchasing customers 
• 75% recurring customer rate 
• Repeat customers order > 2.5x in the last 12 months   

Here's the real kicker - About 2 years ago, Amazon realized the Zappos threat and launched a direct attack at them via a microsite called endless. That effort hasn't seemed to put a dent in Zappos' trajectory. Here's a company that is going toe to toe with juggernaut Amazon, and winning - how do they do that?

Let's look how Zappos does within the CEF framework to figure out the secret of their success.

Zappos and the CEF

1. Selection - excels

Zappos started out in the shoe category and is rapidly expanding to other categories (apparel and handbags seem to be next, but I've seen some electronics too).  For shoes, Zappos has 1200 brands, 200,000 types of shoes and when you look at the size/color/style matrix they have over 3m unique UPCs.  Amazon has 190,000 shoes by comparison, that I imagine probably matrixes out to 1m UPCs. eBay has 524k

Zappos clearly gets the long-tail for shoes.

For selection, it seems Zappos has decided they want to win the shoe selection game.  By focusing on one vertical, that allows them  to go deeper than a multi-vertical player like Amazon.

2. Value - not a focus

While Zappos provides free shipping (and frequently upgrades the shipping from standard to expedited at no additional cost), Zappos actually is not always the lowest price on the internet and even has stated that specifically is not their goal.  In fact they rarely even do mark downs/clearance and have acquired a business, 6pm.com, that has a different brand where they do that kind of activity as-needed.

3. Ease of use - excels

Within the shoe category, Zappos is extremely easy to use.  For some of their core customer sets they even have micro sites that cater the experience to that buyer-type's needs (example: couture, running, rideshop). The Zappos search engine is very tailored to shoes - you can search by any combination of brand, size, color, width, gender and price with a very easy to use filtering system.  A very graphical experience is given to the user so you can quickly see if your result set is getting close to what you are looking for.

Zappos pioneered the return process and I recommend everyone in the internet retail world look at how insanely easy they make it.  In fact every package comes with easy to follow instructions and a return label - Zappos almost encourages returns and in fact charges zero shipping for concerns (more on why in Trust).

4. Trust - innovates

Zappos' is a model citizen when it comes to trust.  Their customer service is second to none and clearly where they are investing to differentiate.  In fact I've hearch Tony and Andrew describe the company as: "a service company that happens to be in the business of ecommerce."  This is a clever way to signal internal+external folks just how important they view customer service to be.  The company takes pride that their customer service reps are not compensated on sales nor do they have any scripts or time limits.  The goal is for them to answer every customers questions regardless of time and not to pressure the customer into buying something.  Try their online chat sometime - it is amazing too.

I already mentioned the return process, but one important statistic I wanted to call out - when asked about abuse of the return policy at a recent shop.org event, Andrew answered that they don't worry about it because they've found that it is their top repeat buyers that return products so they actually view returns (and their policies) as an asset of Zappos and not a liability as many other retailers do.  In other words, each return they take in they believe extends the lifetime of the customer dramatically more than the cost of that return.

When it comes to shipping and handling, Zappos works 24x7 to ship out orders within 4hrs.  They do this via an advanced robotic warehouse system powered by Kiva Systems (watch the video!).  I did want to mention that the Kiva software was built by a good friend of mine and NCSU Professor - Pete Wurman.

Finally, read Zappos 'Safe Shopping Guarantee'.

5. Merchandising - excels

You're probably burning out on me gushing about Zappos at this point, but I did want to point out some areas they do merchandising very well:

• Check out the reviews on this product - they ask customers to review the fit, comfort, etc.  Very helpful with shoes as some may run small/large and these reveiws tell you.
• Each product has 4-7 'views' and zoom capability.  wonder what the heel looks like, click view 3 and zoom.
• Each product has a wishlist capability  
• Tell a friend 
• Share the product lets you put the product out to your favorite social network (fb, etc.) for commentary/reviews 
• Zappos provides a comprehensive glossary of all shoe terms for neophytes. 
• Recommendations - Zappos seems to do a great job at learning about the kinds of shoes you browse/buy and then frequently serves up a value-added product recommendation.

