UPDATE: I posted two follow ups to this post. One is on the consumer frustration with eBay. The other is about the disillusionment of its sellers.
For years it was impossible to even suggest that Amazon buy eBay because eBay’s market value was three or four times that of Amazon. And there was good reason for that: EBay’s margins have been far higher because it simply moves bits around, while Amazon has to move boxes (and take the risk of owning inventory it can’t sell).
Now the tables are turning. Amazon is in favor on Wall Street. Its shares are up 150 percent over the last year, giving it a market value of $38 billion. EBay’s stock has been flat for a year, and it is now worth only a little more than Amazon at $45 billion.
Amazon has been improving its margins, in part because it is increasingly acting as a broker for goods sold by other merchants (and doing a better job for new merchandise than eBay stores or eBay’s Shopping.com). Amazon’s margins, to be fair, have been hurt because it is paying for a lot of two-day shipping under its Amazon Prime program. Amazon also has a wild card in its growing sideline business of selling storage and processing services to other Web businesses.
EBay is more of a puzzle. It still has great margins, but its growth is slowing. Moreover, its recent acquisitions — Skype, Shopping.com and StumbleUpon — don’t seem to be adding much. EBay’s core auction business is also challenged. Fraud is a drag. And many sellers are turning to Amazon or selling directly on their own sites, using Google to attract customers.
The key for me is that Amazon is a very well-run company that has been a leader in technology and disciplined in its management, and most importantly has a knack for satisfying customers — both buyers and other online merchants.
EBay’s management wins credit for not messing up one of the best business models ever invented. But it scores far lower on innovation. To my eye, the site’s design and technology have never been in the same league as Amazon’s.
Let’s also consider the benefits of being in a low-margin business. Jeff Bezos, Amazon’s founder and chief executive, has always tried to emulate Costco and Wal-Mart, which both keep costs down in order to keep prices down. Low prices, rather than advertising, bring in customers. For example, Amazon Prime, which builds on the efficiency of Amazon’s distribution system, is a way to delight customers with good value and also fend off less efficient competitors.
EBay, by contrast, has a stated goal of increasing the percentage of volume its sellers pay it. In other words it wants to keep raising prices. That has made it vulnerable to far more efficient models, like Google Ads.
So what about a merger? I like it because customers benefit. Amazon could no doubt substantially improve the eBay site. It could find a way to deliver better value to merchants, in part perhaps by extending to them the use of its distribution facilities. And it would offer even more selection to shoppers on a single site.
Oh yes, even after doing all that, Amazon’s margins would go way up.