Why a merger with Flipkart could be the only saving grace for eBay in India

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It was March of 2005. India had just about 38 million internet users, less than tenth of what it has currently. Growth potential of India’s e-commerce space seemed promising.

Banking on this hope, US-based online marketplace eBay launched its e-commerce business in India. Just a year ago, eBay had acquired Indian online marketplace Baazee.com in 2004 in order to pave this entry.

It’s been 12 years since that launch. India has over 450 million internet users now.

However, eBay’s journey has not gone ahead as per its plan.

The company which had an early mover advantage has succumbed to competition from much younger rivals such as Flipkart, Snapdeal and its American rival Amazon.

When it could no longer take on the competition, eBay decided to invest in its rivals a few years ago.  eBay invested in rival Snapdeal in 2013. It is now reported to be in talks with larger rival Flipkart for a possible merger.

Moneycontrol Startups charts the story of the San Jose firm’s journey in India to gauge where it lost the plot.

A slow transition from Auctions to Marketplace

eBay India started off as a trading platform offering auctions, quick buys and classifieds modes of person-to-person trading. One could sell gems and jewellery, handicrafts, clothes, even used electronics on the site.

In 2015, eBay announced the launch of eBay India finally merging Baazee’s technology platform with eBay’s.

Auctioning was a popular method of buying products in the US and was seen a good method for price discovery.

India, however, was a very different market. A thing like auction wouldn’t quite match the requirement of the customers here.

eBay claimed then that the buyers and sellers had an access to a global trading community of 135 million across 32 markets globally.

According to a blog post on the company’s website, it then saw great potential for Indian entrepreneurs to trade globally especially in categories like apparel, leather collectibles, handicraft and jewellery.

“eBay had entered into India with an aim to build an Amazon for India, before Amazon could actually enter into the market. It, however, couldn’t even come near to it. The company was built on an auction platform. It acquired online marketplace Baazee (online marketplace) to set up its business in India. The acquisition didn’t go very well,” said a former executive of eBay who spoke on the condition of anonymity.

“Bazee was always built to be a marketplace. It had robust end-to-end payment and shipment notification system, payment build-in etc. After eBay acquired Baazee this entire layer was ripped off and it went back to focus on the auction platform,” the source added.

According to another person who requested anonymity, it took the company a good 3-4 years to come back on the track.

It shifted its focus back on the marketplace model from auctions.

“India was getting comfortable with e-commerce. Our objective was to make people comfortable in purchasing from someone who was not present in front of them,” said another senior former executive requesting anonymity.

“For long, US-based eBay continued to provide things which were very different from what Indian consumers wanted,” he added.

PaisaPay helped eBay gain trust with the Indian user

Selling online was another challenge. The market was highly immature. There used to be basic inhibitions by buyers — “Will I get the product that I have ordered? Will I get the same product that I have ordered?”

Building in trust in consumers for online buying was a big task, a former eBay employee told Moneycontrol Startups.

Soon eBay launched its payment platform PaisaPay, with an escrow-like mechanism. It would ensure that only after the customer received the product and submitted that he was ‘happy’, will the payment be made to a seller. Else the payment would be returned to the customer.

This move helped Mumbai-headquartered eBay India gain some footing, said the person quoted above.

He added that eBay was touted to be an undisputed market leader and used to be the largest in terms of gross merchandise value, orders and enjoyed over 50 percent of the market share, till almost 2011.

By then eBay was competing with Bangalore-based domestic rival Flipkart that had raised over USD 30 million in multiple rounds from hedge fund Tiger Global, among others.

Launched in 2007, Flipkart now was expanding from being an online book selling platform to offering movies and music-related products, too. Snapdeal which had started off as a deals platform, too by now had started selling products online.

The American giant was struggling to compete against the newly formed local rivals. That’s when eBay, decided to invest in Delhi-based Snapdeal and participated in its USD 50 million round along with existing investors such as Nexus Venture Partners and Bessemer Venture Partners in 2013.