Zappos - conclusion

Zappos excels at four of the five pillars - all but Value.  In fact, I think it's Zappos' acknowledgment that you can't have both the best customer service AND the lowest prices AND the best selection define the Zappos brand.  They have clearly chosen customer service and selection at the detriment of value and it works.  Many retailers I meet suggest that consumers won't pay for service and I always put Zappos out there as a case study that proves that wrong.

Case study 2 - Ideeli

(Full disclosure - Ideeli and ChannelAdvisor have a common investor - which I discovered AFTER being interested in their model.)

Ideeli (pictured above) is a relative newcomer in the internet retail world that is interesting because it is based off of a 'quick sale'/members concept that is becoming increasingly popular and disruptive.  The general idea is:

• Only members (free and paid in Ideeli's model)  - this drives exclusivity which amps up the volume and brings people to the  'quick sale' 
• A clear 'start time' to a sale (usually daily around 11/12 ET) and when an item is sold out, the sale is over.
• Very limited selection - one driver of the model is that items need to sell out and be somewhat thinly traded to drive action.
• Huge values - usually 30-60% off retail 

Many of you may be familiar with woot who was one of the first in the US with this model and now in addition to Ideeli we have Gilt and several others that all seem to be doing very well with the model.

Let's use the CEF to understand where these companies like Ideeli are investing their efforts and seeing success.

1. Selection - not a focus

Obviously, Ideeli has decided to favor everything BUT selection.   In fact they have turned very thin/focused selection into a positive vs. a negative. With typically only 50-150 items available per 'quick sale', consumers can't wait around, they need to be there within 30 minutes of the sale.  Ideeli has an interesting twist on this model that is typically called freemium.  Free/unpaid members get access to a sale one hour AFTER paid members.   This paid-member base gives the company a recurring subscription model of revenues and thus allows them to take some risks that other retailers without that revenue stream would be willing to take.

One challenge of this model is expanding selection can be tricky because you have to balance the call to action.  What Ideeli and others have done is scale the number of sales, frequently keeping them focused on different audiences/categories (kids, women's and men's running at the same time or dresses/formal, home goods, denim/casual running at the same time) so as to not cannibalize the 'quick sale' feeding frenzy.

2. Value - primary focus

For Ideeli, value is the primary focus.  Here you have luxury brands that historically are in the > $500 price selling for at least 30% off and as much as 75% off.  The Ideeli model is to drive customer acquisition via very aggressive discounts/mark-downs.

3. Ease of use - adequate, but no returns.

Ideeli is a very easy to use site for the model.  Because of the frenzy caused by the 'quick sale' concept, as a buyer, you want to be able to preview a sale and then when it starts, swoop in quickly, see what's available and add it to your card and get checked out very quickly before someone else snags the items.  Ideeli recognizes this and has streamlined the cart/checkout process and other functions of the site.  One interesting benefit of a thin selection is Ideeli doesn't have to put much effort into search. With 150 items, even the most basic on-site search engine is adequate.

Ideeli doesn't really allow returns, so there is no return process. See Trust for more.

4. Trust - adequate

Ideeli isn't really innovative around trust, but it also doesn't do anything to be a negative.  The site uses SSL for checkout and shipping times are not at Zappos' level, but adequate.  Another interesting aspect of the 'quick sale' model, is I would guess that pre-sales customers support is near zero, but post-sale support is probably higher than usual.  I've also been told that these types of sites can have a higher than normal return rate as the 'quick sale' drives people to buy things without as much consideration of the overall purchase, sizing, and other elements in the haste to get the product at such a great deal. To this end Ideeli doesn't accept returns, but IS very clear about that up front which helps with the 'no shenanigans' 

Ideeli also does some interesting giveaways to get people to experience the site and reduce the friction (and build trust).

Finally, another cool benefit of this model is that Ideeli has a bona-fide reason to email members every day to reveal the next day's sale.  Thus, I imagine they have an unusually high opt-in rate as well as open/click/buy rate for their email marketing vs. other retailers.  Their emails are not spam and if anything add substantial value to the overall experience.

5. Merchandising - strong

With luxury goods, frequently in the apparel category merchandising, you have to really draw the consumer into the product.  Ideeli does that with very strong product images (multiple views) as well as functionality such as zooming, panning and rotating.  Ideeli also does a good job of providing detailed product information that most shoppers will be looking for.

