Handmade goods e-commerce site Etsy (NASDAQ:ETSY) could soon face tough competition as Amazon.com (NASDAQ:AMZN) enters the market for handmade goods. Amazon's competing market, Handmade at Amazon, will launch with over 80,000 items, 600 of which will initially be eligible for Prime shipping. Shares of Etsy, which already trade below its IPO price of $16 per share, initially plunged nearly 7% after Amazon's announcement on Oct. 8.

Source: Amazon.

Taking aim at Etsy, Amazon stated that it "invited artisans to sell their unique, handcrafted goods" to "hundreds of millions of customers worldwide." Like Etsy, Amazon will let artisans create online profiles to describe their craft. Amazon will charge sellers 12% per item sold and a monthly fee of $40 to sellers who sell over 40 items per month. However, Amazon will waive its fee until August 2016. Etsy doesn't charge monthly fees, but charges $0.20 for each listing and takes a 3.5% cut of the selling price with additional processing fees.

Etsy's identity crisis
When Etsy went public in April, it optimistically promised to be a "mindful, transparent, and humane business" in its S-1 filing. But since then, Etsy made two controversial decisions that slightly tarnished its reputation with sellers and buyers.

In August, Etsy decided to route more revenue through its Irish subsidiary, Etsy Ireland, to reduce corporate taxes. The company also changed how Etsy Ireland was registered, so that the company didn't have to publicly disclose the unit's basic financial information. That move could cause Etsy to lose its B Corporation certification (given to companies which aim to solve social and environmental problems) due to a requirement which bars minimizing taxes through "corporate shells or structural means."

In September, Etsy launched Etsy Manufacturing, a service in the U.S. and Canada that matches sellers to small manufacturers. The decision resulted in a fierce PR backlash over the perceived betrayal of Etsy's artisanal roots. In the past, Etsy prohibited all sellers from outsourcing production. It loosened that policy two years ago and let sellers outsource production on a case-by-case basis, which caused some analysts to notice a rise in counterfeit or mass-produced goods sold on the site.


Etsy.com. Source: Author's screenshot.

How wobbly is Etsy?
Both the tax and manufacturing moves might temporarily boost Etsy's revenue and earnings, but they could also alienate its core customers. But as a publicly traded company, Etsy must protect its bottom line.

In the first half of fiscal year 2015, Etsy's revenue rose 44% annually to $120 million, but its net loss widened from $3.6 million to $42.9 million. On the bright side, active sellers rose 25% to 1.48 million, and active buyers grew 32% to 21.7 million. To boost top line growth, Esty needs its sellers to sell more things, so it's embracing manufacturing. To offset rising expenses, it's cutting costs by routing money to Ireland.

But the more it relies on those strategies, the more it loses its original identity as a "socially responsible" e-commerce site for small artisans. At the time of its IPO, Renaissance Capital's Kathleen Smith warned that Etsy investors should carefully assess how Etsy could "scale without going to the 'dark side' of full commercialism."

The Empire Strikes Back
Capitalizing on the anger some Etsy sellers expressed over Etsy Manufacturing, Amazon stated that goods listed at Handmade "must be made by hand" and be completely "factory free."

In addition to promising to be the Etsy of days past, Amazon has several other distinct advantages. Wedbush Securities analyst Gil Luria stated that while sellers might initially list products on both Etsy and Handmade, they might start preferring Amazon's larger customer base, which is nearly 13 times the size of Etsy's, and faster delivery options.

Despite those challenges, Etsy CEO Chad Dickerson told MarketWatch that the site remains the "best platform for creative entrepreneurs" and that it had "a decade of experience understanding the needs of artists and sellers, and supporting them in ways no other marketplace can." Etsy also has a big head start with 1.5 million sellers, compared to the 5,000 Amazon's Handmade site will start with. Etsy's fees also look more attractive than Amazon's, but Amazon could adjust them before the free trial expires next August.

The key takeaway
Over the past two decades, betting against Amazon has been a consistently bad idea. The company disrupted traditional booksellers, turned big box retailers into showrooms, built a digital ecosystem that frightens top tech companies, and stomped on specialty e-commerce retailers with extensions of its site.

Etsy is next on Amazon's hit list. Etsy won't be crushed overnight, but Amazon could certainly hurt the company, which will likely keep struggling with its evolution from a private "socially responsible" company into a publicly traded one.

Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool owns shares of Etsy,. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.