EBay plans storefronts to challenge Amazon.com, Yahoo!

For eBay, auctions are just the beginning. Soon, it will soon move on a new leg of its strategy to become the Internet's dominant commerce company with eBay Storefronts.

For eBay, auctions are just the beginning. The company will soon move on a new leg of its strategy to become the Internet's dominant commerce company with eBay Storefronts - an e-commerce hosting service for businesses that want to set up standard online stores to sell products with fixed prices in addition to auction-based listings.

An executive with knowledge of eBay's plans said the launch of eBay Storefronts is about two or three months away. Meg Whitman, eBay's president and CEO, has made the storefront project a "top priority" for the company, according to the source. And it's a central part of eBay's long-term goal to rival Amazon.com and Yahoo! as the biggest Internet commerce company in the world.

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"They've been working on this for a while," the executive said.

EBay started developing the storefront offering about four months ago, according to the source. In mid-January, eBay registered two domain names--"ebaystorefront.com" and "ebaystorefronts.com"--although neither is live.

Kevin Pursglove, an eBay spokesman, said only that the company is evaluating whether or not to launch such a storefront offering, and he said no firm launch date or timetable has been set. He also said "eBay Storefronts" is not necessarily the official name of the project. "Right now, we're getting feedback from the users, and there was pretty strong acceptance and encouragement of [a storefront service]," Pursglove said.

EBay is, in fact, moving very aggressively to roll out the storefront plan, according to the source familiar with the initiative. The reason: Storefronts are a critical missing link that will help eBay extend its power in auctions--it recently posted its 500 millionth auction listing to date--to other forms of e-commerce by further locking buyers and sellers into its system. EBay is expected to position the storefront service as a pincer move to beat its two chief competitors, Amazon and Yahoo!, both of which offer auctions as well as hosted e-storefronts to large and small businesses.

The initiative is being developed under Jeff Jordan, senior vice president and general manager of eBay's U.S. operations. Pricing has not been determined. According to a source inside eBay, the various pricing models the company is considering include charging merchants a fixed fee for each transaction, a percentage of merchants' gross merchandise sales or a flat-rate monthly fee.

Unlike Yahoo!, eBay focuses only on e-commerce and boasts 22 million registered users who come to the site specifically to purchase products or services. And unlike Amazon, which hosts small merchants on its zShops site, eBay doesn't sell merchandise itself, so there is no potential conflict with its business customers.

"EBay is solely focused on improving the marketplace, whereas for Yahoo and Amazon, it's just one aspect of their business," said Jill Frankle, an e-commerce analyst at research firm Gomez.

But Shannon Ledger, Yahoo!'s vice president and general manager of small business, said the fact that Yahoo! is not only in the commerce space makes it an even stronger provider of e-commerce services.

"There are portions of the site that aren't commerce-focused that still drive users to commerce sites," she said.

Furthermore, Yahoo! has a healthy three-year lead over any move by eBay to host e-commerce sites, Ledger said. Yahoo! Store has 13,000 merchants, including Ben & Jerry's Homemade Holdings and Crabtree & Evelyn, and the site cleared $1.4 billion worth of auction and e-commerce transactions in the fourth quarter of 2000.

Some analysts said eBay's expansion into fixed-price e-commerce storefronts would be a natural extension of its business. Many small companies already rely on eBay for a certain percentage of their transactions, and storefront services would expand that relationship, said Carrie Johnson, an analyst at Forrester Research. "The trend in auctions is going away from person-to-person and toward business-to-consumers," Johnson said. "EBay would really just be backing up in its business to take on hosted storefronts."

Not everyone agrees. "The margins aren't as good in hosted storefronts," said Andrew Bartels, an e-commerce analyst at Giga Information Group. "There may be customer demand for this, but it's not going to be as attractive as their regular business." One of the problems eBay faces is that an undisclosed percentage of transactions occur outside its service. Buyers and sellers often hook up after an auction fails to meet a reserve price, and eBay has no way to get a piece of the final sale. EBay refers to these as "gray market" transactions and in January it took a key step to reduce them by hiding the e-mail addresses of buyers and sellers from one another. EBay said the new policy is intended to reduce spam, but it was widely interpreted as a way to ensure that all transactions go through its site.

EBay Storefronts will further address the issue of "transaction leak" by letting small and midsized businesses--or even large companies--operate their own e-commerce sites directly through eBay. The idea is that merchants that acquire loyal customers through eBay auctions will now be able to direct them to their own branded eBay-hosted storefronts instead of to external Web sites.

"It's a defensive strategy," the eBay source said. "They feel they have to do this to keep the shoppers from leaving their platform."

In its bid to conquer all e-commerce, the storefront push would complement eBay's strategy to make its "commerce engine" pervasive on the Internet. Last month, eBay announced an alliance with Microsoft, under which the companies will extend eBay's Application Programming Interface--which allows third-party sites to hook directly into eBay--by using Microsoft .Net technologies.

Microsoft has also held talks with eBay about providing the services for eBay's hosted storefronts, but no formal agreement has been made, said Marcus Schmidt, lead product manager for Microsoft's bCentral. Microsoft and eBay are already working together to allow bCentral's 1.6 million registered small businesses to list and manage products on eBay's auction site, Schmidt said.

In addition to Half.com, a site that eBay bought last year that lets sellers offer items at a set price, eBay has experimented with fixed-price selling with its Buy It Now feature, launched in November. Originally, the feature was intended to last just through the holiday season, so nervous shoppers could buy something immediately instead of waiting for an auction to end. Since then, Buy It Now has grown even more popular--about 25 percent of the 5 million-plus items listed on eBay auctions use the feature--so eBay plans to continue offering it.

EBay's virtual marketplace saw stunningly high gross margins of 82 percent last quarter. In comparison, erstwhile king of e-commerce Amazon, which buys goods and ships them out, has average gross margins of about 20 percent. Clearly hosting small-business storefronts is not very lucrative, especially compared with auctions; Intel, for example, recently shuttered its small-business hosted storefront center, iCat, because it was losing money, Giga's Bartels said.

EBay's Pursglove suggested other sites that have tried the storefront concept and failed have not been able to attract a critical mass of buyers. "The thinking is that we've got 22 million people who have been buying and selling from the very beginning," he said.