• by January 29, 2003

In 1999, Amazon.com's CEO, Jeff Bezos, was Time magazine's Man of the Year. Now, three years later, his company looks like it may not survive as presently constituted. eBay, on the other hand, is a bright star in the Internet universe. Understanding the difference between these two business models goes a long way toward understanding what kinds of Internet businesses will be winners in the future.

The Case Against Amazon
Amazon now claims to be a direct marketing company. However, direct marketing has always been a niche business, utilized by no more than 30% of the population. If Amazon’s customer base is to be believed, they have most likely captured that 30%. But, attrition and high acquisition costs will ultimately lead to a shrinking business.

The relationship that Amazon has with its base is strictly commercial. There is convenience, but no emotional component between the buyer and seller. This makes loyalty a problem in the long run. All of the company’s attempts to personalize the experience revolve around transactions ... in other words, "personalizing" purchasing suggestions based upon what you bought before. The Internet was conceived first and foremost as a communication vehicle. Using the Internet in a commercial way without paying attention to its historical roots is a mistake. E-commerce companies like Amazon only give lip service to relationships and communication (which go hand in glove), and in the most rudimentary characterization, direct marketing companies reduce relationships to economic transactions. This has always been a glaring problem, and it is a reason customer attrition is so high.

The Contrast of eBay
Commercializing the Internet medium has been a challenge, but eBay has proven that there can be commercial successes if one uses the Internet in a manner that capitalizes on its strengths. When the Internet is used to lower transactional costs, possibilities for making profits increase. It is easy to see that the cost of processing commercial transactions on eBay is much lower than in the traditional offline auction environment — the opposite of Amazon’s situation.

eBay has also managed to create a place where buyers and sellers come together. It is not a direct marketing channel, but a marketplace. Its economic dynamics are completely different from Amazon — no inventory, shipping and handling, etc.

eBay has created an environment defined by relationships. Buyers and sellers congregate around their interests and often communicate one-on-one. They share interests, from things exotic to the mundane. Passion fuels eBay's growth. Although its users are also customers, there is a cultural component distinct from Amazon's belief that customers are "only economic transactions." Buyers and sellers can check out the other’s profile because eBay offers a personal “Me” section. eBay has become a very personal medium, where buyers an sellers often become friends. In fact the site may be considered a social gathering. eBay buyers do not even say they buy; they use a different language: they "win" the merchandise. They feel lucky to have outbid an "opponent." Nobody ever felt lucky purchasing from Amazon. Buying on eBay becomes a game.

Outlook
Amazon might survive as a niche business or change its model, but as it exists now, I think it has structural problems. eBay's model is sound and looks as if it possesses many of the qualities needed to make a successful enterprise for years to come.