Companies with high market capitalization are changing their order one by one.

Companies with high market capitalization are changing their order one by one. For years, eBay has had a much larger market capitalization than Amazon. However, this situation has changed dramatically. I'm going to explain how Amazon was able to beat eBay in terms of fundamentals and valuations.

First, Amazon has outperformed eBay in product innovation. One of the three most important technological innovations of the past 20 years is the Amazon Web Service (the rest are iPhone and Tesla cars), which is actually it. Currently, Amazon Web Services alone will be worth 20 times as much as eBay. However, Amazon has also been highly innovative in other areas, including Kindle, AI device Alexa, Prime shipping programs, state-of-the-art logistics systems, and cashierless stores.

Second, Amazon consistently maintained a longer investment horizon than eBay. In his first letter to shareholders in 1997, Bezos stated specifically about the long-term investment horizon, stating, "We will make investment decisions based on long-term market leadership rather than short-term profitability or Wall Street response."

eBay executives thought long term, but it doesn't seem to have been as successful or as consistent as Amazon. Amazon's executive pay is determined by annual evaluation, while eBay's executive pay is determined by quarterly performance until 2008. It's difficult to prove, but communicating with both executives over the years gave me the impression that Amazon could be more detached from short-term expectations than eBay. eBay sought to manage performance and expectations far more tightly than Amazon.

Third, Amazon obviously had a better management team. And they were more consistent. According to a February 2020 article in The Seattle Times, the average tenure of the Amazon S team (mostly senior executives, such as 20 or so) was 16 years. This is a rare long time even for large corporations in general, and especially for the tech industry. In addition, from the IPO to 2021, Amazon had only one CEO, while eBay had four.

Fourth, Amazon had a bigger market reachability. eBay has always prioritized products at both ends of the cycle, such as the first-generation Xbox consoles and first-generation iPads, which it has tried to compete in the middle of the product cycle, and later-in-the-cycle products (e.g., vintage clothing, baseball cards, and used car parts). This means that Amazon has always had a much larger reachable market than eBay.

eBay's target market was a tiny fraction of the $20 trillion or more global distribution market. As a result, Amazon was able to maintain a higher sales growth rate in the distribution sector for more than 10 years than eBay's. Amazon's growth period was longer.

Fifth, Amazon was more consumer-oriented from the beginning. The first key presented in Amazon's first shareholder letter was about long-term horizons, but the second key was "obsession with customers." Management's most frequently used phrase was "start with what customers need and work in the opposite direction."

eBay's issue, on the other hand, is that it actively focuses on seller success. Over the years, eBay's focus has shifted from small sellers to bulk sellers and then returned to small sellers. Amazon's customers were consumers. This has made a huge difference in the long-term success of the two companies.

The launch of Amazon Prime on February 2, 2005 illustrates most of the reasons for Amazon's success (how it managed to beat eBay and other retailers). After the market closed on the same day, Amazon was planning to announce its fourth quarter earnings. Earlier in the day, Jeff Bezos posted a letter on the first page of his website. In the letter, Bezos announced Amazon Prime, a membership program that offers fast shipping for $79 a year. He said he hopes Prime will attract more customers to Amazon and warned that it will be "costlier for Amazon in the short term."

When the CEO announced a new plan and said, "In the short term, the cost would be high," this was usually a clear indicator that EPS estimates would fall. And that's exactly what happened. Amazon forecasted operating profit for the first quarter of 2005 and the full year of 2005, which was significantly below Wall Street expectations. Additionally, it predicted that capital expenditure would almost double in 2005.

Prime shipping was too expensive a plan for Amazon. The important background knowledge here is that Amazon's operating margin has steadily risen since 2001. Furthermore, 2004 was expected to be a record-breaking year for Amazon in terms of operating margin. It was also a record year. Investors would not like Prime to derail Amazon's profitability train that was on track.

Amazon demonstrated its willingness to invest in long-term plans that would harm short-term investors and benefit consumers by launching Prime Services. Prime Services was able to cut costs in roughly three months for the average Amazon customer who orders twice a month. However, Prime Services lost 15% of the average Amazon investor's portfolio within minutes of earnings release.

Did Prime service work? Of course it did. Prime was the most customer-loyal program in the history of the Internet, or perhaps even in human history. The program had more than 100 million subscribers by 2018 and more than 150 million by the beginning of 2020. According to extensive research I've conducted for about a decade, Amazon Prime customers have become more engaged, buy more, more loyal, and spendful than those of Amazon or any other online retailer. Now, Prime has become one of the key factors driving Amazon's high sales growth.

The launch and success of Prime had all the essential characteristics of Amazon's success story. First of all, Prime was a very innovative service. None of the major Internet retailers offered delivery subscription programs at the time.

At the same time, it was a long-term initiative. In the long run, it was profitable in that it significantly increased customer loyalty, despite being expensive in the short term.

Finally, it was customer-centric. Prime customers were able to save hundreds of dollars in shipping costs over time.

Investors reacted negatively and dragged down the stock price. However, customers reacted positively, and over the next decade, Amazon was able to steadily move beyond eBay and other online distribution businesses.

《NOTHING BUT NET》 Mark. S.F. Mahaney