The idea for the US-based eBay auction site began when Pierre Omidyar`s wife, an avid Pez collector, told him it would be a good idea if she were able to collect the sweet dispensers and interact with other collectors on the Net. Realising the need for a virtual place where people could buy, sell and interact, Omidyar launched eBay in September 1995.
There are now more than 10 million registered users and the site hosts nearly four million auctions daily, with more than 450 000 new items joining the sale list every 24 hours. More than 60 million auctions have been completed on eBay since its inception.
The success can also be seen on the bottom line, with revenue of $224.7 million in 1999 (161% up on 1998`s figure) and net income of $10.8 million.
No doubt attempting to capitalise on a good idea and generate similar wealth, a host of auction Web sites were launched around the world, including SA, where there were at least 14 sites at last count, including AucorActive, This Week, Auxion, Bidorbuy, The Lot and Digital Planet Auctions.
No barriers
The development of Internet-based auctions has been welcomed by many who believe that the process is more fair than traditional auctions. There are no limits to the number of people participating, nor are there geographical barriers.
"We believe that the concept of an online auction redefines the business process as we know it," says M-Web Business Solutions GM Eddie van Rensburg. "The pricing model puts the power back into the hands of the consumer and adds benefit to both the buyer and seller."
Auction site companies believe the new trend will have an impact on traditional auctioneering, but most are under no illusion that it will replace traditional auctions. "Traditional auctions still have their place because many people like to haggle first-hand and see their opponents," says Michael Bouchier, financial director and co-founder of The Lot. "The traditional companies might take a bit of flack, but generally users of online auctions are not the same people who go to traditional auctions." He adds that the biggest losers will not be traditional auction houses, but classified advertisement publishers.
Says Aucor MD Brian Winterstein: "There is no doubt that the online auction industry will affect the traditional auction industry. I believe it will automatically increase the auction market in general by educating the non-auction going public. I do not think that it will ever replace traditional auctions but will definitely open up a door of marketing to both business and the general public, thereby attracting them to the auction industry in general. After all, it is the one and only method of establishing a genuine 'open market` value on any item."
However, Bidorbuy.co.za MD Nitzan Tal says: "In my opinion it will have a significant effect on the traditional auction industry in due course. This will be more and more significant as consumers become more comfortable with online trading."
Fighting for domination
Yet, the main battle in the short-term will probably be waged among the online auction companies themselves as they fight to dominate the South African market. Most of the companies acknowledge that the SA market is not big enough to support so many players. "The South African market is big enough, in my opinion, for one or two main players," says Tal.
While Bouchier agrees with this assessment, Aucor`s Winterstein does not. "We believe the market is big enough to sustain all the sites," he says. "Choice is the one thing that the Internet offers users. In fact, the power of the Internet is that it offers the consumer the same thing in a myriad of formats, and all this at their fingertips. Hence the consumer will decide which type of auction site suits them best.
"We are all fighting for the same audience at the end of the day and therefore it leads to better service standards, better technology and best practices. All these things benefit the new economy and the options available to the consumer. Most importantly it shows an industry that is growing very rapidly due to consumer demand."
Almost all of the South African online auction companies follow the eBay revenue model, which involves charging sellers a percentage of the selling price. Some sites also require a deposit up-front when placing an item for sale. Selling on the Bidorbuy site is currently free, but Tal says the company will soon institute a placing fee and sale percentage system.
At this point, few, if any, of the sites are profitable, as they have adopted a strategy to sacrifice profit to build critical mass. Many do expect profitability within six to 12 months. On average, between 60 and 100 deals take place on each site on a daily basis, but the companies also expect this to change as online trading becomes more acceptable. The Lot`s Bouchier says the goal is to have 5 000 sales a day within a year. Bidorbuy also expects a few thousand sales each day by the end of the year.
The sites, with the exception of Aucor, which is managed by a traditional auction company, do not become involved in fulfilment, leaving them free of the overheads required for that aspect of the business. "Aucor.co.za is different in that where other sites work on the eBay model of introducing buyer and seller, Aucor.co.za actually fulfils the entire deal," says Winterstein.
In addition to enforcing a 10% redeemable deposit on the amount bidders are prepared to pay for an item, the buyer pays Aucor.co.za, which then ensures the item is collected from the seller and delivered to the buyer. "Once the buyer has received the item there is a seven-day period before the seller is paid. This allows the buyer to dispute the description of the item. All this leads to 'zero fraud`. Both the buyer and the seller are protected within the Aucor online auction."
Survival of the fittest
While most of the auction companies admit that the number of players will be cut dramatically, each believes it will be among the survivors of a consolidation. Thus far, the war for market share has been waged predominantly in the marketing arena, with a few of the sites - notably Bidorbuy, The Lot and Aucor - engaging in aggressive campaigns from the time of their inception. Most have also gained publicity by hosting charity auctions, and plan to continue these into the future.
The question is which sites will survive, and what the online auction market will look like five years from now.
Bouchier expects total online auction revenue to grow, with the next development being the business-to-business market. There may be a fewer number of deals in that market, but the turnover is considerably higher. "This is the year online auctions get wide acceptance," he says. "After that, we can start to get people`s heads around business-to-business auctioning." Among other things, such a model would include suppliers bidding for contracts. Tal and Winterstein both expect more companies will use the dynamic pricing platform to maximise their revenue.
"Online auctions allow more consumers to participate in a real-time trading environment where they define the price," says Winterstein. "We really believe that they will grow and flourish and will take over from the normal retail channels that are presently dominating consumer spend online. This is already happening as eBay is showing huge growth quarter on quarter. Anybody can include auctions into their online offering where retailing is far more restrictive. To see the threat that auction sites pose to the e-tailers, just have a look at how many of the e-tailers are now offering some sort of auction option."
Some of the smaller auction companies will either have to merge, become affiliated with a major portal, focus on a viable niche area, or come up with some other survival plan such as a unique revenue source, or close down. Certainly some form of consolidation is inevitable.
The current trend seems to be alliances with portal sites. AucorActive, already backed by parent Aucor, which has been involved in the traditional auction industry since 1968, recently formed a strategic alliance with Metropolis, allowing Aucor access to industry-specific buyers in Metropolis` online communities. Ananzi was its first partner site, and it also has an alliance with Standard Bank of SA. The Lot was bought by Internet portal M-Web in December 1999, while Auxion is backed by the Junk Mail group.
Some companies have also set up niche auction sites, but on the most part these sites do not generate the bulk of the companies` revenue. Bid2stay, for example, is the City Lodge hotel group`s initiative to auction rooms available in its hotel chain. Bargainbid offers users the opportunity to sell or bid for timeshare weeks. Like the main auction sites, Bargainbid charges a portion of the accepted price of each deal. Even South African Airways has set up a facility on its site to auction off tickets.
These niche sites are likely to continue operating well into the future, as they serve only to supplement their companies` business. However, in the general online auction industry, expect some major consolidation over the next two years.
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by Rael Levitt, CEO of Auction Alliance Holdings
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