eBay, Amazon, and Marketplace Platforms

As the internet went massive in the mid-1990s, e-commerce companies proliferated. By the end of the century, two leaders had emerged: eBay and Amazon. They had very different business models, and one would become dominant.

On September 4, 1995, the auction site eBay was launched by Pierre Omidyar, a computer engineer who had previously worked in several start-up companies in Silicon Valley? According to the narrative built by eBay, the first item to be auctioned was a broken laser pointer. The bidder was a collector of broken laser pointers, probably the only one in the world. This is the beauty of digital platforms: they facilitate the interaction of individuals who previously had limited chances to interact.

As the number of available goods grew, the platform became more attractive for bidders. As the number of bidders increased, it made it more interesting for sellers, as even the most improbable item might be of interest for at least one person in a large crowd. In this way, indirect network effects benefited both sellers and bidders. Furthermore, any item could be traded, no matter how low the value, thanks to the low transactions costs.

eBay did not develop any infrastructure for the management of goods. eBay does not manage inventory, storage, and distribution; it only provides a marketplace for individuals to make their own transactions. The seller takes care of sending the item to the bidder and eBay takes a commission from the bidder. Thus, eBay, and digital marketplaces in general, are transactional multi-sided markets.

Instead, eBay invested in the development of soft infrastructure to manage transactions. In 2005, eBay acquired Skype, a communications platform (see Chapter 8) so that sellers and bidders could communicate easily, even across borders. In 2002 eBay acquired PayPal, a payment platform already popular among eBay users. PayPal was a digital payments system that facilitated payments between individuals without the intervention of a bank or a payment card company. It was inspired by the peer-to-peer model that was popular for the exchange of music files (see the next chapter). Skype and PayPal were themselves platforms that were creating massive network effects by pooling millions of individuals.

PayPal CEO Peter Thiel correctly identified the potential of network effects, but he also identified the “chicken-and-egg” challenge. A payment system requires a critical mass of participants. In order to solve this challenge, his solution was to focus on a small, closely connected community that could adopt the new service almost as a block. eBay heavy users were such communities? PayPal grew on top of a pre-existing network (eBay) and was built over still another network, the internet. It is indeed easier to build a network on top of another one.

The group of individuals who created PayPal, based on their early and deep understanding of network effects in the internet, ended up having a long-lasting influence on the evolution of digital platforms. The “PayPal mafia,” as it came to be called, would be key in developing platforms such as Facebook, YouTube, Linkedln, and Yelp, which involve individuals and companies that will repeatedly appear along this book.

The initial marketplace for the peer-to-peer exchange of collector items evolved over time to include any saleable good, fixed price sales, and an international reach. As of 2019, eBay had more than 180 million active buyers and revenue close to $11 billion.

The main competitor of eBay was Amazon, originally incorporated in 1994 by Jeff Bezos, an electronic retailer. It started selling books and music CDs. The fact that Amazon did not have physical stores was turned into a competitive advantage as the lack of physical constraints allowed Amazon to manage the largest inventory on Earth.4 That was Amazon’s winning proposition that enabled it to grow. Eventually Amazon expanded to sell basically any relevant saleable item.

Amazon’s strategy was the opposite of eBay’s. The objective was not to invest in soft infrastructure such as communications and payment. On the contrary, Amazon invested heavily in the development of the physical infrastructure to improve the buyer’s experience by reducing delivery times. Amazon has developed the world’s densest network of automated warehouses, where goods are stored and packed, as well as the most efficient parcel delivery network.

Over time, Amazon proved more successful than eBay - its revenue in 2019 was $280 billion, ten times more than that of eBay. Investing in infrastructure proved a winning bid. Such a large size, along with Amazon’s aggressive pricing strategy, have attracted criticism for potential antitrust breaches.5

In any case, Amazon’s success relies on adopting a multi-sided market strategy, which is not so different from eBay’s strategy. In November 2000 Amazon launched Amazon Marketplace. The retailer would also support third parties to sell products on Amazon’s site and make use of Amazon’s physical infrastructure. Amazon became a digital platform in a multi-sided market, intermediating between customers and other retailers and thus exploiting indirect network effects. The more retailers there were, the more attractive the platform was for customers. The more customers there were, the more attractive the marketplace became for retailers.

Amazon Marketplace created tensions inside the company, as the department selling books had to compete with the department managing the marketplace for the sale of used books by third parties - all on the same webpage.6 However, scale was necessary to make Amazon’s logistic network of warehouses and parcel delivery the most efficient logistic network in the e-commerce market.

Amazon’s vertical integration has always raised suspicion among third parties using the marketplace, as accusations of discrimination and predatory pricing strategies have been common. These are common issues when digital platforms vertically integrate and start competing with their customers. Significant challenges exist to ensure the right incentives for third parties to participate in the platform, but it is not impossible, as Amazon Marketplace has shown. In fact, more than half of the items sold on Amazon are sold by third-party sellers, not by Amazon itself. However, suspicion continues, and the European Commission opened an antitrust investigation against Amazon in 2019 for self-preferencing: Amazon would be exploiting access to third-party data as the manager of the marketplace, in order to provide a competitive advantage to its own activities as retailer. Self-preferencing is becoming one of the more common criticisms leveled against digital platforms.

In the international market, the Chinese marketplace Alibaba is a powerful competitor,7 with 654 million annual active buyers and annual revenues in 2019 of $56 billion, even if most of its users and revenue are concentrated in China.

 
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