eBay Through The Lens Of Porter’s Five Forces

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eBay (NASDAQ:EBAY) is one of the dominant players in the global e-commerce market. While its marketplace segment is currently facing headwinds, we expect long-term growth in this segment owing to eBay’s strong market position. The payment’s business continues to expand at an impressive pace –  its net total payment volume (TPV) rose by 35% during the nine months ending September. In this article, we assess how eBay stacks up along Porter’s Five Forces to analyze where it could gain or lose going forward.

According to our analysis – competitive rivalry within the industry, bargaining power of customers and the threat of new entrants are the three key forces which can pose a threat to eBay’s business. eBay faces huge competition from both online and offline sources, which restricts pricing increases on its marketplace. Due to relatively low barriers to entry, new companies continue to crop up in the global e-commerce market, further intensifying the competition. We encourage investors to watch out for the entry of Apple and Alibaba in the online payments space as it has the potential to disrupt the growth story at PayPal. In addition, Google holds significant bargaining leverage as it accounts for a significant portion of traffic on eBay sites; changes in Google SEO (search engine optimization) algorithm and SEM (search engine marketing) policies could impact transactions volumes on eBay in the future.

See our complete analysis for eBay

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Porter Five Force Analysis

Porter Five Force Intensity
Competitive Rivalry Within The Industry Medium to High
Bargaining Power Of Customers High
Threat Of New Entrants Medium
Bargaining Power Of Suppliers Low To Medium
Threat Of Substitute Products Low

Competitive Rivalry Within The Industry – eBay faces intense competition in both its marketplaces and payments businesses

  • eBay faces competition in its marketplaces segment from both offline and online players. Customers can buy products from a wide range of retailers, distributors, auctioneers, directories, search engines, etc and hence the competition is intense.
  • Various factors such as price, product selection and services influence the purchasing decision of customers.  E-commerce companies frequently engage in price-based competition to woo buyers, which limits their ability to raise prices.
  • In the payments business, there is competition from sources such as credit and debit cards, bank wires, other online payment services as well as offline payment mechanisms including cash, check, money order or mobile phones.
  • Considering the entry of newer players such as Apple Pay and Alibaba, the competition is expected to heighten in the online payments space.

Bargaining Power Of Customers Customers hold high bargaining leverage as they can buy from multiple sources

  • The huge competition in the e-commerce market allows the customers to win as companies have to keep their prices in check to attract buyers.
  • Customers can choose from a wide range of offline as well as online players. A large number of companies have entered the e-commerce space with relatively niche product offerings. Hence, customers can always buy from some other website or some other store in case they are not satisfied with any one player.
  • Since customers demand not only low prices, but also a large range of services and products, their bargaining power is huge.

Threat Of New Entrants – Established players can impact PayPal’s strong market share

  • The e-commerce market is characterized by low barriers to entry. It is relatively easy for newer players to enter the market and start selling products. Having said that, it’s difficult for newer players to gain brand recognition and attain high ranking on search engines.
  • Newer players require significant marketing budgets to compete on a large scale and this restricts entry of newer players to an extent.
  • The online payments market has relatively higher barriers to entry as there is intense competition between established players; additionally, security is a paramount during online payments and hence newer players which do not have the necessary brand recognition will find it difficult to attract new customers.
  • However, established players such as Apple, Amazon and Alibaba have the potential to make a dent in PayPal’s strong market position.

Bargaining Power Of Suppliers Watch out for the impact of Google SEO algorithm changes and shipping providers’ policy changes

  • Tens of millions of sellers list their products on eBay marketplaces; hence their individual bargaining power is limited.
  • However, sellers can also list their products on multiple platforms and sites, including Amazon, Etsy.com and various international e-commerce sites. Hence, if eBay introduces policy and pricing changes that are unsatisfactory to sellers, then it could result in lower number of product listings on its marketplace.
  • There are relatively fewer number of postal and delivery services as well as shipping carriers; hence any pricing change or disruption in their services could hamper eBay’s ability to deliver products on time. Hence, these carriers hold some bargaining power.
  • The sources that generate traffic on eBay’s site can also be classified as suppliers. Search engines hold significant leverage as they account for over 20% of traffic on eBay if we account for both organic and paid search (according to SimilarWeb estimates). Changes in Google SEO (search engine algorithm) have a negative impact on traffic. eBay’ seller marketplace model leads to large amounts of unstructured data on the site, which is detrimental to its SEO efforts.
  • Additionally, several referring sites such as slickdeals.net, dealnews.com and social networks also bring considerable traffic to eBay and any changes in their policies could adversely affect the company’s top-line and profitability.

Threat Of Substitute Products Large product range keeps this barrier low

  • eBay sells a vast range of products on its platform and hence there is no real threat from this porter five force.
  • Further, the product range continues to expand and eBay can easily introduce several different types of products to adapt to changing customer trends.

Our $67 price estimate for eBay’s stock, represents near 20% premium to the current market price.

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