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 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. announced a deal to feature online auction king eBay on its service and then saw its stock jump 8%. And on Mar. 30, gave the phenomenon its blessing by launching Auctions. That same day,, 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 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., 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.

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