How to dominate the online auction market
Jeffrey Phillips • Brian Somok • Xiaoke Zheng
eBay Inc history:
September 1995: funded as a sole proprietorship.
May 1996: incorporated in California.
April 1998: reincorporated in Delaware.
September 1998: completion of initial public offering
October 2002: acquired PayPal
Online Auction: Every day, 24 hours a day, 7 days a week, 365 days a year, millions of people from all over the world go shopping at online auctions. This is not an exaggeration - eBay, with a 76% share of the auction site market, reports 42.7 million users and a growth factor of 100% per Year
Porter’s Five Forces Analysis
Rivalry is very intense. Yahoo had to give up Japan and Australia online auction sites in 2003 because of low margin in this market even if Yahoo made great investment in these two sites beforehand.
Number of firms
Online auction firms: www.eBay.com, www.overstock.com, www.ubid.com, www.yahoo.com, www.amazon.com, www.CQout.com, www.bidville.com, etc. The large number of firms in this market reflects the intense competition among those sites. Margin profit is decreased to a relatively low level. eBay could still survive because of its scale of economy and good reputation. However, eBay’s growth in 2004 was much smaller than in 2003. Shareholders put much pressure on eBay, and eBay had to readjust its pricing on varied services on the short run in order to satisfy people’s short term expectation. However, he is risking his long term revenue and reputation.
Essentially, fixed costs on online auction market are rather low: purchasing programming technology patents, web, administration, credit, accounting, staff, and daily operations.
Differentiation depends on how the transaction is performed. There is not too much difference among different online auction companies in web processing efficiency and shipping efficiency, but eBay is more convenient than others, due to their lengthy expertise in the market. eBay differentiated itself by integrating PayPal payment system, which is famous for its security, cheap rate and network utility. eBay offers a cheap transaction fee rate, as well. It has greatest number of users by far, which offers excellent network utility. Amazon used to be a substitute product provider. However, since 1999 Amazon added auction module in its business. eBay likewise encroached on Amazon’s niche by adopting fixed price functions like “buy it now” button and purchasing www.half.com. eBay and Amazon have been less different and therefore rivalry has increased a little. However, there is still an obvious gap between them in terms of business model and software development. Amazon built its reputation with high-end users. It has a friendly and succinct transaction interface, which offers superior product mix. Amazon is utilizing Porter’s value strategy and has not changed this for years. On the other hand, eBay is a large community of small buyers and sellers who deal with single-item transactions at negotiable prices. It has a created cost advantage by scale of economy. Most goods traded on eBay are secondhand, and eBay’s inventory changes more rapidly than Amazon’s. eBay is actually taking Porter’s cost strategy. Different business models result in different financial performance. eBay generated $441 million profits in 2003 on $2.17 billion revenue compared with Amazon's much smaller $35 million profit on far more revenue -- $5.3 billion. eBay has a more liquid and efficient financial structure. Besides, these two companies are both valued by their own network/community. Most customers don’t switch between auction and fixed price retail very often partly because they are rooted in the community culture of either network. They don’t have incentives to change their current method of transaction if it is satisfactory. Different business models and different networks...
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