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What more could Swap.com want? It has a high-powered management team, led by a former chief financial officer of E! Entertainment Television, lots of venture capital, and the backing of startup maestro Bill Gross and his idealab! incubator juggernaut. Still, the barter site doesn't seem to have what it really takes to survive yet -- enough Internet traffic to turn it into a humming bazaar in cyberspace.
After launching with great fanfare in January, Swap.com remains largely off the radar of Web surfers. According to Media Metrix and Nielsen Netratings, traffic to the site as of March, 2000, was well under 300,000 unique visitors per month. That's too few surfers to even show up in the Web rankings created by those traffic monitors. Numbers from another Web-data firm, PC Data Online, showed Swap.com with only 279,000 unique visitors in that period.
One problem: The Web is awash in swap sites. And it's easy to see why, in the context of eBay's success. Each year, Americans spend hundreds of billions of dollars on books, compact disks, clothes, and other consumer goods. But buyers tire of their new stuff quickly and then go shopping again, leaving old Backstreet Boys recordings and Furbies to gather dust in garages and basements across the land. Enter the swap sites. They figure to pick up where auction giant eBay leaves off, helping folks who have something they no longer want trade for something else other swappers no long want.
NAME GAME.
Most of the swap sites have followed the same pattern: They launched their businesses within months of each other between late 1999 and the beginning of this year. Many got millions of dollars in startup funding. They come with a dizzying array of names, everything from Intellibarter.com to SwitcHouse.com to SecondSpin.com. At least half bear names with some variation on the word swap, such as MrSwap.com, WebSwap.com, and QSwap.com. All want to be the next eBay, but none has a proven business model. And none has any profits.
Also, eBay logged close to 12 million unique visitors last month and landed the 14th slot in the Media Metrix monthly rankings. Only the largest swap site -- Palo Alto (Calif.)-based WebSwap -- clocked more than a million visitors. With so many sites vying for pieces of the swap pie, consumers are becoming confused, and listings are splintered throughout the sector.
Last year, eBay shoppers spent $224.7 million, up 374% from the previous year. While the company's profits were a scant $10 million, eBay enjoyed sky-high operating margins of 80%, based on an efficient business model that involves no inventory, no factories, and a relatively small number of employees. The model has attracted eye-popping stock prices. At its peak this year, eBay's stock valuation had risen 364% above its 1999 low. Even after the latest market sell-off, eBay remains more than 200% above last year's low.
BIG EDGES?
As swap sites try to extend the eBay model, they're attracting lots of venture capital. Their approach is simple: In exchange for the technology and a liquid marketplace that allows swappers to find each other, the sites charge a fee as either a percentage or a flat rate on each transaction. Some swap-sites also charge for advertising on their sites and collect demographic data that is sold to merchandisers. In some instances, when demand exceeds supply in certain goods, the sites offer discount deals from traditional retailers for the items.
Once a swap site has installed a working infrastructure, says SwitcHouse.com CEO Michael Lin, it faces few additional costs. "Compared to traditional e-tailers, the model is tremendous. We have no warehousing costs. We have no infrastructure costs. We only manage information," says Lin, who argues that profit margins for the sector could one day look "more like eBay than Amazon."
But that comparison may be optimistic. eBay ballooned into a behemoth in the blink of an eye, vaulting the unique-visitors count well into the millions before potential auction competitors Amazon or Yahoo! had a chance to react. Analysts also point out that much of the liquidity that eBay enjoys has been supplied not by consumers but by merchants who have moved chunks of their operations to the site.
CD SURPLUS.
Many swap-site execs insist they looked before they leaped into the market. They claim they decided on their own that consumer barter on the Web was the next evolution of the Net-auction model. Indeed, a 1999 Goldman, Sachs & Co. study predicted the consumer-to-consumer online-trading market would increase to $3.8 billion in 2001, from a modest $100 million in 1997.
While no one doubts that Americans have billions of dollars worth of stuff they no longer want, the business plans of these swap companies focus on the potential, not the actual. And few reliable economic numbers are available. For example, SwitcHouse's Lin cites an analyst's estimate that the typical American household has 109 CDs, implying a total of 15 billion nationwide. "That's 15 billion items of currency that someone would otherwise have to pay cash for," says Lin. But that doesn't factor in the large percentage of consumers who want to hang on to the CDs they own.
Most important, the swap sites have so far largely failed to create a sense of community. That makes for easy entry by other upstarts and giants like portal Yahoo!, which could very well decide to take a run at the consumer-swap market.
SMALL TICKET.
The swap companies argue that's unlikely because their technology is not easy or cheap to replicate. "You always have that threat [of competition]. Our big advantage at this point is we have some patent-pending technology behind our matching-and-negotiation engine that allows our site to work very efficiently," says David Berglass, executive vice-president for marketing at WebSwap.com.
Barter sites do appear to be doing well in the trade of CDs, videogames, and other small-ticket items that are favorites of teens. These goods have generally traded poorly on eBay, partly because the supply is relatively abundant and they have little sex appeal to high-end buyers.
A nice niche, but hardly a lucrative one. A problem looming larger is that almost everything traded on the barter sites right now -- CDs, books, games -- is in danger of being digitized and transportable across the Net. That's doesn't bother Lin. "From our standpoint, when things are digitized, our costs become less," he says. "We would still serve as the swap point, but it would be a digital swap, not the shipping of CDs to customers." That would mean negotiating a huge set of agreements with recording-industry companies based on a technology that doesn't yet exist.
BLOOD FROM A STONE.
Most analysts following the swap-site industry concede that when the dust settles, only one or two companies will be left. The best positioned: WebSwap, which drew 1.2 million unique visitors last month according to PC Data, and SwitcHouse, which boasts the largest aggregation of listings, at over 400,000 -- a number it projects will grow to 1 million in the next few months. SwitcHouse also claims its listings are growing at a weekly rate of 40%.
But if the vast majority of customer transactions bring the sites a dollar or less, that would mean Lin and his company would need to bag tens of millions of swaps just to get to the point of showing earnings potential. "They are targeting a community that doesn't want to trade money online. It's tough to squeeze blood from a stone," says Gomez Advisors analyst Alan Alper.
Against those odds, Swap.com company officials say they're reevaluating their business strategy, but they decline to discuss the situation in detail. They're likely not alone.
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
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