Two eCommerce Opposites

Washington Post looks at the two contrasting approaches taken by eBay and Amazon:

EBay raised its prices this month for the fourth year in a row, while Amazon renewed its pledge to keep cutting prices even if it means lower profits. The contrast reflects how much more power the highly profitable eBay wields than, which reported its first-ever annual profit this week. Their business models differ, too, since eBay owns no inventory and its prices are commissions charged to sellers. But their diverging strategies also suggest a difference in attitude that may bode well for Amazon and ill for eBay.

Starting next week, an item selling for $150 on eBay will cost a seller $7.15 in fees, or about 5 percent of the sales price. And that doesn’t count payment processing fees eBay collects from many sellers through PayPal, its payment subsidiary. You have to wonder how long eBay can sock it to sellers in the form of annual price increases before small sellers start fleeing to rivals such as Yahoo and Amazon.

It’s interesting to watch eBay and Amazon marching toward some middle ground in retailing after each started in opposite corners. For years, eBay was home to small merchants who sold mostly used goods at auction prices. It has since added loads of big retailers who sell new merchandise, some at fixed prices. At the same time, Amazon started as a direct seller of new books and subsequently invited other merchants to sell both used and new merchandise on its site. Amazon collects commissions on those third-party sales, just like eBay does, which yields higher profits for Amazon in part because it doesn’t have to buy those goods.

Gateway to buy eMachines

A few years ago, eMachines was given up for dead. It was revived by Wayne Inouye. Now, the fairytale turnaround (a rarity in the Dell-dominated PC industry) has attracted an embattled Gateway, which is buying eMachines for USD 266 million in stock and cash. “The companies’ combined PC businesses would constitute the third-largest PC manufacturer in the United States, Gateway said, and rank it eighth in the world. By making a bid for eMachines, Gateway is hoping to combine the best of two worlds, creating a much larger PC business and giving itself additional sales channels for consumer electronics, such as its Gateway televisions, both inside and outside the United States. The move could allow Gateway to double its annual PC volume from about 2 million to about 4 million units and position itself as a very strong No. 3 to Hewlett-Packard and Dell, Ted Waitt, Gateway’s CEO said.”

The secret behind eMachines’ success: “eMachines has been one of the fastest-growing PC companies in the United States. Last quarter it posted a higher unit shipment growth rate than any of the other top manufacturers in the United States. It grew unit shipments almost 21 percent year over year to 498,000 units, which moved it back into the top five manufacturers in the U.S. market, according to IDC. eMachines also operates with a unique business model, designed to help keep its costs low. It only builds enough PCs to satisfy orders from retailers. It also aims to sell all of those PCs by the end of each quarter. Meanwhile, it does not accept returns or provide price protection to retailers against future price drops, two measures that could also cut into profits.”

Another report gives the background to the acquisition from eMachines’ viewpoint:

In late 2001, the company’s shareholders agreed to its acquisition by one of the company’s directors in a buyout that took eMachines private in a deal worth about $161 million.

Rather than fade into oblivion, like so many other PC makers of the previous 20 years, eMachines found itself at the start of a turnaround. The company was able to boost its share of the U.S. PC market from 2.1 percent in the first quarter of 2002 to 3.4 percent by the end of last year, rising from ninth to fourth in terms of market share, based on units sold. During the same period, Gateway’s share of the U.S. market dipped from nearly 6 percent to just below eMachines’, also at about 3.4 percent, for the last quarter of 2003, according to IDC.

Despite its success, eMachines faced challenges for the future, some of which led it into Gateway’s arms. One of the most pressing issues was where to get the money needed to continue the company’s expansion into notebook computers and overseas markets.

“Clearly, eMachines had been struggling with how to bring capital into the company,” IDC analyst Roger Kay said. “They had even talked about going public.”

Although the company was profitable, analysts doubt that eMachines was making much money, likely posting margins of just 2 percent or 3 percent. “They had to work really hard to make $20 million or $30 million (a year),” said Stephen Baker, an analyst at the NPD Group. “That’s hard work.”

More inputs from Fortune and WSJ.

Linksys Story

Inc crowns Janie and Victor Tsao who co-founded Linksys as Entrepreneurs of the Year. Cisco acquired Linksys for USD 500 million last year. Here’s how they began:

Like not a few business owners before them, the Tsaos heard the entrepreneurial clock ticking: They were determined to be independent before they reached the age of 40. Victor was 37 and Janie was 35 when they decided to put to use their familiarity with Taiwan (where they’d met at Tamkang University). They were both working in information technology–Janie at Carter Hawley Hale and Victor at Taco Bell–and with Victor a step higher on the corporate ladder they decided that he would continue to punch the clock while Janie launched the business, a consultancy they named DEW International. The new company mated American technology vendors like Northgate Computer with Taiwanese manufacturers that could make their wares cheaply.

Soon, one of those manufacturers brought them an idea. At the time, the cables used to connect printers and PCs could extend only 15 feet before the data began to degrade. To solve this, the manufacturer invented a setup that used telephone wire to extend the reach to 100 feet. This company needed someone to market the thing in the U.S. “With companies like that,” says Victor, “actual English was not their strength.” The manufacturer came up with products that connected multiple PCs to multiple printers, and the Tsaos renamed their company Linksys. Victor quit his job in 1991, and within two years Linksys had moved twice, eventually to a 2,000-square-foot office, and each month was selling 8,000 Multishares, as those units were called, through tech catalogs like Black Box. In these early years, the Tsaos invested $7,000 in Linksys, the only capital the company required until it tapped a bank loan for the one and only time, in 2001. (They paid that loan off in less than six months.)

Linksys slowly expanded from printer-to-PC connectors to PC-to-PC Ethernet hubs, cards, and cords, gear that let small businesses and nerdy households connect computers so that they could share data. It was a niche market, and with 1994 revenue of $6.5 million the company was far from a behemoth. But slow growth was the only way the Tsaos could expand without taking on debt or investors. While Victor managed operations and finances as CEO, Janie handled sales in her job as vice president of business development. As Mike Wagner, the company’s director of marketing, puts it, “Janie brings the money in, Victor keeps everyone from spending it.”

Fast and frugal – that sums up Linksys.