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January 20, 2008

What’s so great about Ebay? 

Everyone who is anyone in the world of financial advice seems to love Ebay these days. Bear Stearns has placed a strong buy rating on the stock. Rich Smith of Motley Fool praises the Ebay business model as follows: 

You see, unlike Drugstore.com, Overstock.com, and Amazon.com, eBay carries no inventory. As a pure play e-commerce "facilitator," it doesn't need to. Every incremental additional sale eBay adds to its income statement brings essentially pure profit, as the company plays gatekeeper and toll collector on the E-Commerce Superhighway. 

 

I see the argument here. And since a share of Ebay  can currently be had for about a third of what a share of Amazon will cost you, adding Ebay to your portfolio may be a good idea in the short term. 

But the simplicity of Ebay’s business model is also the source of its weakness. Any number of companies could emerge as the transaction “facilitator” of choice in the coming years. Craigs List already allows buyers and sellers to find each for free. All it takes it the right software and a bit of exposure.  

Nor can we assume that Ebay has a stranglehold on the concept of the online auction. Google experimented with an online auction service in 2006; and Amazon.com currently offers seller services which have “Ebay-like characteristics.” 

Now, just imagine how difficult it would be for a rival to duplicate what Amazon.com has: all that selection, all that customer service, all those reader reviews and buyer recommendations. Amazon is more than just a facilitator. Amazon has developed a real brand----something that Ebay lacks.