From a social/user generated content standpoint, Ideeli's products don't 'live' long enough to be rated, so they don't do that, however the site is designed to be very viral.  For example, as a member you can invite other members via email, or an html link like this  or with facebook and other social networks.  For each friend you invite that buys, you receive a $25 credit. Thus I imagine Ideeli doesn't have to spend more than $25 for new buyer acquisition which is very low by industry standards.

Ideeli - Conclusion

Ideeli is an interesting counter-case study to Zappos because while Zappos focused on all elements of the CEF except value, Ideeli has chosen value and ease of use at the expense of selection.  The 'quick sale' model gives Ideeli some interesting advantages and disadvantages that they have successfully navigated and turned into overall positives.

Conclusion - Applying the CEF to eBay and Amazon, coming in Episode III....

This brings us to the end of Episode II. In this post, we've reviewed the ChannelAdvisor Ecommerce Framework which allows us to look at any internet retailer across five dimensions to understand where they are focusing their efforts, where they are strong and where they are weak.

I purposefully chose very different companies to illustrate how the CEF can help you understand the similarities and differences to different models and also to prove that you don't have to focus on all 5 pillars of the CEF, in fact, it maybe better and certainly more practical/achievable if you really focus on 3-4 of the pillars and not the others so you are differentiated.

Finally, even if you are not interested how this CEF applies to eBay and amazon which we'll cover next, I hope you find the framework helpful to helping analyze, self critique and determine your own strategy or those of other internet retailers of interest.

I look forward to hearing your comments about the CEF in comments.

SeekingAlpha disclosure - I am long Amazon and Google

Episode IA - Some quick answers to your episode I questions.

Earlier in the week, I started a series around the battle between ebay and Amazon - here.  

Before I get into Episode II, I wanted to answer some of the more common questions that have come in from Episode I to make sure everyone understands the foundation we're building here. Many of these were in comments, but I also received several calls and emails with interesting questions/clarifications from the data in Episode I that I thought everyone would find of interest.  Here they are in Q+A format.

Q: What 'counts' in eBay's active user base? How about Amazon's

A: This question was spurred by the datapoints that eBay's active user base grew 4% vs. Amazon's grew 10%.  Here's my understanding of these metrics.  eBay's active user base counts anyone who bid, bought or sold in the last 365 days. 

Amazon's active BUYER metric just includes anyone that purchased.  

Q: Several people asked for the actual data behind eBay and Amazon's active user counts.

A: As of Q408, eBay had 86.3m active users.  Amazon reported 88m customers (buyers) and 1.5m seller accounts (for a apples to apples of 89.5m vs. eBay's 86.3m).  What's impressive about this is that Amazon is in only a fraction of the geographies of eBay and has a tighter definition (doesn't include sellers or bidders) and even given those disadvantages has already surpassed eBay AND is growing faster.  This is another datapoint that supports the theory that eBay has hit a tipping point.

Q: How does eBay count someones second, third or fourth ID on the site?  For example, many sellers have 2+ buyer accounts and 3+ seller accounts.

A: If ANY ID has activity in the last year, it will count.  If it does not, it will not. eBay doesn't do any 'de-duplication' of IDs to match them to individual people or anything.  To be fair, Amazon doesn't either, but I don't know many people with multiple amazon IDs, and most eBayers have at least 2.

Q: If active buyers increased, but the GMV of fixed-price and auction were down, what did those buyers do?

Similar Q: If active buyers are up, why are pageviews down?

A: There is much less activity per buyer (you see it for example in the GMV/user stat in my post). If active buyers goes up 3% and activity (gmv/buyer, ASP/purchase and pageviews/user) goes down 10%, you're going to get a massive decrease in page views as that 10% decrease goes across 86m buyers. Said another way - A 10% drop is the equivalent of 8m users 'lost' activity.  A 3% increase in active users is 2m - so there's a net 6m user activity loss.

Q: Does the eBay data include international sites?

A: Unless I specifically called it International or Domestic, yes, the eBay data includes all international sites (GMV-based - not stuff like kijijijijijijiji).

Q: How many visitors are leaving eBay due to marketing?

