Online Auctions: Going, Going, Gone
Haggling is the hottest thing happening in E-commerce
Audie Schwardt was cruising the Web one January evening when he saw an advertisement for
Onsale Inc., an online auction house. Schwardt, a 42-year-old Army sergeant major at El Paso's
Fort Bliss, checked it out--and found prices up to 50% off retail. Since then, he has spent more
than $1,000 a month on PCs, digital cameras, and other gear for himself and friends at Onsale
and WebAuction.com. Says Schwardt: ''Except for an emergency, I don't buy electronics at retail
anymore.''
Going once, going twice--sold to the man with the mouse! Forget plain old online stores. Forget
portals. Today, there's nothing hotter in E-commerce than auctions. On Mar. 25, America Online
Inc. (AOL) announced a deal to feature online auction king eBay (EBAY) on its service and then
saw its stock jump 8%. And on Mar. 30, Amazon.com (AMZN) gave the phenomenon its
blessing by launching Amazon.com Auctions. That same day, PriceLine.com, which allows
consumers to bid for everything from home loans to airline tickets, launched an initial public
offering. Its shares immediately tripled, giving the profitless cyber-emporium a market cap of
$9.8 billion. Even traditional retailers like Sharper Image (SHRP) are adding sites. Says Forrester
Research Inc. analyst Kate Delhagen: ''It's only a matter of time before every retailer has an
online auction.''
What's going on here? A whole lot more than virtual bargain hunting, that's for sure. Even
though there's no guarantee that they'll get a better price, millions of consumers and business
buyers are opting for the chance to say what they'll pay for all manner of goods and
services--everything from mortgages and shoes to steel and even cattle. In all, predicts San
Francisco Internet market watcher Keenan Vision Inc., consumer and business auctions will
account for 29% of all E-commerce, or $129 billion, by 2002, up from $3.8 billion at the end of
1998.
The implications could be massive for the entire economy. Potentially, cyber-auctions and other
online markets could push aside sticker prices and usher in an era of ''dynamic pricing,'' in which
a wide range of goods--not just barrels of oil or shares of stock--would be priced according to
what the market will bear, instantly, constantly.
This revolution in pricing is something that couldn't have happened without the Web. Thanks to
their Internet connections, buyers and sellers around the world can connect at almost no
cost--making instant bargaining a snap. Even if they don't buy at auction sites, consumers have
access to reams of data about products and pricing on the Web, so merchants can't use obscuring
tactics such as ''suggested dealer price.'' But sellers can gain advantage, too: They know more
about buyers and can tailor products and prices to individual customers.
That's the long-range potential. For now, auctions are clearly a great way to draw buyers to
online stores. ''There are people who love buying this way,'' says Darryl Peck, CEO of Cyberian
Outpost Inc., an online computer seller that launched an auction service on Mar. 16.
The killer company in this new category, so far, is eBay Inc. Since it was started in 1995--when
founder Pierre Omidyar tried to find a market for his girlfriend's Pez-dispenser collection-- eBay
has single-handedly created a new market out of Web auctions. In the process, Omidyar has
stumbled on a setup that turns a profit faster than other E-business models. The key: eBay avoids
inventory and shipping costs by simply setting up a market and taking a cut of transactions--so it
has been profitable from the start. Investors know this well: Amazon's auction effort added $4
billion to its market cap in two days.
Not all of the name-your-price models are quite so lucrative. Consider PriceLine, which often
makes up the difference between a low bid and what it pays for airline tickets. It says the
subsidies--which help keep it in the red--are justified because they create customer loyalty. So
far, investors seem to have no qualms.
INVENTORY BOON. Meanwhile, the pricing revolution is transforming commercial markets.
Transactions in many industries--especially those with perishable wares, such as advertising
space--may soon come to resemble electronic equities trading. Adauction.com, for instance, sells
online ad space that once went unsold. In April, it will move into print publications and later into
broadcast. Says Keenan Vision analyst Vernon Keenan: ''In industrial markets, auctions will
destroy fixed pricing.''
This scenario does have a potential downside for merchants. After all, if you can buy a used
copy of Henry Kissinger's new book for $5 on eBay (as you could on Mar. 30), you won't pay
$24.50 for it at Amazon. Might buyers eventually demand price concessions on other products,
too? That's precisely what worries retailers. Their fear, says CSC Consulting Vice-President
Chris Davis: ''The benefits of reduced marketing and sales costs may not outweigh having profit
margins driven down.''
Still, sellers don't necessarily lose in the new rubber-pricing world. The vastly lower cost of
selling online provides plenty of riches to go around. And auctions can actually boost margins.
Amazon may net more from the fee it gets for selling a used book at auction on its site than it
does from selling the same book--which it has had to buy wholesale, pack, and ship--through its
retail arm. Auctions can also be a great way to turn inventory losses into profits. Sharper Image
says it's getting 40% of retail on excess goods via online auction, compared with 20% from
liquidators. Plus, says CEO Richard Thalheimer, ''we can sell it a lot faster. And maybe they'll
buy something else at full price.''
In any case, Pandora's E-box is now open, and pricing will never be the same. Already, market
watcher Forrester Research says 35% of online buyers have purchased through auctions, and the
number of buyers will grow from 3 million in 1998 to at least 14 million by 2003. Says Ken
Neibaur, senior vice-president of marketing at Internet Shopping Network Inc.: ''You'll see
auctions becoming a permanent way for how people shop on the Internet.''
For how businesses sell, too. Auctions are moving from eBay-like person-to-person affairs,
which now account for 70% of the $1.4 billion in goods sold online, to businesses selling to
consumers, which will account for 66% of the $19 billion Net market in 2003. The merchandise
mix will change, too. Computers now are huge sellers. But by 2003, some $2.1 billion of airline
tickets and hotel rooms, $1.7 billion of car sales, and $1.2 billion of apparel sales will be sold
through online auctions. Industrial auctions such as FreeMarkets Online Inc., which sell coal and
printed circuit boards to businesses, are growing even faster--from $8.7 billion last year to $52.6
billion in 2002, says Forrester.
HOME LOANS, TOO. At the same time, suppliers are using auctions to bid for buyers. At
IMX Mortgage Exchange, an online home-loan market, brokers post homebuyers' requests for
loans and lenders bid on them. One broker says the process saves her up to a half-point and her
customers another half-point over traditional transactions.
True, auctions--in particular, person-to-person auctions like eBay's--can be risky business. At
least two government agencies are investigating alleged cases of fraud on eBay. While eBay has
instituted new protections, such as insurance services and identity certification, its hands-off
attitude toward the sales on its site concerns some consumer advocates. Replies eBay CEO Meg
Whitman: ''If fraud were rampant, we would not have had such big growth.''
Will the name-your-price model sweep the economy? Not entirely. It takes work to
haggle--which is why fixed prices happened in the first place. Says Amazon CEO Jeffrey P.
Bezos, who thinks fixed prices will remain the norm: ''Would you want to negotiate the price of
The New York Times every time you bought it?'' But for many other products, millions of buyers
figure a little haggling is a small price to pay for a sweet deal.
By Robert D. Hof in San Mateo, with Heather Green in New York and Paul Judge in Boston |
