Commentary

Google's Answer To Consumer Weakness? Give Amazon, eBay (and Microsoft) Away for Free

In the last few quarters, my company has observed the growing advertising impact of Google Product Search and influence of Google Checkout as Google has established preferred placement for retail product listings within its natural search results pages.

With the quantitative results we're observing across our portfolio of merchants, Google's e-commerce plans are the topic of the day in offices, conference calls and emails. Our marketing managers are keenly interested in the strategy, market potential, and competitive impact of Google's moves on current e-commerce marketplace leaders Amazon and eBay.

What would it take for Google to beat Amazon and eBay at the third-party seller game? Simply cheaper ad inventory built on Google's search monopoly, combined with 35% profit growth on 39% revenue growth year-over-year (Q2 2008 results) self-funding a loss leader strategy that gives online merchants free e-commerce services in exchange for more core advertising dollars.

In spite of Google's incredible year over year growth, Wall Street expects more and expressed disappointment in the form of a 12% drop in valuation following the Q2 earnings report. But Google has the leverage to disrupt major established markets to continue its advertising business expansion, with software services a rich and vulnerable target.

Every retailer knows the classic story of King Camp Gillette and his pioneering razor and blades business model, first introduced in 1903 along with Gillette's namesake products. Whether labeled freebie or loss leader marketing, the key to success is market control gained by giving away for free that which your competitor cannot or will not. Google knows this. Amazon and eBay know it too.

The strategy has proven highly effective in Google's own short history with Gmail and Google Analytics cannibalizing inferior free (Hotmail) or incrementally better fee-based (Webtrends) products and services. In a perfect case of turnabout, Google's Chrome aims to beat Microsoft's Internet Explorer at desktop monopoly. In fact, Microsoft has adopted a wholly new business strategy focused on advertising revenues in response to Google tactics. Now Google has set its sights on e-commerce services as the next lever for ad revenue growth.

Retail Advertisers Win (for Now) at Amazon and eBay's Expense

An online seller generating leads through Google Product Search pays no listing fees, cost-per-click (CPC) marketing fees, or cost-per-acquisition (CPA) commissions on converted orders. Compare this zero cost basis to eBay's 8.75% per transaction on top of their recently announced 35 cent per-SKU 30-day listing fees. Note that 43% of eBay's listings are fixed-price as of August 2008, and eBay has publicly disclosed its strategic shift toward supporting and growing large, branded fixed-price seller participation. Amazon charges no listing fees for participation in the Merchants@Amazon.com marketplace program (a more programmatic and enterprise-ready version of the company's Marketplace branded seller program), but applies a variable 6 - 20% cost per order depending on vertical category.

Amazon's and eBay's fees include credit card processing and seller protections related to fraudulent orders, but Amazon retains marketing control over the end-customer buyer. By some estimates Amazon's third-party seller program generates 40% of Amazon's total order volume, representing $5 billion potential gross merchandise sales worth $450 million in commission revenue at an estimated average 9% transaction fee.

Of note: while Microsoft owns a much smaller percentage of the online commerce market, they are executing on (experimenting with?) a similar loss leader strategy with the launch of Microsoft Live Search cashback (formerly Jellyfish.com), wherein consumers receive cash rebates from Microsoft on purchases executed through the shopping portal. Of course, in the case of Microsoft Live Search cashback unlike Google Product Search, advertisers foot the bill for the consumer rebates.

Google does charge its sellers transaction fees, but applies an aggressive loss-leader pricing strategy funded by AdWords revenue (and a $12.7 billion cash war chest). A seller adopting Google Checkout receives preferential ranking among other merchants in Google Product Search results, benefits from a new trusted method of payment, and sees the entirety of their Google Checkout processing fees credited to their AdWords account balance. Effectively, with Google, all e-commerce services that generate and capture demand are free to the merchant, so long as the merchant is an active buyer of AdWords.

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