A: That's a really good question and one that only eBay knows the answer to.  eBay stopped reporting the advertisitng revenue specifically from the marketplace business.  They do report a 'bigger' advertising number that includes classified revenue, shopping.com and some other areas like rent.com which is $228m/Q or $901m/yr.  I think we could say that on a Q basis, there's $100m of advertising from marketplaces. Now some of that's going to be based on pageviews and some clicks, but if we assume a $.50 effective revenue per click that blends industry average $30 CPM and .40 CPC, we can back into 200m off-site clicks/Q  If eBay has about 80m unique visitors/m, then I believe they are essentially putting 20-30m of them off-site with ads (2 clicks/visitor/m - normalize the 200m/q to 66/m).  More on advertising later.

Q: What's up at Shopping.com?

A: In the conference call, eBay's CFO, Bob Swan, made a short remark that shopping.com's revenue was down 50%.  We've seen this with our comparison shopping retailers we work with.  Google changed the quality score algorithm and the result has been the destruction of the paid-search arbitrage that kept shopping.com chugging all these years.  Score one for google in the behind-the-scenes battle that has continued on since the more public Boston Tea Party a couple of years ago.  If eBay's business is in a decline, shopping.com has had the wings come off the plane and the pilot is standing at the door with a parachute.

Q: You say that autos GMV is down 30% - does that include auto-parts?

A: No, I should have been clearer.  Passenger vehicle GMV was down 30% - that does not include auto parts.  eBay actually produces this data, but for some reason, I can never find it.  I was able to get a friend to send it and have provided it for anyone that wants to look via this PDF: Download Ebay_categories_q4 .  

Here's some quick Q4 highlights:

• auto-parts was down 12%
• consumer electronics down 14% 
• apparel down 10% 
• Wow, now that I look at it y/y, no single category is up.  Yikes.

Q: You say eBay is down 12%, but I'm up on eBay 5% - how is that possible.

A: Congratulations my friend, you are taking share (on eBay)! BUT, depending on ecommerce, you are neutral or losing share and you are clearly losing share to Amazon.

Q: Are auctions really down 26% y/y?

A: Yes, auction-GMV is down that much y/y.  You can really see this if you look at this graph that was in the original article.  You can see that in Q407, auctions was at 9.4B and in Q408 it is down to 7B for a 2.4B difference.  That equates to a 25.6% decrease.  I don't make this stuff up folks ;-) 

Q: Bonanzle! I love bonanzle why didn't you cover them?  They are replacing eBay soon and have 1m listings!

A: While Bonanzle seems to have picked up a huge following with expatriated eBay selllers, it is just starting to get some buyer traffic.  You can see this in the comscore data or if you look at sites like compete or quantcast, they show 300k/visitors/month - compare that with Amazon/eBay's scale of 80m+ visitors/month and you'll see they have a loooong way to go.  I think it's more interesting to think of someone like a Yahoo!, Google or Microsoft jumping into the competitive mix, because they each have buyer scale that could be married to supply.  Without a good mix of both in the recipe, you don't have a sufficiently liquid marketplace.

Q: Why did eBay change their discussion boards - I hate them! Why did JOhn Donahoe do that to me?

A: I have no idea.  I doubt that Donahoe even notices they were changed or was consulted in that decision.

Q: Aren't sellers worried that Amazon competes with them essentially?

A: Yes and there are stories where sellers have had a hot product that Amazon has come in and started competing with them on. The safest strategy for a seller is to build your own website, brand and buyers - potentially leveraging eBay/Amazon to help move this along.  

Q: You used this term "tipping point" - isn't that the point where something goes from behing a niche to a phenomenon?

A: Yes, but I use the term here because I think it works both ways.  Some folks have suggested "Negative network effects" or  "exponential death". Yes, I think these all describe what I'm trying to get at - the potential accelerating descent of eBay's business.  A snowball going down hill - pick your metaphor, I think it's happening.

SeekingAlpha disclosure - I am long google and amazon.

Q408 In-depth Analysis - eBay vs. Amazon - The Giants of Ecommerce Duke it out

This is the first of a four part series focusing in on eBay and Amazon.  This series comes from many questions we are receiving at ChannelAdvisor from our customers and prospects (and the press/Wall st.)  about what is going on at the two companies and what retaliers strategically should do about it.

