EBay (EBAY) may be the global powerhouse in the Internet auction arena, but it has struggled mightily in Asia. The $4.5 billion company, which pulled out of the Japanese e-commerce market a few years back, has just announced plans to lay off staff in Taiwan and lags badly behind a local rival in China. Now, eBay's most successful Asian operation is under assault from Korean upstart Gmarket, which is 10%-owned by arch-nemesis Yahoo! (YHOO). Gmarket is readying an initial public offering on Nasdaq, where its shares will be priced on June 28.
All of this must be causing consternation for eBay CEO Meg Whitman back at the company's San Jose headquarters. Just two years ago, eBay's Korean subsidiary, Internet Auction, was the dominant player in South Korea. Internet Auction accounted for 75% of eBay's Asian revenues. Not any more. "Gmarket is neck-and-neck with Korea's hitherto Internet shopping king," marvels Lee Hyun Chang, director at Seoul-based market researcher Metrix.
By one measure, Gmarket has already edged past Internet Auction. In May, Gmarket logged 17.2 million unique visitors, compared to 17.1 million for the eBay unit, according to Metrix. That is a stunning turnaround, given that Gmarket only entered the business in late 2003. In volume terms, Gmarket and eBay each sold about $490 million worth of goods in the first quarter of 2006.
BITTER RIVALS.For Gmarket, the first-quarter performance translated into revenues of $29.6 million, most of which came from transaction fees. That's about three times the sales performance of the year-ago period. In 2005, revenues from transaction fees, advertising, and other earnings totaled $59.3 million, about a fivefold jump from 2004. "Gmarket has taken everyone by surprise," says Park Kyung Min, CEO at fund manager Hangaram Investment Management. "No one had expected it to be a credible force when it began providing an online open market in the fall of 2003."
The situation in Asia is somewhat ironic given that in the U.S. Yahoo and eBay have forged an alliance to protect their dominance in the $12.5 billion online advertising market against Google (GOOG). But in Asia, the eBay-Yahoo rivalry is ferocious (see BusinessWeek.com, 5/26/06, "Tech Titans Take Sides"). Yahoo's Japan subsidiary absolutely crushed eBay in the profitable e-commerce market, the region's biggest, earlier this decade. And it hasn't let up. On June 6, Yahoo! purchased a 10% stake in Gmarket for some $60 million from Oak Investment Partners, a U.S. venture capital outfit that will still own 19.3%
NEW ALLIANCES.Gmarket will gain access to even more capital with its Nasdaq public offering, set for the first week of July, by which it hopes to raise $100 million. "The Nasdaq listing, instead of an initial public offering in Korea, underlines our determination to grow in international markets," says Jo Chang Sun, Gmarket senior vice-president in charge of business strategy. "Our partnership with Yahoo will help us save time and cost in our overseas push."
In fact, the Yahoo and Gmarket alliance will target other markets in Asia. When the deal was announced, Yahoo Chief Operating Officer Dan Rosensweig said: "We look forward to working with Gmarket to leverage their e-commerce expertise to further expand Yahoo!'s leading position in commerce in Asia." Gmarket executives say they are tentatively planning to set up an overseas subsidiary in an unspecified Asian country either late this year or in 2007. Part of Gmarket's IPO proceeds will be used to finance its overseas growth.
The partnership got off the ground last summer when Yahoo co-founder Jerry Yang caught up with Gmarket's CEO Ku Young Bae at an Internet conference hosted by Alibaba.com founder Jack Ma in Hangzhou, China. Yang was apparently impressed enough at that meeting for serious talks to begin about an alliance.
SHOPPING FUN.So what attracted Yang's attention? For one thing, Gmarket's business model places less emphasis on an open auction format than eBay's. The company offers goods that one can order at fixed prices, with an option to negotiate prices with a seller on an exclusive basis. This allows buyers to conclude deals instantly instead of requiring them to wait until all bids are completed in open auctions. That option is available on eBay as well, but at Gmarket open-bidding auctions account for less than 10% of overall sales volume.
More important, Gmarket has introduced a number of marketing initiatives to differentiate itself from eBay. "We wanted to make sure those who sell their products at our site have marketing tools to promote their goods," says Jo. "We refused to limit our role to a provider of an e-market place and an agent of attracting buyers and sellers." The aim is to provide new features constantly at the e-commerce site. Such tactics give sellers various options to attract consumers' attention to their products and at the same time offer some fun to shoppers to encourage them to come back.
TYING IN.One such marketing program is a lottery called "lucky auction." It gives buyers chances to buy everything from LCD televisions to T-shirts at a fraction of the market value. A seller promoting an MP3 player, for example, invites consumers to bid for two of them within a given price range—usually less than 10% of the retail price. Then Gmarket's computer picks two bids at random to decide the winners. Others visitors can buy the MP3 player at a special offer price. The seller attracts consumers, while Gmarket happily hauls in commissions.
Another incentive at Gmarket is that retailers can offer online links to their own mini homepages within the site, issue discount coupons, run joint mileage points programs, and use an internal messenger service called G-messenger for instant chatting with sellers. Some shops listed on the site have also drawn traffic by promising to donate 10 cents to a favored charity every time a product is sold.
A NEW DAY. Gmarket's success has attracted plenty of imitators. Traditional online retailers such as Daum Communications, GS Home Shopping, and CJ Home Shopping have all opened their own online marketplaces, making the competition even tougher. Even eBay's Korean unit has changed its model dramatically by offering fixed-price sales on Internet Auction (as opposed to open auctions), which now account for some 60% of transactions.
For now, however, Gmarket's growth doesn't seem to be threatened. South Korea's e-commerce market is expected to grow more than 30% in 2006. "When compared with the meteoric rise of Gmarket, Internet Auction even looks like a setting sun," says Kim Chang Kwon, an Internet analyst at Daewoo Securities in Seoul. He's forecasting an 80% jump in Gmarket's net profit next year, to $50 million, following a fivefold growth this year to $27.7 million. It all adds up to very impressive growth and a shot at emerging as a regional player in Asia.