announced it was teaming up with big names like
to pool auction listings across a network of sites. Shares in
fell 10% on news of this potentially powerful new rival.
A year later, eBay has less to worry about. Despite the big names, FairMarket hasn't dented eBay's market share. Neither have
, a pair of trusted Internet brands boasting enormous name recognition among consumers.
The lesson of the last year? Given eBay's continuing dominance, the company's challenge isn't to avoid being squeezed by domestic competitors but to squeeze more out of the catbird seat it occupies -- by continuing to add new markets and capitalizing on its loyal customer base. As other Internet companies stumble along the much-discussed road to profitability, eBay's efforts to apply the lessons of its auction success to its newer ventures will determine whether its shares remain healthy.
How did eBay fend off the competition? If liquidity is key to an efficient market, it makes sense that everyone will want to hang out in the same place, says David Lucking-Reiley, a professor of economics at
. eBay was the first auction site to attract a critical mass of users, an advantage that can be chalked up to its initial emphasis on creating a community of hardcore collectors who made the site their preferred center for commerce. That critical mass attracted more potential buyers and sellers; think of it as a virtuous circle.
However established it was, eBay might have been forgiven for being on its guard when Internet behemoth Yahoo! launched auctions in September 1998. Now Yahoo! says it's up to 3 million auctions, compared with about 5 million for eBay. But in a survey conducted in summer 1999, Lucking-Reiley found that 54% of eBay's auctions resulted in a sale, compared with 38% for Amazon and just 16% for Yahoo!.
Yahoo! doesn't charge fees for its auctions, which at first glance seems like an advantage. But Lucking-Reiley thinks free listings remove the incentive for sellers to make sure auctions actually result in a sale. Most Yahoo! auctions have high reserve prices, he found, with the sellers apparently waiting for some sucker to come along and pay it. At eBay and Amazon, however, sellers have to set relatively low reserve prices in order to increase the chances of a sale -- and recouping the listing fee. (In the period of his survey, Amazon was offering a promotion on listing fees, which may explain the smaller percentage of completed auctions.) Moreover, because Yahoo! allows sellers to automatically relist unsold goods, a lot of stuff gets counted twice.
It's no surprise, then, that market share based on trading activity in the most recent period stood at 92% for eBay, 7% for Yahoo! and less than 1% for Amazon, according to analyst Steve Weinstein at
Pacific Crest Securities
Are You Experienced?
User experience seems to back up Lucking-Reiley's thesis. "Of these three, only eBay gets me consistent bidding and even some healthy bidding wars! It's been great. At the same time, I have not had one sale on the other two," wrote a participant on the
message boards under the user name Biffette. "Yahoo is a giant vacuum ... sucks you in with free listings, easy relist feature ... now you get hundreds of auctions running ... and guess what? Lack of bidders!" complains Quickdraw29.
Of course, auctions were never intended to be Yahoo!'s main bag. "Launching auctions was for us a natural extension of our commerce strategy," which also includes shopping and classified ads, says Brian Fitzgerald, a producer at Yahoo! auctions.
Hopes were far higher for Amazon's auction efforts, which began in March 1999. Amazon's shares shot up 18% over the two days that it rolled out auctions and unveiled its investment in
. Well, it seemed like a good idea at the time. ...
But according to Scott Ehrens, managing director and senior analyst with
, just 400,000 items were recently listed on its site; that number jumps to about a million including zShops, Amazon's mall for small retailers. Amazon wouldn't comment for this article. But analysts say the piddling market share the company has picked up is a disappointment to the Street and to Amazon itself. And it illustrates the difficulty Amazon has had in extending its high profile in the book business to newer product categories.
And for FairMarket Auction Network? A spokeswoman says it, too, was never intended as a challenge to eBay and that things are going fine, from their perspective. Because it's a network, enabling different sites to share listings, as opposed to a destination site, FairMarket doesn't track items listed. But high-profile customers like Excite@Home and
haven't made a splash on the auction scene. eBay has also demonstrated its willingness to fight back against the auction bots that troll its listings without permission; in May it won an injunction against
for doing just that.
Only the Beginning
While eBay seems to have won the U.S. auction battle, it certainly still faces challenges. For starters, the stock trades at a pricey 783 times trailing earnings and 58 times sales. While it may be the big fish in the online auctions pond, there's a limit to how big that business will get.
"We anticipate at some point that the rate of growth
in listings will level off to some degree," says Kevin Pursglove, spokesman for eBay. That means it has got to keep growing with the help of acquisitions like
, initiatives like its Billpoint payment system, international expansion and at some point, attempts to cash in with advertisers on its loyal user base.
And to avoid the fate that has hit Amazon -- less traction in new businesses than its old business -- eBay's got to remember the lessons of its original auction business: develop customer loyalty, create critical mass and provide customers with incentives to make markets liquid and efficient. That will make its second act as good as its first.