Here's an outline of the series:

• Episode I - Q408 in-depth analysis
• Episode II - Introducing the ChannelAdvisor Ecommerce Framework (CEF)
• Episode III - eBay, Amazon and the CEF
• Episode IV - How to fix eBay

Many long-time readers have been giving me a hard time for being sparse with posting and this is my attempt to catch up and give some meaty strategies and data vs. looking at smaller news items and covered in other excellent venues.  For those readers that are not even involved in eBay or Amazon, I believe there are some VERY valuable lessons to be learned.  Heck even if you aren't in ecommerce, this is a very interesting case study playing out that could very likely be simliar to the Google/Yahoo! 'winner takes all' kind of example we are seeing in the paid-search tangential market.  We're going to start at Q4 results and then really drill into what's going on at these two companies and why their growth rates have started to separate at such an accelerating pace.

I hope you find it useful and thanks for your patience.  The good news is the entire series is fleshed out and I should be able to get it out over the next week or two without interruption.

Now on with Episode I...

Q408 - I think this will be the most important Q in the history of Ecommerce

Given the economic backdrop and what's going on at the ecommerce giants eBay and Amazon as well as the rest of the industry, I believe that for years we will look back at Q408 as a significant 'ah-ha' moment when the entire World finally woke up to what those of us entrenched in the industry have been seeing indications of for the last two years - Amazon is significantly, methodically, and relentlessly eating away at eBay's market share. I believe Amazon is the largest beneficiary of eBay's decline, but certainly not alone. Online retailers from Zappos to Newegg to Wal-mart and others are all doing their part in taking share from eBay.  In fact, many of eBay's changes are actually self-inflicting further declines as I'll attempt to illustrate later in the series.

Before we go into details on how material this is, I wanted to pull together some highlights from eBay and Amazon's results.  These results are culled from many areas including:

• Company announcements and conference calls (transcripts here: eBay , amazon)
• Analyst notes - I've read and dissected information from every analysts and you will see specific references to datapoints from Jeetil Patel @ DB, Scott Devitt @Stifel, Imran Kahn@JPM, Justin Post @ML/BOA, Derek Brown, and others.
• Industry analysts - I was just at shop.org and talked with some of the top analysts about these trends. 
• Where possible, we enhance this data with data from ChannelAdvisor and our own internal analysis/tracking.

eBay Q408 Highlights

By all but three measures eBay had a terrible quarter.  The focus of this blog is eBay's marketplace business so I'll only cover that area and not spend any time on Paypal or Skype (which are both doing well, but still too small to turn the tide of the core decline).  Thus all data and analysis in this section specifically refer to the marketplace business and omit any and all PayPal/Skype information.

The three bright spots for eBay's quarter were:

• Items sold were up 3% y/y
• Active users increased 4% y/y (a small acceleration, well big percentage-wise, but small in absolute terms) from the Q3 3% y/y gain.
• Fixed price items are now 49% of GMV 

Here are some graphs from Jeetil Patel that show the trends in the item sold and active user metrics: (click to see full-size version):

The transaction growth chart shows that while eBay held onto a y/y growth on this metric, the trend is definitely decelerating.  It will be interesting to see if this goes negative in Q1 or if eBay can hold the line here.

In active users, you see a little bit of a bounce y/y growth-rate-wise vs. the lows of Q208.  Jeetil points out that this could largely have been driven by the expensive (contra revenue) coupon and mslive cashback activities in Q408.

These were the bright spots and the negative datapoints were:

• Overall GMV was down 16% y/y
  • Autos GMV was down 30% y/y 
  • International GMV was down 15% y/y 
  • Domestic GMV was down 9% y/y
  • Fixed-price GMV was down 2% y/y  
  • Auction GMV was down a whopping 26% y/y
  • Total non-vehicle GMV was down 12% 
• ASPs were down 7%
• GMV/user was down 8%  

I believe the GMV datapoints are the most significant measures of the health of any marketplace and every eBay GMV trend is defnitely very concerning.  Before Amazon announced, it was easy to look at these through the lense of the economic backdrop, but after Amazon, a different picture emerged (more on that later)

Here are some interesting graphs that show these datapoints and the trends that led to them.  First, here's a breakdown of GMV over the last 5 Q's with the fixed-price and auction portions called out from JP Morgan.  The second graph shows the growth rates  of fixed-price and auction over the course of the last year:

I think the second chart is very important because it shows both the well known fact that eBay's auction business is ailing, but it also shows that fixed-price isn't too far behind.  It also begs the question if eBay's movement from auction to fixed-price will really help at all.  In other words, are they going from the frying pan (down 26% y/y) into the fire (down 2% and dropping) here?

