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

Comments

[creeping bang and bling]

Thank you for this...insightful...thorough. Helpful to anyone learning the goings in the ecomm business space.

[SkyNeon]

I would have to agree with the last comment. eBay has emerged as an auction site. I would also say as an internet flea market where a person could sell some of the stuff people usually sell on garage sales. However ebay, like most of US businesses is looking to make money and like many US business is gambling with all the changes they made.

What happened to the old good ebay where you could sell an old bike or a painting you no longer want? I think they killed it. Simply put. After all fraud and stuff there will be never another website where you could auction your stuff nationally. Because of that craigs list is kicking in by pushing local business for safety reasons.

You could divide ebay sellers into 2 categories:

1. Businesses. Because of recent policy enforcements business are struggling to concentrate on customer service to ensure buyer's satisfaction. Therefore, they leave for two reasons: ebay suspends them for poor performance or their costs pushing for alternatives.

2. Individuals. They no longer trust eBay because of fraud and because of new policies. If I want to sell a teapot I do not want to wait up to 21 days to get my money and now I can't even accept money orders or checks… I could have cash in my hand within 24 hours if I list an ad on craigs. On top of that one negative feedback could ruin my seller account if I only sold 10 items.

Bottom line. Business sellers are turning to Amazon and individuals are going to craigs list.

eBay has become too big and no empire lasts forever...

[Harry Bunting]

Probably one of the main reasons Ebay is declining is in how they treat their Sellers. When a buyer purchases an item over $100, on Ebay, using PayPal, buyer money is held in escrow until 3 days or more after the buyer receives the item up to a maximum of 21 days. During this time, the buyer can damage the item, decide they don't want it and to get their money back, simply provide negative feedback on Ebay and file a complaint. The Sellers PayPal account now has funds in dispute until the dispute is resolved and they may potentially receive a damaged item back with no recourse. They also have a negative feedback which could destroy their future sales potential. The seller will be at the mercy of PayPal and Ebay and their decision making process. There is no Buyer Feedback anymore. Even if you are an ethical seller, you are going to get burned now and then by Ebay/PayPal experience.

[How to sell on eBay]

Very insightful analysis. My first reaction is to wonder if I should start learning about other alternatives to eBay. However, eBay bay is still a great marketplace and it has a few years to reverse the current downward trends. I look forward to the upcoming episodes.

[Henrietta]

Outstanding and thought provoking article.

[verderber]

Some people may not know this but many Mary kay resellers on ebay are being sued by Mary Kay Inc. As far as I know, Mary Kay asked Ebay to stop allowing it, Ebay said No and Mary Kay decided to go after the people with SMALL pockets and it's working... over 25 stores are gone in just a few months... Here's my letter to John Donahoe, Lorrie Norrington...

"To Whom it may concern:

I am emailing you to let you know, if you didn’t already know, that many of Ebay’s Mary Kay Ebay resellers are being sued by Mary Kay, Inc.
I would think this would of interest to Ebay seeing as how there are currently 20,000+ individual Mary Kay listings and over 200 Mary Kay LOTS on Ebay right now as I type. Perhaps it is Ebay’s stance to not get involved with these lawsuits and allow the Mary Kay resellers, selling authentic products NOT in violation of any VERO policies, to handle these lawsuits themselves. With the declining economy and Amazon eating away at Ebay’s sales I would think that Ebay would want to protect their sellers AND their pockets since without the Mary Kay resellers on Ebay, Ebay will lose millions of dollars and 100’s of thousands of listings yearly. I just thought that I’d give Ebay a heads up and let them know that are standing to lose over 1000’s of sellers & millions of dollars without us. I have retained an attorney as a few other sellers have but most (as you may be seeing) are choosing to take the path of least resistance and closing down their auctions, stores and selling out of their inventory. Mary Kay’s “lawsuits” do not even have any factual LEGAL grounds but it has become apparent that with DEEP pockets and a way to intimidate small sellers, they can SUE anyone in Texas. If I lose and have to shut down, Ebay will lose over 3000 listings from me, @ $2K in fees to paypal and ebay every month and that is just ME. I am not a consultant as some other sellers MAY be and have maintained a good reputation on ebay for over 4 years now. It’s such a shame to me that Ebay would allow us to be bullied and strong armed by a company like this. I would imagine that if we were actually committing “copyright and trademark infringement” that Ebay’s VERO program would END our listings since Mary Kay is a member of your VERO program and seeing as that has not happened I guess that is why they are going after us individually; to hurt us financially and give us no other choice but to cease selling on ebay. If a lawsuits like this continue where will Ebay be? Will Ralph Lauren SUE ME because I’m selling a PAIR of their Jeans?? Where does it end? What does Ebay stand to lose by laying back and allowing their sellers to be intimidated with no REAL legal basis?

