Defection bid highlights Amazon, eBay turf war
The attempted defection of an Amazon executive sparks a legal squabble between the e-tailer and eBay--a case that portends larger battles for the e-commerce archrivals.
Former international Chief Financial Officer Christopher Zyda was a trusted member of Amazon's "select inner circle of top executives," according to statements filed last month by the company's lawyers. Amazon insists that Zyda's September bid to join eBay as vice president of financial planning and investor relations could dent Amazon's sales and jeopardize its long-term business strategy.
In legal documents filed in California, eBay counters that Zyda has every right to work for the online auction company. Lawyers for eBay called Amazon's noncompetition agreement and legal actions "unlawful, unfair and fraudulent." They're demanding that Amazon pay related attorney's fees and court costs for Zyda and eBay.
Zyda is not the first Amazon executive to resign and resurface at a rival. But this case--ostensibly concerning little more than a restrictive employment contract--has roots far deeper than Zyda's three-year tenure or the technical differences of employment rights in Washington state and California.
Observers say it's the latest salvo in a turf war between e-commerce nemeses Amazon and eBay, whose business strategies increasingly butt heads. Wall Street is pressuring both companies to grow their audiences--especially as the companies ramp up for the traditional holiday spending blitz--and both are looking for ways to increase revenue despite an economic slowdown.
"I wouldn't call it paranoia," said Morningstar analyst David Kathman. "Amazon and eBay are both leaders in their respective niches in e-commerce. Amazon Auctions hasn't been a total failure, but it hasn't been as successful as they hoped. eBay, meanwhile, still dominates the auction world and has also been getting into fixed-price selling. Amazon may be getting concerned."
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see commentary"We're the No. 1 in all of the categories except books, movies and music. And we hope to be a leader in that category," Swette said during a U.S. Bancorp Piper Jaffray conference in Boston. Movies, music and books, in particular, have been the core of Amazon's market since the company was founded in 1995.
More on the line
The lawsuit also comes at a vulnerable time for both companies--particularly Amazon.
Amazon cut 1,300 jobs in February, closed a 2-year-old distribution center in suburban Atlanta, and scaled down another facility in Seattle. It's scrambling to generate revenue to build faith among investors and to pay interest on speculative-grade debt of $2.1 billion. The stock closed Tuesday at $6.08, down 61 percent since the beginning of the year and well below its all-time, split-adjusted high of $113 in December 1999.
Investors have more confidence in eBay. The stock closed Tuesday at $47.49 per share, up 44 percent since January but still below its March 2000 peak of $127.50. eBay also has laid off workers from at least one division.
Most important, Amazon and eBay are in a race to build a new generation of Web storefronts--online outlets where new products can be offered at fixed prices that are often heavily discounted, rather than the overstocked inventory or used items sold to the highest bidder that they largely feature now.
Both see online storefronts as a necessary step toward a much larger goal: ownership of an e-commerce "platform" that will serve as a retail model for the entire Internet. The idea is to create a new model that will serve any preferred way to shop online, whether it be brand-name storefronts, discount outlets, person-to-person auctions or any other form of commerce.
"Amazon is going to merchandise and let others merchandise on their platform. In this strategy, Amazon doesn't own the inventory, they just facilitate transactions, which is what eBay does," Jeetil Patel, a financial analyst who covers Amazon for Deutsche Banc Alex Brown, said Tuesday.
"If you think about eBay's side of the business, they are going from allowing small entrepreneurs to sell from its platform to behemoth companies like IBM to sell there now," Patel said. "The big carrot is who's going to be the platform that retailers sell from. At some point down the road, they could collide."
Two sides to the story
A courtroom collision over the executive defection is already brewing.
According to court documents, Amazon is particularly concerned that Zyda will pass along intelligence about Amazon's business strategies to eBay as it looks to expand from online auctions to retail. Lawyers for Amazon say Zyda gathered "intimate knowledge" of the online retailer's "most confidential business plans" during his three years at Amazon. They fear Zyda's defection could allow eBay to siphon sales of Amazon's core market.
"As a company we strongly believe that we all have a responsibility to each other and our shareholders to protect Amazon property," Amazon spokeswoman Patty Smith said Tuesday. "The value we create can't be used by others to the detriment of Amazon. eBay has said that they are a direct competitor."
Zyda and eBay lawyers tell a different story. In court documents, Zyda said he left Seattle-based Amazon to live closer to his mother, who was recently hospitalized and lives in Santa Barbara, Calif. He also said he didn't enjoy the relatively wet weather in Seattle, and he believed he would have more opportunity to play a larger role in the decision making at San Jose, Calif.-based eBay than he had at Amazon.
Zyda resigned from Amazon on Sept. 7 after six weeks' notice, according to court documents. Three days after his resignation, Amazon sent a letter to eBay informing the company that Zyda had signed a noncompetition clause that prevented him from working at eBay.
On Sept. 14, eBay filed a complaint against Amazon in Santa Clara, Calif., asserting that Zyda never entered into any agreement. Any such agreement, eBay argued, would be unenforceable under California law. In its complaint, eBay asked the court to declare that Zyda is free to work for eBay.
"It's always been eBay's practice to respect the property rights of third parties and trade secrets of other companies," said eBay spokesman Kevin Pursglove. "We still believe that it will be possible to find a resolution to this matter."
Amazon filed a formal lawsuit against Zyda and eBay in Washington state federal court on Sept. 17. U.S. District Judge Barbara Rothstein handed Amazon a preliminary victory Sept. 21, when she issued a temporary restraining order that prevents Zyda from working for eBay.
Lawyers for eBay filed a complaint for declaratory and injunctive relief Sept. 25--an attempt to block the Amazon lawsuit and get Zyda back to work immediately. eBay is also asking Amazon to pay related attorneys fees for the company and Zyda. eBay contends that Zyda's noncompetition clause was "false and lacking in any foundation" and does not apply in California.
According to Rothstein's Sept. 21 ruling, the parties are scheduled to give testimony in a hearing set for Oct. 9.