These two charts also make me wonder about eBay's search strategy that we believe is really starving off auctions in favor of FP listings.  How much of the trend you see in the second chart is self-inflicted and how much is consumer-inflicted?  Only eBay has the data on that, but we're seeing such terrible results with auctions from our customers (e.g. pair of shoes at $.99 with zero bids) that I'm quickly moving to the camp where many sellers are that the decline in auction GMV is largely self-inflicted due to the changes made in 08 to fees and finding (more in ep iv).

Amazon Q408 Highlights

As with eBay, for Amazon I'm going to focus on what internally Amazon calls Amazon's Seller Business (ASB), or what many analysts call their third-party business (abbreviated 3P).

• Overall revenues (mix of first party/retail GMV and seller business/3P revenues) were up 24% 
• Overall unit/transaction growth at Amazon was 28% y/y 
• Amazon's Seller Business increased to 27% of all units
  •  International is really accelerating 
• ASB units were up 33% y/y (according to analyst estimates)
• ASB GMV was up  36% y/y for Q4
• Active customers grew 16% 
• Customer frequency increased 10% 
• Amazon is forecasting 15% y/y overall growth if you look at their guidance according to analysts.   

The most interesting graphic I found for Amazon's amazing Q4 was this one from Jeetil Patel at DB:

Here you see the unit growth rates of Amazon's retail (first-party) and seller businesses (third-party).  This graphic illustrates the flexibility that having both models has given Amazon.  If times are tough or pricing competitive, they can rely on partners to compete on price with other retail venues and take their foot off the Amazon retail gas pedal.  In other times, they can change direction (e.g. 2Q07) and surge on the retail part of the business.  This allows them to ultimately manage their unit margin economics at a level unavailable to a pure-retailer and also a pure-marketplace.

Having both models gives Amazon uprecedented and unequaled in ecommerce network effects that I believe are fundamentially unwinding the network effects that built eBay over the last 10 years.  We'll be spending much more time on drilling into this one concept (in epIII) as it is very very important to understand if you want to take advantage of it in your business.

eBay vs. Amazon

Now that we've seen each company's individual results, let's compare them side by side. 

For brevity, here are the three key measures I think that show the most material differences:

First, y/y GMV growth which for me is the single most important measure and allows us to compare 'share' gains and losses:

• eBay (non-motors): -12%
• Amazon (seller business/3P): 36%
• Difference: 48% (In other word's Amazon's apples-to-apples business is growing 48% faster than eBay)

Second, y/y active user growth rates:

• eBay: 4%
• Amazon: 10%
• Difference: 6%

Third, y/y unit transaction growth rates:

• eBay: 3%
• Amazon (seller business): 33%
• Difference: 30%

A near 48% growth rate difference is hard to visualize, so what I've done is hacked one of Jeetil's charts to include some extra information:

There's a lot going on here so let me explain.  First, draw your attention to the industry lines.  The green line is retail sales (offline) and the red line is overall ecommerce.  For anyone in this industry those are the benchmarks you should measure your business against.  If you are growing faster than ecommerce, you are taking share.  If you are growing slower, you are losing share.

Now the top line (blue) is Amazon's growth rate (entire business - retail and seller business).  I've added two other data points to illustrate the 48% difference in Amazon's seller business and eBay's non-autos business.  The top square dot is up at the 38% growth rate (I didn't have historicals to show the trend, but you can imagine it tracks about along the Amazon line, but higher).  The bottom round dot shows eBay's -12% non-autos growth rate.  You can imagine the historicals by looking at the earlier eBay charts.

This chart clearly illustrates that you have Amazon gaining share significantly vs. eCommerce (21% difference: 18% vs -3%) as well as eBay losing share vs. ecommerce (9% difference: -12% vs. -3%) and then finally the 38% difference between Amazon's marketplace business and eBay's.

