Thursday, April 22, 2004

Kill eBay, Vol. 1

eBay has announced another good quarter. Is this flea market turned shopping superstore really invincible?

Those who argue that a natural monopoly exists in online auctions claim that the auction site with the most users always is better. Buyers want selection from a large number of sellers and competition between sellers to drive down prices. Sellers want a large number of buyers to get the best price and drive high sales.

Others have argued that any site that has a critical mass of buyers and sellers is competitive. Growing the user base hits a point of diminishing returns. Sufficient sales volumes are sufficient sales volumes. The bar is much lower with this model. You don't have to be bigger than eBay, you just need critical mass.

Whether you believe the natural monopoly, bigger-is-always-better theory or the critical mass theory, there is a way to attack eBay. It is not necessary to be the biggest auction site overall. When a buyer is looking for a used copy of a Harry Potter DVD, all that matters is the number of sellers of the Harry Potter DVD. A competing auction site could focus on a particular category, perhaps computer hardware, CDs, or DVDs, and build scale in this category. Acquire more buyers and sellers in this niche, dominate the category, then move on to the next, chipping away eBay piece by piece. Selling liquidation merchandise might be one way to bootstrap, attracting buyers to a relatively low volume site with low prices. Auctions failed because it arrogantly attempted to attack eBay head on. Had Amazon focused on dominating specific categories such as books, music, and video, we might be looking at a very different situation today.

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