The “e-commerce revolution”: free listings and a new revenue structure (2013)

From a fee model to an advertising model

The essence of this decision was not to beat Rakuten and Amazon at running an e-commerce business, but to swap the whole mechanism of earning — from fees to advertising. Where Rakuten made its money on a SaaS-style mall that collected reliably from merchants through monthly listing fees and sales royalties, Yahoo tore down the barrier to opening a store, maximised the number of shops and products, and moved to a design that sold advertising within the thickened marketplace and recovered its money there. It was the choice of a company that had built high advertising profits as a portal to wield the same weapon between shoppers and merchants. To accept a short-term drop in revenue in order to maximise distribution scale was to swap the quality of its earnings from the certainty of fees to the possibility of advertising.

That turn was not, however, all-powerful. Even as the number of stores swelled from about 20,000 to some 80,000, only a portion could actually buy in-mall advertising to raise their exposure, and it was hard to fill immediately, with advertising alone, the fee income surrendered in exchange for going free. Even so, widening the sheer scale of distribution by removing the barrier to entry moved Yahoo’s e-commerce off the ground where it competed on the level of fees and onto the ground where it earned through the thickness of the marketplace and advertising. What Yahoo chose was not to win e-commerce by its own operational strength but to create value through the scale of the platform. Rather than meeting Rakuten and Amazon head-on in a contest of assortment, it widened the marketplace with the single move of “free” and recovered through advertising — that was the answer Yahoo gave for its underdog e-commerce business.