Speaking with some knowledge of the company, it boggles the mind a little that they failed to snap up Shopify (or more likely one of that company's scrappier competitors) when Etsy got like $27M in 2008. Every single time Etsy didn't help a seller set up their own e-commerce site, someone else did, and this happened hundreds of thousands of times. And is still happening.
But Etsy struggled with leadership and technical problems in those days that were really serious, and not easily solved.
But in the early days many Etsy sellers didn't have their own e-commerce sites. A lot of them didn't even have websites outside of Etsy, often just a Facebook page. I'm not sure that's changed much.
You're mistaken. Etsy was for many people their first steps at e-commerce, but every seller who made sales on Etsy has asked themselves "What about all the people not on Etsy? How do I reach them?".
In 2005 Etsy's advantage was that creating your own standalone shop was hard, expensive, and ineffective. They shuffled CEO's while Shopify, BigCartel, WooCommerce, BigCommerce, and many others solved those problems. And Kickstarter proved you could make a lot of money without losing your cool indie cred.
There has always been a disconnect between what Etsy wanted to be (and there have been multiple versions of that) and what it's sellers (who are its customers) wanted. That grew into a chasm so big that Amazon saw light shining through it.
It would be interesting to see data to support whether this hypothesis holds up.
I have two gut feelings:
1. Hobbyist Etsy sellers don't dedicate the time and/or lack the business savvy to be running additional sales channels outside of Etsy. Additionally, even setting up a Shopify, etc. store requires some technical ability that you or I take for granted.
2. Semi-professional Etsy sellers, for example, those coming from operating eBay or Amazon Stores, were already using their other channels before Etsy. So they were sophisticated enough that it was cheap/easy to have someone whip up an osCommerce + PayPal site for them. I did this personally for a few clients already successfully selling on forums between 2005-2008.
But Etsy struggled with leadership and technical problems in those days that were really serious, and not easily solved.