Will Auction Frenzy Cool?

It's not the format that brings sellers to eBay and other sites--it's the pool of buyers

Online auctions boast an undeniable appeal that no other mode of shopping on the Web can match. Sure, Amazon.com is convenient, even pleasant. But eBay is downright fun--so much fun that people will likely buy more than $5 billion worth of merchandise through it this year. So why do online auctions smell so much like the CB radio craze of the 1970s?

For one thing, the novelty soon wears off, and bidding for item after item becomes tiresome. If I really want something on eBay, I have to sit with my finger poised on the mouse in the final minutes, or somebody invariably swoops in and outbids me--seemingly just for sport. (No way that postcard was worth that much!)

More important, just as the telephone generally worked better than CB for gabbing with friends, a lot of stuff sold at auction really doesn't fit the format. Used or one-of-a-kind merchandise such as Beanie Babies and baseball cards, which are tough to price, are perfect to sell at auction. But eBay also has loads of office supplies, plumbing gear, and countless other common retail items. Do most people really want to wait a week to see if their bid for inkjet printer cartridges or brand-new kitchen sinks won? C'mon, Staples and Home Depot sell them at a fair price already.

The reason all this stuff shows up on online auctions is simple: It's a cheap way for sellers to reach a large pool of buyers. But that appeal has little to do with the auction mechanism itself, says analyst Michael May of market watcher Jupiter Communications Inc. "Right now, sellers are attracted to eBay not because of the auction format but because of all the buyers," he says. Once all the new business exchanges build critical mass, they likely will provide a better venue for those products, because they often offer more flexible negotiating terms than simply price.

Indeed, some merchants already are becoming disenchanted with auctions. Joseph Rybicki, a registered nurse from Sicklerville, N.J., who sold stethoscopes on eBay as a side business, largely gave up auctions in favor of selling through his own Web site, Stethoscopes4u.com. The reason: Transaction fees, cumbersome payment methods, and uneven bidding traffic made auctions unprofitable. "It was more of a hassle than it was worth," he says.

I think that's why other forms of "dynamic pricing"--such as Priceline's "name-your-own-price" system and group buying sites like Mercata--are growing much faster than auctions. Jupiter predicts that between now and 2004, online auction revenues will more than double, to $19.6 billion, but other forms of dynamic pricing will leap sevenfold, to $7 billion.

Of course, that still means boffo growth for auctions. But even eBay, with more than 90% of the person-to-person auction market, sees the writing on the wall. It recently spent more than $300 million to buy Half.com Inc., a site that lets people sell books and CDs for half off list price or less. eBay Chief Executive Margaret C. Whitman says it will play a big role at eBay: "Our goal is to take this model beyond the auction format to fixed prices." Wow. If even eBay is moving on, the hundreds of other sites using auctions had best figure out what they're going to do next.

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