This startling 48% difference in growth rates got me thinking about what actually had never crossed my mind given eBay's huge scale - when, if ever, will Amazon's seller GMV equal or surpass eBay's?

When will Amazon's Seller Business surpass and eBay's non-motors GMV ?

The trick to figuring this out is that while eBay reports their GMV ex-autos (or at least just started to), Amazon does not give this data point.  I reached out to several analysts and their 08 estimate for Amazon's seller GMV ranges from $5-9b.  This variance is caused by some assumptions you have to make on mix (how much seller activity on media vs. the non-media categories) and average selling prices.  Based on our experience at CA, I settled in on a model that has 08 seller GMV at $7.5m - this jives with several analyst numbers as well.  I filled in the quarterly data based on this estimate and then did a forward quarterly swag, assuming that Amazon continues to grow at 36% and eBay continues to decline at 12%.

While they start Q109 with a large near 6X disparity with eBay at $11b and Amazon at $2b, by Q3 2012, Amazon's business reaches $6b and is pretty much tied with eBay and exceeds it from that point forward.  There are many arguments you could make either way on this, but I thought it was an interesting exercise and actually happens much faster than I thought it would due to the 48% delta in growth rates.

One argument that supports this assumption is that Amazon and eBay don't even really compete in the same geographies yet and categories.  As Amazon brings those online it could very well maintain a healthy growth rate difference and continue to chew away.

Here's a chart of the model.  The blue line is eBay, the red trend-line is Amazon.

Everything to the left of the green line are actuals and everything between green and red is the extension of the 48% growth rate difference into the future. You can see it takes about 3 and a half years for the lines to cross.

You also can see that while Amazon has an enviable growth rate - don't forget that eBay is at a significantly larger share so does have some time to turn things around and if you're not on eBay today, you are still missing 20-25% of ecommerce.

Is eBay at a tipping point or caught in a death spiral?

Looking at the historical data (specifically the fourth graphic in this post) and what we're seeing with sellers (and thus GMV) leaving the platform at an increasing pace (some voluntary, some involuntary), it's a fact that the spread between Amazon and eBay is increasing and increasingly increasing (for you calculus buffs out there). This raises an interesting question - What if eBay is at a tipping point where they are losing enough GMV and sellers, (and thus buyers) that the model starts to unwind as quickly as it grew in the early days?  Conversely, what if Amazon continues to innovate and add buyers and selection, driving more and more value, helping eBay speed through a death spiral.

We could be looking at a perfect storm here and actually historical data supports this thesis with the fact that Amazon is accelerating while eBay is increasingly decelerating.  Over the last year the difference in their growth rates has increased 20%.

To illustrate, I took my model and experimented with a slight up-tick in Amazon's growth rate each quarter and a down-tick in eBay's growth rate - essentially growing the already healthy 48% delta to 68% over time. (this sounds crazy, but remember, the delta has gone from a Q108 delta of 17% (ebay: 14% Amazon: 31%) to 38% in under a year so a 20%+ swing per year isn't uprecendented and I've even spread that out over two years - so you could argue this is conservative in a way based on historicals.  This more aggressive 'tipping point' model shows Amazon's Seller Business GMV surpass eBay's non-motors GMV by Q3 2011 - a relatively short two and a half years away, which is stunning given the 6X difference at the start.

The 'tipping point' model is show in this diagram:

 

The lines to the left of the green line are the actuals and the data between the green and red line show an acceleration of the growth rates from the current 48% to 68% by 2011.

Which brings us to Episode II....

Amazon's ability to grow materially faster than ecommerce and eBay's continued loss of share against ecommerce are very interesting case studies.  Even if you aren't involved in any of these channels, I believe the case study of what's going on here can shed light on your ecommerce initiatives and help you become a share gainer vs. a share loser.

In Episode II we'll introduce a framework for thinking about some of the macro-components of a successful ecommerce site and then look at various Amazon and eBay strategic initiatives against that framework (epiii) and finally we'll use the framework to see what eBay needs to do to try and turn things around (epiv), before it's too late.

SeekingAlpha Disclosure: I am long Amazon and Google