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Amazon & eBay And Their Impact On The Industry

...retail competition; on the other, they have given specialized retailers access to millions of buyers worldwide. Herewith, an in depth analysis of the two mega-players.

The development of the internet ranks as one of the most disruptive forces in the history of retail. Aside from permanently shifting power to the hands of the consumer, it has also given rise to entirely new business models that are dramatically altering the retail landscape—specifically Amazon, eBay, and Reverb.com. eBay began listing musical instruments and audio gear for sale shortly after it was launched in 1995. Amazon was later to the game, only offering music products in late 2004. And Reverb, the newest entrant, has been in business since 2013. Today, these digital platforms are on track to move well over $2.5 billion in music products this year, or about a third of the industry’s total volume. Can they continue to expand at the same breakneck pace of the past decade? Do they present a mortal threat or a new sales channel specialized m.i. retailers? Given the evolving nature of the enterprises, the past doesn’t offer much insight into the future. However, it’s safe to say that the impact of Amazon, eBay, and Reverb on the music industry has far from run its course.

Just how big are these sites? For a large publicly traded company, Amazon’s financials are extremely opaque, and it doesn’t break out the revenues of its five main business units, much less its music products revenue. However, informed estimates place Amazon music sales at about $1.2 billion, with half being generated by third-party sellers making use of the Marketplace. eBay also doesn’t disclose sales numbers for music products, but the best guess is that the division transacts about $800 million in the U.S., with 70% being done by businesses, and the balance by individuals. Reverb is the most forthcoming of the trio, and expects to transact close to $300 million in music sales on its site this year, all through individuals and third-party retailers.

Competition from outside giants is nothing new for specialized m.i. retailers. In 1906, the industry was so spooked by the rapid growth of Sears Roebuck, that NAMM members attempted a boycott of any manufacturer that included its products in the Sears catalog. In the 1920s, when leading department stores like Macy’s in New York and Wanamaker’s in Philadelphia began selling pianos, music dealers were were wary. The guitar craze following the Beatles’ U.S. debut in 1964, led K-Mart, F.W. Woolworth, and just about every other discount chain to load up on entry-level fretted instruments, prompting a NAMM director to declare, “If the mass merchants take over the market, who will be left to provide service, give lessons, and do all the legwork needed to build the market.” More recently, there was much consternation when Wal-Mart, Target, Best Buy, and Costco each made a brief foray into musical instruments, expanding their offering beyond a minimal selection of low-end guitars and portable keyboards.

Despite widespread concerns, brick-and-mortar mass merchants never really had much of an impact on specialized m.i. dealers, and it’s easy to see why. They offered a limited selection of entry level products, and usually only in the fourth quarter; store managers responsible for hundreds of thousands of SKUs, rarely paid much attention to their music products offerings; and at the slightest slowdown in sales, merchandising managers regularly would eliminate, shrink, or move their music offerings to the worst location in the store.

By contrast, online platforms offer an enormously broad selection. Amazon claims to represent more than 800 vendors, 2,000 brands, and 500,000 distinct items in its musical instrument section; the eBay musical instrument and pro-audio sections list 1.7 million new and used goods; and Reverb has about 500,000 items on its site. If it’s on display at the NAMM show, chances are you can find it on one of these sites. All three sites also have a much greater committment to the music products category than the mass-merchant chains. Alejandro Bethlen, Amazon’s musical instrument category leader, says his team “lives and breathes musical instruments every day—many of them passionate musicians themselves. They are in regular contact with our vendors to hear about the latest products and innovations. They are always trying new products or brands and keeping up with the latest trends.” This commitment is probably based less on a love of the category and more on the dynamics of online merchandising. Unlike brick-and-mortar stores, where finite display space constrains selection, Amazon and eBay have virtually unlimited ability expand their product offerings.

Perhaps the biggest difference between Amazon and eBay and mass merchants is that they are simultaneously fierce competitors and useful allies. eBay is exclusively a market platform where third parties list and sell products. Although the site got started as the online equivalent of a yard sale, today about 70% of the sales transacted there are done by businesses, and m.i. retailers from Guitar Center down to hundreds of smaller independents list products on the site. Yes, retailers complain about competing with eBay, but it’s really no different than competing with other m.i. dealers. Michael Mosser, who oversees eBay’s music sales as division merchandising manager for Lifestye, Media, and Toys, emphasizes that “we never compete with our sellers. We consider ourselves partners—when they succeed, we succeed.”

Amazon’s hybrid operations make it more controversial. The company is a fiercely competitive conventional retailer, buying merchandise, selling it on the Amazon website, and processing orders through a global network of 123 advanced fulfillment centers. However, it also acts as a service provider to other retailers. Its Fulfillment by Amazon service (FBA) enables other retailers to place inventory in an Amazon fulfillment center, effectively hiring Amazon to handle order processing and shipping functions. With 90,000 full-time employees, assisted by 30,000 robotic units, these operations are unsurpassed in efficiently moving packages into customers’ hands, giving FBA customers access to the same distribution capability that Amazon founder Jeff Bezos describes as a “major competitive advantage.” FBA also gives third-party sellers access to Amazon’s immensely popular “Prime” free and expedited shipping service. The Amazon Marketplace allows third-party sellers to list products for sale on the heavily trafficked Amazon website, the fourth most visited website in the world, trailing only Google, YouTube, and Facebook.

