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The Honolulu Advertiser

Posted on: Sunday, February 1, 2004

EBay, Amazon strategies offer study in contrasts

By Leslie Walker
Washington Post

MEG WHITMAN

JEFF BEZOS

Analysis — EBay executives bubble with optimism as they discuss plans to raise prices to cash in on its success, while down-to-earth Amazon plans to lower prices to build customer loyalty.

EBay and Amazon.com, the Internet's top two e-commerce sites, are taking opposite approaches to growth.

EBay raised its prices last month for the fourth year in a row, while Amazon renewed its pledge to keep cutting prices even if it means lower profits.

The contrast reflects how much more power the highly profitable eBay wields than Amazon.com, which reported its first-ever annual profit last week. Their business models differ, too, since eBay owns no inventory and its prices are commissions charged to sellers.

But their diverging strategies also suggest a difference in attitude that may bode well for Amazon and ill for eBay.

Listen to eBay chief executive Meg Whitman gushing about the company's quarterly earnings on a conference call with investors last week: "The eBay marketplace is a powerhouse," she crowed. "We continue to enjoy ever-bigger, ever-faster cycles of success, fueled by the unlimited opportunity of our huge addressable market."

Unlimited? I suppose if eBay could piggyback on President Bush's plan to send humans to Mars, that might be true.

On Amazon's conference call with investors last week, by contrast, chief executive Jeffrey Bezos sounded down to earth. He didn't flinch when an analyst asked why the firm insists on lowering prices.

Bezos said his company believes in giving customers what they want. "The things that matter to them are convenience, selection and lower prices," Bezos declared.

He said the company has made a "conscious decision" to drive product prices lower on the belief that it will ultimately pay off in higher sales. "We will, for years and years and years, consistently give back the gains we get in lower operating costs to our customers in the form of lower prices," he vowed.

Contrast that with the rhetoric from eBay execs, who raised the company's 2004 sales forecast, predicting it would collect $3 billion in revenue this year, a full year ahead of a target it set two years ago.

Yet after years of growing much faster than rivals, eBay is finally showing signs of a slowdown, however slight. Last month, the auctioneer reported earnings of $143 million on $648 million in revenue during the final quarter of 2003. Yet its 57 percent increase in quarterly revenue was down sharply from the 89 percent revenue spurt eBay saw a year earlier.

Which may be why eBay decided to raise prices. Starting today, the fees it charges to list items for sale are going up sharply.

Items with bid prices starting at more than $500 will cost $4.80, up 45 percent from the current listing fee. Items priced from $1 to $9.99 will cost 35 cents, an increase of a nickel, or 17 percent. While there's no increase for items priced under $1, fees for setting reserve prices in some cases will double.

Separately, eBay collects commissions on the final value of each item sold, and it raised those fees by roughly 10 percent two years ago. Last year the auction giant raised prices for several other services.

To put the company's complex fee structure into simple perspective, some 292 million items were listed for sale on eBay in the last three months of 2003, which generated $502 million in fees — or about $1.72 per listing. Higher-priced items, naturally, cost more to sell.

Starting this week, for example, an item selling for $150 will cost a seller $7.15 in fees, or about 5 percent of the sales price. And that doesn't count payment processing fees eBay collects through PayPal, its payment subsidiary.

Five percent might seem paltry when you consider the tens of millions of buyers who frequent eBay; to be sure, putting up brick-and-mortar stores would cost a great deal more. But you have to wonder how long eBay can sock it to sellers in the form of annual price hikes before small sellers start fleeing to rivals such as Yahoo and Amazon.

It's interesting to watch eBay and Amazon marching toward some middle ground in retailing after each started in opposite corners. For years, eBay was home to small merchants. It has since added loads of big retailers who sell new merchandise.

At the same time, Amazon started as a direct seller of new books and subsequently invited other merchants to sell both used and new merchandise on its site. Amazon collects commissions on those third-party sales, just like eBay does, which yields higher profits for Amazon in part because it doesn't have to buy those goods.

That's probably the biggest difference between the two Internet commerce leaders — how eBay's lower costs yield fatter profits. Fair revenue comparisons are tough, precisely because Amazon still owns most of its inventory and includes those costs in its reported revenue, while eBay neither buys nor ships any goods.

But any way you look at it, eBay is the giant. Its sellers moved $7 billion worth of merchandise in the fourth quarter last year, while Amazon's gross sales totaled $1.94 billion.

EBay's gross profit margin — revenue minus cost of sales — amounted to a whopping 82 percent. That's after subtracting the cost of running its Web site, customer support and payment-processing operations.

And eBay's bottom-line profit stood at 22 percent of its revenue after subtracting all other expenses, including the hefty $172 million that eBay forked over for marketing and sales expenses. Amazon's gross profit for the same quarter, by contrast, was 22 percent, and its bottom-line profit was under 4 percent.

Given its profits, no wonder eBay executives can afford to hopscotch around the world in the $30 million private corporate jet the company purchased a while back.

But I can't help feeling dismayed by the self-congratulatory tone of their comments to Wall Street. In fact, it reminds me of the cheerleading we used to hear from executives at America Online before the onetime king of new media merged with Time Warner.

And we all know how that one turned out.