EcommerceBytes-Update, Number 33 - March 03, 2001 - ISSN 1528-6703     4 of 7

OPINION PIECE: Online Auction Co-op Destined for Failure

By G. Patton Hughes

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On the face of it, the idea of a sellers coop auction conjures up lot of warm fuzzies. The warmest and fuzziest part is its promise of a more democratic way of making key decisions.

Second, it is a no-brainer that eBay needs a competitor. As it stands, that company, reveling it its monopoly position, will do what monopolies have always done ... maximize their profits at the expense of those who are economically weaker.

Something must be done, and the seller's co-op auction is the flavor of the day. The first lick, like the first look, seems to make sense.

The difficulty in opposing this admittedly popular idea is that it is spring, and this idea is one that at least some have fallen in love (love often being an irrational emotion.). In the haze of the crystal ball future that we all think we see, the co-op is a viable vision that is good, true and beautiful.

The first ugly truth is that another online auction simply doesn't make sense.

Online auctions are a business. eBay's success brought with it tons of imitators - by some count 2,000 or more. There are just too many online auctions right now to even rationally think about adding another.

"But a co-op is a better idea for an auction?" say proponents.

I reply that numbers are numbers, and there is no good idea for a general Consumer-to-Consumer online auction at this time. With the average sale being about $40 on sites with listing fees and $20 on free listing sites, the task of making enough to pay basic overhead is difficult to near impossible. Think, for instance, of the site with a 25-cent listing fee and a final value fee of 2.5 percent overall. That's a $1.25 for each successful sale. New sites typically convert listings to sales at 20 percent of listings or less.

Now, think about overhead. Five employees at $4,000 a month average including benefits and another $10,000 for operations, office space, licensing fees for a total of $30,000/month minimum. But that is just the beginning. Add advertising and promotion to the mix ... you do want to advertise and market the site ... and you're no where unless you're spending at least $20,000 a month doing that. Fact is, you could easily spend that among key online auction sites such as Honesty, AuctionWatch, GoTo, here, and similar sites serving the industry.

Go outside the group to include key-word buys on sites like Yahoo, print media or even cable television, and your in-house expenses increase so dramatically that you will have to hire another person just to manage the your ad agency. Real world marketing expenses, on a monthly basis, are easily in the six figures.

Instead, this plan is one based on doing the project on the cheap, cheap. I'd suggest that any quasi-credible effort is going to have a base cost of about $50,000 a month or $600,000 per year minimum. That means that with a 25 cent listing fee and a flat 2.5 percent EOA, the site would have to successfully complete 25,000 auctions per month to break even. With a 25 percent conversion ratio, you need 100,000 auctions per month with an average sale price of $40 per auction to pay expenses. (This would require a daily inventory of about 25,000 relatively decent items - not ten-cent common baseball cards.)

On its face, that seems doable. Of course, the site I'm most familiar with had ten times as many people employed and spent at least in the six figures on advertising in print, on key sites, etc., monthly, and it only came close to attaining these metrics. The fact is, the only sites that have sold this many items in two consecutive months are Amazon, Yahoo and eBay. To suggest they did it on a paltry $20,000 a month in advertising is laughable.

"That's okay," proponents say, 'because in a co-op, each one of the members is an advertising machine virally marketing to thousands of potential buyers and making it all happen."

That is a great dream and if I were an eternal and insufferable optimist, I might buy it.

We do agree that the key task is getting buyers for the goods. That is what eBay does so well. Indeed, the second position in this marketplace is, at present untenable. The reason is simple. If you are from another online auction and people ask you what you do, you almost have to say, "We're like eBay."

That should tell you something. The deck is stacked. There is no number two auction because the consumer legitimately asks, "Why settle for second best?"

Is there away around that? Sure, but don't expect your buyers trot over to the co-op site lemming-like. First, you probably aren't willing to drop eBay, so why expect your buyers to drop them? A good friend will look at the new site once, maybe twice. Unless he or she finds what they want, they're gone.

To change the online auction shopping dynamic will take a complete change in behavior. It is possible, but the answer is not another online auction site.

The final reason this is a bad idea has to do with the nature of co-ops and business. While co-ops are no more likely to fail than other business types, as a dot.com company, an online auction co-op would be operating in a very high-risk area. The most unrealistic of these expectations is that everyone will get along and promote the site effectively to the benefit of all. The political reality, played out on virtually every message board dealing with auctions, is that level of cooperation and support is not available for any site today - including eBay. There is just too much distrust and negativity.

The fact is, online auction sellers have already been hyped and helped with the hyper-helpers benefiting from a key stock in the OAI. The stock, of course, was eBay in the heady early days. The smart entrepreneur would, rather than suggest a co-op, follow (somehow) the path of eBay or even of Gold's by offering a way for individual sellers to gain options for the new auctions' stock.

I wish it weren't so, but it is my opinion that any broad online co-op auction site is destined for failure because it just doesn't make much sense. If done right, a new online auction using a corporate structure would not only share the risks, but also the rewards from success. A co-op only shares the risks.

If the question were whether a co-op might work in a specific niche category where buyers and sellers have largely developed lasting and trusting relationships, I would feel differently. The reasons are that the risk is not great, there is not a lot of money to be made, and since the players in the market can get along, that effort has a chance of success.

The short-term truth remains. eBay won the war and everyone, at least until things change, must pay tribute to them for this astounding feat.


About the author:

G Patton Hughes (aka: neomax) is editor of the OAUA Newsletter. He has been writing and consulting in the online auction industry since 1996 and is credited with publishing the first online auction trade e-zine, AuctionLand Online Report. In late 1997, Hughes signed on with Auction Universe (AU) and later auctions.com, the newspaper industry's entry into the online auction field. Among his duties was penning a consumer column entitled the online auctioneer in 1997-98. While at AU, he also was instrumental in supporting early efforts of now established auction service companies such as honesty.com, OTWA.com and auctionwatch.com. Prior to his arrival in the online auction scene, Hughes background included newspaper writing and editing, custom market research, television program syndication as well as ad agency experience in media and marketing, where as media director, he was the agency's "marketing guru." A computer enthusiast since 1980, Hughes maintains several Internet site! s including his home base, http://www.neomax.com.


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