Is Some Internet Competition Devolving?

March 12, 2009

eBay Retreats in Web Retailing,” the WSJ top story today, suggests some Internet competition may be devolving.

What does it mean that eBay has decided to retreat from competing in web retailing against Amazon and other online retailers of new goods, in order to focus on:

  • Selling secondary-market/used goods, and
  • Brokering overstocked, clearance, or out-of-season goods?

First, it is a stark reminder of the Internet’s unbeatable network effects where the strong tend to get stronger and the weak tend to get weaker.

  • If eBay can’t compete against Amazon in web retailing, when it…
    • Is the world’s largest online marketplace with ~84 million users and $8.5 billion in revenue;
    • Has 149 million PayPal users and commands 9% share of the global e-commerce market;
    • Has the 46th best global brand, twelve slots better than Amazon at 58th, per Interbrand‘s 2008 global rankings…
      • … who can compete with Amazon in web retailing other than maybe WalMart?
  • Moreover, if eBay forfeits the web retailing game in roughly the third inning of the nine inning game — what does that tell us about the rest of the Internet competition game?

Second, it suggests even less business model competition on the Internet going forward. There are basically three main business models on the Internet: advertising, transactions, and auction brokering and each are increasingly dominated by one player.

  • eBay has 95% share of the world market for online auction listings, per Jupiter Research.
  • Google has 70% share of the search advertising and search advertising syndication markets per Hitwise and the DOJ.
  • Amazon has established enough of an advantage that eBay has forfeited the web retailing market.

Third, eBay’s decision to compete less directly with market leader Amazon, has some similarities with Yahoo’s ill-fated decision to compete less with Google by entering into an ad-partnership with Google. That Yahoo decision was ultimately blocked by the DOJ.

  • In both cases, one of the relatively strongest and best informed competitors in a leading Internet market segment, decided to devolve competitively and cede some of their market share to the market leader.

Exit question: What does it mean for the future of Internet competition, overall and long term, if  profitable Internet companies best-positioned to compete in key Internet markets choose to give up on fully competing?




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