According to a report in NextBigWhat, eBay had close to USD 10 billion of surplus cash which it had to deploy outside US. The company needed to have a big presence in the India market before the entry of rival Amazon (https://www.nextbigwhat.com/ebay-invests-in-snapdeal-297/).

The report said that Snapdeal’s focus on marketplace model was one of the biggest attraction for eBay Inc, which expected a global revenue of USD 10.5 – USD 11.5 billion in 2015 from the marketplace model.

But all this was happening even while eBay India was losing market share.

The market soon saw the entry of US behemoth Amazon, which launched its India website in 2013 and started off with categories such as books and movies.

These developments changed the whole narrative.  “Unlike eBay, Amazon didn’t need to customize its product for the Indian market. Their product was much more suitable for the Indian market than eBay’s. Besides, eBay could also never match the user experience as offered by Amazon,” said a third former employee of eBay India.

Tech decisions dictated by San Jose

The senior executive quoted above also highlighted that eBay had a very monolithic view of eBay India. “All software development had to happen from San Jose. The option to take a call locally didn’t exist,” he said.

The days of cash burn and rising investor interest had started in India and almost every investor wanted to have a pie of the rising e-commerce market. From 2011 to 2014, the Indian e-commerce industry grew from a few millions to over USD 10 billion. eBay India somehow completely lost the plot there.

“When you are in a market which is growing very fast, the leader should spend more than the rate of growth of the market. Else, the largest firm will lose the market share the most,” said one of the senior executives quoted above.

2013 saw an investment of USD 567 million in the Indian e-commerce sector with Flipkart and Snapdeal together mopping up USD 360 and USD 50 million, respectively.

In 2014, eBay again participated in USD 133-million round in Snapdeal. According to media reports, the company also hinted at plans of acquiring Snapdeal eventually. Nothing of that sort happened.

Dilutes stake in Snapdeal, bets on Flipkart

In August 2015, eBay announced that it had sold a portion of its investment in Snapdeal, without disclosing the details. “Over the past two years, the valuation of Snapdeal has significantly increased, and because eBay was an early investor, this sale will enable us to earn a strong return on our invested capital and strategically redeploy it into other areas of our business,” Scott Schenkel, Senior Vice President and Chief Financial Officer said in a blog on the company’s website.

According to a report in Mint in August, eBay held around 9 percent stake in Jasper Infotech, the parent firm of Snapdeal, after Softbank Group announced USD 627 million in Snapdeal.

In 2016, eBay’s revenue growth slowed for the financial year ending March 31, 2015, with a revenue of just over Rs 132 crore, a rise of 23 percent against Rs 107 crore during an year-ago period. It had reported a growth of 33 percent on its revenue in FY14 over a revenue of Rs 81 crore during the financial year FY13.

This, at a time when Snapdeal reported a revenue of Rs 933 crore in 2015.

According to a person quoted above, for all practical purpose eBay has exited Snapdeal.

In a note eBay has said: “eBay continues to own equity stake in Snapdeal, but as a policy we don’t share details of our investments. We also don’t comment on market share and on our internal strategic decision making process.”

eBay is currently in talks with Flipkart for a potential merger, which is raising a USD 1 billion round, with Microsoft, eBay and Tencent as main investors.

According to a person privy to the development, eBay is likely to invest in the merged entity only once the due diligence gets over.

The company is recently likely to have reported a gross merchandise value of USD 400-500 million, according to industry sources. Moneycontrol could not independently verify it.

This GMV figure would include its imports in India, exports to global customers and domestic purchases.

eBay’s journey in India offers great learnings for other companies. Local decision-making, investments in marketing, promotions and people have become key to penetrating this growing Asian market.

The USD 9 billion company was just plodding through the India market till now. A merger with Flipkart will at least be a face saver for ebay against its American rival Amazon which is on a blitzkrieg.