I’ve seen and spoke to several sellers who are simply closing down. That should be of great concern for Ebay and it’s stockholders.

Very truly yours,
XXXXXXXX"

probably will fall on deaf ears... but it WILL HURT them... and as far as I can see, none of the resellers over on Amazon are getting sued... Just opened a seller account over there today:o)

[global]

great analysis Scot. I enjoy reading your blog as I find it very informative and refreshing.

I agree with one of the comments, eBay will probably have a management change by the end of the year.

One question: You noted that Autos GMV was down 30% y/y. Are you referring to eBay Motors site (including all parts and accessories) or just the vehicles (autos)?

[tj]

Excellent job Scott, looks like eBay are well & truly doomed, can management really be so stupid!

[Tom]

I agree there is still time for Ebay to turn things around but one other thing they will have to do is fix the changes in the feedback system and offer amnesty to the 1000's of sellers that they have suspended since its onset. They need to let the suspended seller back on with 1 account for a trial period. Many people were trashed by power crazy buyers when this was changed. If they would offer this amnesty to the suspended sellers with a new account they would find a flood of new seller and buyer within a few short weeks.

[Donohue's an idiot]

Instead of trying to clone Amazon and failing miserably, Ebay's management should be trying to differentiate themselves and improve upon their strengths. Ebay has forgotten that one big difference between their business model and Amazon's is that Ebay is a marketing company. Not a retailer. They do not handle inventory. Ebay cannot offer free shipping to compete with Amazon Prime so they try to push it onto sellers. That will not work. The mix of FP and Auction listings in search results causes confusion to buyers and damages long time auction sellers.

We will probably see a management change at Ebay later this year.

[Andy Chen]

Great analysis, Scott. Another obscure item in Ebay's Q4 result was that Shopping.com's revenue dropped by an astounding 50% in Q4...at the same time, Amazon just launched it's own comparison shopping program (called Product Ads). I wonder what your thoughts are on how this will shake out.

[Gotta Ride]

A couple of questions.

1. Since I don't see anything which notes otherwise, does the eBay data include international sites? If so, doesn't that skew the data even further in Amazon's favor?
I mean, eBay does better outside the US than inside. Many of those markets haven't matured, while the deceleration is coming fastest on the oldest ones (US, Germany). The US market is the dog, overseas the tail. It takes a while for the tail to stop wagging, but if the dog is sick, the disease will eventually hit the tail as well. Meanwhile, the wagging of the tail can just hide the malaise that the dog is having.

2. How many of the visitors are being siphoned off-site before they ever seriously look for a purchase? We know that eBay is making serious dough off these ads, so much so that they're pushing them even more aggressively. It stands to reason that they're causing a decline in actual buyers, even if there are more people coming to the site (since so many are leaving via 3rd party ads).

2. Scot notes items not being bought at $.99, and attributes this to problems like finding. However, I have to ask, isn't it also very attributable to many fewer real buyers? If the growth #s are skewed by international, and do not take into account the buyers leaving the site, what's the percentage of buyers on the core site actually trying to purchase something? (I doubt we'll ever see those figures!) We can see that page views are WAYYYYYY down. Finding 2.0 isn't helping, but neither does having few serious buyers. Put enough rats in a maze and some will find their way to the other side. The fewer the number of rats, the less likely this will happen...

[Renagade]

Great analysis. And the cause of the rise in Amazon vs. the decline in eBay is simple, and twofold.
1. their user interface - Amazon is making it faster and easier for customers to find what they what and quickly purchase it. eBay, with all the bells and whistles they have added, is simply put, turning people off.
2. eBays shifting away from the auctions - eBays name was built on one word...AUCTIONS...when they started heavily relying on the Fixed price items and the move towards merging auction listings and the Buy-It-Now listings together in the search, things started to go downhill.
eBay HAD a good thing going, and the only way to turn this around is to go back to their roots.