Note: The company I cofounded, Hunch, was acquired by eBay in November 2011. I am now an eBay employee. But all the opinions expressed below are my own, and were developed prior to the Hunch acquisition, through my own research on e-commerce.

Amazon and eBay are the two largest e-commerce companies. As of this writing, Amazon has a market cap of about $87B, trading at a trailing twelve-month P/E of about 139. eBay has a market cap of about $42B, trading at a trailing P/E of about 13. Each company competes with many other companies in many different areas. For example, Amazon competes with Apple on tablets (Kindle vs iPad) and digital media (Amazon’s media store vs iTunes). Ebay’s Paypal unit competes with multiple payment companies, and its marketplaces division competes with other “peer-to-peer” e-commerce sites like Craigslist. But given the potential size of the e-commerce market (not to mention the online-to-offline commerce market), Amazon and eBay’s main competitors are each other. And to understand their large strategic moves (e.g. large acquisitions like GSI and Zappos), it is important to understand their fundamentally opposing strategic outlooks: eBay wants commerce to be more decentralized (around its GSI/Magento partners and eBay marketplaces sellers) and Amazon wants it to be more centralized (around itself).

First, some background. During the dot-com boom, many largest offline brands debated how to best move their businesses online. Some tried to build their own websites from scratch. Others partnered with commerce technology providers. Toys ‘R’ Us took a novel approach and signed a “strategic alliance” to outsource all of their e-commerce operations to Amazon. Over the next few years this relationship soured – apparently Toys ‘R’ Us felt Amazon was competing too directly with them and successfully sued to end the relationship.

The end of the Toys ‘R’ Us – Amazon relationship marked a turning point for a company called GSI Commerce. GSI took an aggressively neutral approach to providing technology and marketing solutions to retailers. Their main appeal over Amazon is that they didn’t compete with their partners (but of course their partners competed with each other). This approach paid off: GSI now powers over 500 large commerce sites, including Toys ‘R’ Us, Adidas, Ralph Lauren, and the commerce sites of all the large sports leagues like the NFL, MLB and NBA.

Last year, eBay paid $2.4B to acquire GSI Commerce. They also acquired a smaller company called Magento that provides e-commerce technologies to smaller retailers. You can think of GSI as the leading commerce platform for the “fat head” of retailers, and Magento as the leader for the long tail.

The key difference between eBay and Amazon isn’t auctions vs. fixed price sales (the majority of eBay sales aren’t auctions anymore). It is that eBay doesn’t take inventory, and prefers to be an intermediary that facilitates peer-to-peer commerce. This strategy wins if e-commerce becomes more decentralized, with the majority of commerce continuing flow through small to medium retailers. In this world, eBay makes money by sending traffic from eBay.com, from fees collected by GSI and Magento, and Paypal transaction fees. In a centralized world, Amazon grows its current 9% e-commerce market share to a much larger percentage, taking advantage of its scale, efficiency, advanced technology, and the convenience of shopping in one place.

One way to view this battle is to think of eBay as a platform a la Windows or Android and Amazon as an end-to-end solution a la Apple computers in the 90s or iOS devices today. Platforms tend to provide greater diversity. In the case of e-commerce, the platform approach could also have a price advantage. As the CEO of TrialPay, Alex Rampell, argues: “Who can beat Amazon on price? The companies whose products are sold on Amazon”. End-to-end solutions like Amazon’s tend to provide greater convenience and a better user experience.

I’m not arguing that one approach is superior to the other. My point is simply that when you understand that the battle is between centralized and decentralized commerce, the strategic moves of the two companies make a lot more sense.