Reverb is similar in concept to the eBay model, acting exclusively as an online marketplace where retailers, individuals, and boutique manufacturers can place their products for sale. Where it differs is in focus. While Amazon and eBay are the online equivalent of Wal-Mart or Costco—mass consumer sites that respectively reach 300 million and 167 million buyers a month—Reverb positions itself as a boutique, specializing exclusively in music products. Although the site has a much narrower reach—approximately seven million visitors monthly—its specialized search options and editorial content attract a more serious and committed music buyer.

The three platforms also have different pricing structures. Amazon.com charges a 15% commission on third-party retailers who sell products on the Marketplace. The fee also includes credit card processing charges. The cost of Fulfillment By Amazon varies based on the size and weight of items handled, but on average adds an additional 5% to the Marketplace commission. eBay charges businesses a 7% flat commission on items sold. However, merchants that attain “Top Rated Plus” status, based on a combination of positive customer feedback and order fulfillment rates, qualify for a lower 5.6% commission. As a newcomer, Reverb offers the lowest commission rate, a modest 3.5% flat rate with a $350 maximum charge per transaction.

M.I. retailers are a diverse group, but one thing they have in common is shrinking gross margins. Why then would so many willingly give up precious margin points to third-party intermediaries? The answer can be summed up in two words: customer traffic. Amazon’s Bethlen offers some telling detail. “Amazon provides merchants of all sizes with access to more than 300 million customer accounts worldwide, by opening our virtual shelf space and letting them sell right next to us,” he says. According to an internal Amazon survey, 71% of sellers using Fulfillment by Amazon reported a more than 20% increase in sales after joining FBA.
No one disputes the vast reach of the Amazon site, but some m.i. merchants gripe about the inherent conflict between Amazon’s retail operations and its Marketplace. “If you’re listing a product that Amazon has in its own inventory, they’ll always take the sale. You don’t have a chance,” says one m.i dealer, speaking off the record. “The only way to make it work profitably is with a unique product that commands a high margin.” Another adds, “When you sell on the Marketplace, you’re providing Amazon with market research. They watch what you do, and whenever they see you sell something in quantity, they’re quick to stock it and compete with you.”

Despite the complaints, the prospect of interacting with 300 million customers continues to draw retailers to the Marketplace. Bethlen reports that third parties continue to sign up for the Marketplace and FBA, and that “So far this year, customers have purchased 25% more musical instruments than they purchased last year.”

When compared with the cost of buying Google keywords, developing website content, or using search engine optimization to gain visibility in an increasingly crowded internet, Mosser says that eBay’s commission is a compelling value. “eBay has more than 160 million active buyers worldwide, allowing sellers of all sizes to get their brand and inventory in front of millions of buyers,” he says. “Our team, dedicated to the musical instruments and gear category, is constantly looking for opportunities for our partners to get visibility—whether through our Deals program, visual placements, or even homepage ‘Billboards.’”

Matthew Stoecker, who built Quinn The Eskimo into a $5.0 million business selling wind instruments on eBay, agrees. Although he has his own website, he continues to rely heavily on eBay because he says the site “attracts millions of moms and dads looking for a bargain. It’s been well suited for our business.”

Given eBay’s status as a pure marketplace, retailers don’t view it as a direct competitor. However, the company has drawn criticism in the past for the automated algorithm it uses to assign “Top Rated” seller status and the lower commission rate. Some retailers claim to have unfairly lost their Top Seller status because of customers who file phony complaints for “monetary gain,” or simply failing to fill out the rating forms. Mosser acknowledges the complaints and says, “eBay has made a pivot over the past 12-18 months regarding our seller appeal process. We have created rehabilitation paths for sellers, providing a clear path to regain standard status, and frontline teammates have been trained to review each case on its merits prior to taking action.”

Although eBay doesn’t have any fulfillment centers, its sellers can take advantage of discounted freight rates from UPS and FedEx. In addition, the “Fast N Free” algorithm on the eBay site matches customers to the closest seller to minimize freight costs and speed delivery.

Dealing With Price “Bots”
The industry’s suppliers recognize that all three platforms are here for the long term, but remain wary. Their primary concern is that by allowing sales on third-party sites, they cede control over how their product and brand are presented to the marketplace. Automated price-matching “bots” on Amazon routinely lower prices below MAP levels. On eBay, merchandise in an “opened box” is regularly offered below MAP by sellers who may or may not be authorized dealers. Some high-end guitar makers also express concern about guitars being returned with broken strings.

Of the three digital players, Amazon brings the most cause for trepidation, in large part because company representatives have not been shy about their stated goal of becoming the industry’s largest retailer. In an industry that has been so heavily based on personal relationships, the company’s automated business model and algorithms for stocking and pricing decisions are also hard to adjust to. However, as one supplier noted, “They can be difficult to deal with. They won’t even take a call if you’re not at a certain sales level. But, they really do put the customer first, and they expect their vendors to do whatever it takes to make the customer happy.”

How these digital sites impact the way m.i. products are being sold is an ongoing story, and the change they are bringing about is unsettling. However, the vast reach of the sites is prompting retailers and suppliers to shelve their misgivings and adapt. As one explained, “With so many consumers starting the buying process on Amazon and eBay, you can’t afford not to be there.”

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