Amazon vs. eBay: Business Models and Profitability Compared
This paper compares Amazon and eBay across several financial and strategic dimensions, arguing that despite surface similarities as e-commerce platforms, the two companies differ fundamentally in business model, focus, and profitability. The analysis examines three key profitability ratios (P/E ratio, net profit margin, and return on assets), reviews significant news events for each company, and interprets income statement data and vertical analysis figures. The paper finds that eBay consistently outperforms Amazon on traditional profitability metrics, while Amazon's growth depends heavily on its Amazon Web Services (AWS) division. The conclusion offers strategic recommendations for both companies going forward.
- Introduction: Apples and Oranges: Contrasting core business models of Amazon and eBay
- Company Synopses: Origins, product focus, and revenue streams of each company
- Three Profitability Ratios: P/E ratio, net profit margin, and ROA compared
- Two Key News Events: eBay–PayPal split and Amazon AWS growth
- Income Statement Analysis: Gross profit, operating loss, and net income figures
- Vertical Analysis and Investment Outlook: Assets, liabilities, debt risk, and strategic recommendations
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What makes this paper effective
- Uses concrete financial figures (P/E ratios, net profit margins, ROA percentages) to anchor comparative claims rather than relying on general impressions.
- Maintains a clear evaluative thread throughout — each section circles back to the question of which company represents a sounder investment.
- Balances descriptive background with analytical commentary, showing how news events and structural decisions (e.g., the eBay–PayPal split) translate into measurable financial outcomes.
Key academic technique demonstrated
The paper demonstrates applied financial ratio analysis in a comparative framework. Rather than analyzing each company in isolation, it uses three standard profitability ratios as a consistent measuring stick across both firms, allowing direct, apples-to-apples comparison even when the underlying business models differ significantly. This technique is a staple of undergraduate business and finance writing.
Structure breakdown
The paper opens with a conceptual introduction distinguishing the two companies' core models, then provides background synopses. It moves systematically through three profitability ratios, two news events (one per company), and income statement data, before concluding with vertical analysis and investment recommendations. This funnel structure — from broad context to specific numbers to strategic conclusions — is well suited to financial comparison essays.
Introduction: Apples and Oranges
Comparing Amazon and eBay is really like comparing apples and oranges. The two, while appearing to be the same on the surface, are nothing alike once the superficial labels are peeled off. eBay began as a C2C e-commerce site — consumers selling to consumers. That gradually morphed into B2C as businesses (from large car dealerships to small business owners) saw the advantage of posting items on eBay in order to boost sales. Amazon may appear to the untrained eye to follow in eBay's footsteps by offering a web-based platform where all sorts of sales strategies can be employed — C2C, B2C, B2B — and yet Amazon's ability to dominate the online marketplace has not resulted in significant income from this particular eBay-like niche.
Beyond the platform, the two companies are not similar in terms of how products are sold: eBay offers bidding and direct correspondence between vendor and customer, while Amazon itself acts more as the middleman, allowing vendors to post on the site so that customers can shop. Amazon's core money-maker is in cloud services — not in transactions between a vendor selling goods to a customer, or a consumer purchasing books online. Amazon is everywhere and is generally regarded as having ushered in the demise of the American mall — the traditional brick-and-mortar store. eBay is not credited with this. Yet what money Amazon does make is not generated via the platform that eBay essentially pioneered, though demand at Amazon is less price-elastic than among competitors like Barnesandnoble.com (Chevalier & Goolsbee, 2003). Amazon is carving out its own path behind the e-commerce facade — yet if Amazon is ever to be consistently profitable, it has a long path forward.
Company Synopses
Amazon was founded in 1994 by Jeff Bezos, who began his e-commerce site by focusing on the top five products that could be sold via the Web: videos, books, and CDs along with computers (hardware and software). Thus, the site began as an online bookstore, in the same way eBay began humbly as an online garage-sale site in 1995 (its original name was AuctionWeb). While Amazon envisioned itself as a retailer, eBay always envisioned itself as an online auction site. Over the years, both sites have grown to appeal to producers of virtually everything. In fact, the only items not traditionally sold on either site are liquor and adult materials.
Major suppliers for Amazon are essentially anyone with merchandise to sell, though the main sales categories remain relatively unchanged. Amazon has ventured into acting as a streaming service — like Netflix or Hulu — and is attempting to do everything that any other online business does, even briefly entering the mortgage business through a joint venture with Wells Fargo. eBay's major suppliers range from individual sellers with a single item to ship, to small and even large business owners. Customers are similarly broad — though Amazon is now selling cloud storage to enterprise clients, which accounts for the bulk of its actual income in recent quarters.
Three Profitability Ratios
Three profitability ratios that creditors may be interested in are: (1) the P/E ratio — a company's share price divided by its per-share earnings (the lower the P/E, the cheaper the stock is considered to be); (2) the net profit margin (Net Margin = Net Income or Loss ÷ Sales); and (3) return on assets (ROA). For Amazon, the net profit margin is a difficult ratio to apply cleanly, as the company has expanded into so many sectors — cloud services, retail, streaming, and brick-and-mortar pop-ups. For eBay it is more straightforwardly applicable. ROA is another profitability ratio of interest to creditors, and both companies lend themselves to this measure, though it applies more meaningfully to Amazon given its asset-heavy structure.
The P/E ratio of Amazon is high. Its stock trades at a P/E of 189 — well above the average P/E for the Nasdaq, which sits at 24. Thus, Amazon is very expensive relative to its earnings. The P/E ratio for eBay is much more in line with the market average, sitting at 19. Of the two, eBay is therefore the less risky investment for a creditor according to this ratio.
The net profit margin applied to Amazon shows that the company has been becoming more profitable, thanks to cloud services — but overall the ratio is still modest, at 1.60% for the quarter ending June 30, 2016. A year prior it stood at -0.20%, so the company has made genuine progress. eBay's net profit margin for the last quarter of 2015 was a substantially higher 20.08%.
Amazon's ROA at the end of 2015 was 0.91%. eBay's was 9.7%. According to every ratio examined, eBay emerges as the more attractive investment and the financially healthier company.
To improve its ratios, eBay can continue marketing itself as the premier online auction site and expand into adjacent categories — such as real estate auctions, which sites like auction.com are already pursuing. Amazon must bring its P/E down and its other ratios up. To do that, it would need to narrow its focus — yet narrowing focus runs counter to Amazon's brand identity as the everything store. Management will need to decide how much longer the current trajectory is sustainable. If cloud services can carry the company, Amazon may survive and even thrive as the de facto one-stop online retailer.
References
Chevalier, J., & Goolsbee, A. (2003). Measuring prices and price competition online: Amazon.com and Barnesandnoble.com. Quantitative Marketing and Economics, 1(2), 203–222.
Curbera, F., et al. (2007). Bite: Workflow composition for the web. Service-Oriented Computing, 4749, 94–106.
Di Pietro, I., et al. (2009). Semantic web service selection at the process-level: The eBay/Amazon/PayPal case study. Web Intelligence and Intelligent Agent Technology. DOI: 10.1109/WIIAT.2008.237
Linden, G., Smith, B., & York, J. (2003). Amazon.com recommendations: Item-to-item collaborative filtering. IEEE Internet Computing, 7(1), 73–82.
Statt, N. (2016). Amazon's earnings soar. The Verge. Retrieved from http://www.theverge.com/2016/4/28/11530336/amazon-q1-first-quarter-2016-earnings
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