ONLINE AUCTIONS: GOING, GOING, HERE TO STAY

The bargains, the technology, the fun: It all adds up to a "radical addition" to retailing

It's an article of faith in Web circles: One day, some major share of the commerce that takes place around the world -- maybe even a majority of it -- will occur over the Internet.

Does that idea sound absurd? Exaggerated? Ridiculous? If that's what you think, take a look at what's happening in one small galaxy of the E-commerce universe, the corner where the frenetic, sometimes grubby, but always entertaining spectacle called online auctions takes place. Need a shrunken human head? You got it, for $5,600. How about an ancient book for $13,000? Or an heirloom from Sotheby's, the upscale auction house? It's there, too.

From virtually nothing three years ago, online auction sites are proliferating by the day and becoming big business. They're so new and their growth is so dramatic that the market is hard to quantify. But it's already clear that "this is a radical addition to the retail landscape," (see "A Buyer's Guide") says Maria LaTour Kadison, a senior analyst at Forrester Research. Kadison estimates that the electronic flea markets called person-to-person auction sites should garner up to $50 million in revenues this year. Forrester predicts that business-to-business auctions, which sold $2.9 billion worth of goods in 1997, will sell $52.6 billion worth by 2002, of which $32.2 billion will be commodities such as oil and gas. If that estimate is right, business auction sites could account for 15% of all business-to-business E-commerce by then.

ROARING STOCK. Wall Street seems to think consumer auctions could be just as significant. Ebay ( EBAY), which pioneered, person-to-person auctions in September, 1995, has grown into the most popular and profitable auction Web site and is taking the Street by storm (see "Which Stock to Buy"). On Oct. 27, eBay (www.ebay.com) reported $633,000 in net profit for the third quarter on revenues of $12.9 million. It also reported that its number of registered customers rose nearly 50% in the quarter, to 1.2 million, and that during the period it hosted more than 9.2 million individual auctions, up from 6.6 million in the second quarter. That roar you hear is eBay's stock taking off. It hit $90 on Oct. 27, five times the price of its $18 initial public offering on Sept. 24 and up nearly 100% in the previous two days.

Why online auctions -- and why now? Bargain-hunters say online auctions provide rare finds at good prices, and, most important, are fun to use. Bidders experience the thrill of the hunt and, often, the element of surprise when they get a first look at what they've bought. "More than anything else, it is the endless variety and the access to things that would otherwise be difficult to obtain," that keeps him coming back to eBay, says Leonard Miller, a New York art collector.

Sellers see a chance to reach a huge new worldwide audience. In fact, Internet auctions have created a new retail sales channel for thousands of entrepreneurs across the country who are making a living -- or trying to -- by holding auctions on the Web. (See BW Enterprise Online, "Entrepreneurs Hitch Their Ventures to Online Auctions "). The answer to why now is that Web technology is at last capable of handling the interactivity, billing, and even live broadcasting needed to make online auctions work.

What's remarkable about online auctions is that they work for virtually any type of product. You'll find natural-gas producers auctioning off excess capacity, part-time Barbie dealers hawking their dolls to other collectors, homeowners selling used vacuum cleaners, and computer makers offering up thousands of units of refurbished equipment.

TESTING MARKETS. Indeed, electronic auctions started out mainly as a way for manufacturers to unload surplus goods -- especially computer equipment -- quickly and efficiently before the stuff became too outdated. Sales of electronics still seems to account for the bulk of dollars spent on Web auctions. But suddenly, companies are using them for much more -- for example, to test markets and identify the right price for first-run goods, according to Forrester. Businesses are also auctioning off a wider variety of time-sensitive goods, including travel packages, ad space on Web sites, and clothing. Priceline (www.priceline.com), has made a business running so-called "reverse auctions" where bidders name their price for air tickets, new cars, hotel rooms, and -- soon -- mortgages. The companies that supply such stuff can decide which price to accept.

While business auctions garner the most dollars per transaction, many more sales and individuals are involved in what are known as "person-to-person" auctions. These sites, such as eBay, operate like a virtual flea market, providing a space where goods are traded between individuals. Most items on person-to-person auctions sell for under $100: CityAuction (www.cityauction.com) boasts that its average sale is $87, about twice that of eBay's. The sites typically earn revenue by taking a cut of up to 5% from each transaction processed and sometimes also by charging sellers a nominal listing fee.

Much of eBay's sales are driven by collectors (see "Shrunken Heads and Bellybutton Brushes"). "I believe we are growing that market by enabling people to collect the things they love right from their living rooms," says Meg Whitman, eBay's president and chief executive. That hasn't escaped the attention of the traditional auction market, which is now experimenting with online sales of high-priced art and antiques (see "Dipping an Upscale Toe into the Online Auction Waters"). Hundreds of niche auction sites have also sprung up to serve collectors. Just this week BidFind (www.BidFind.com), an auction index site, added new sites for wine, baseball cards, Gibson musical instruments, and autographs.

Onsale (www.onsale.com), by contrast, is the leader in business-to-consumer auctions, mostly of surplus computer equipment, of which there seems to be an unending supply. Onsale's average order is $193, with the average customer buying $800 worth of goods over 12 months. On Oct. 19, it reported third-quarter revenues of $57.8 million, a 130% increase over the comparable quarter in 1997. It lost $3.3 million, equal to 17 cents per share, in the quarter, mainly due to spending on marketing. But it handled 350,000 orders, had 822,000 people registered, and processed its 7 millionth bid. Onsale (ONSL) currently competes with Surplus Auction (www.surplusauction.com), run by the former software retailer Egghead, and with webauction.com (www.webauction.com), offered by retailer MicroWarehouse. These sites have an advantage over person-to-person auctions in that they control their own inventory and provide customer service and warranties. And they usually aren't exposed to the fraud that person-to-person sites can encounter.

FREE VS. PAY. Now that online auctions have struck a rich vein, competition is bound to heat up. Ebay achieved its profit by charging sellers both a small listing fee and a cut of the transaction. But free sites, such as five-week-old Yahoo! Auction (auctions.yahoo.com), are springing up that aim to be supported purely by advertising. Other potential eBay competitors include Auction Universe (www.auctionuniverse.com), which has support from the deep pockets of parent Times Mirror, and CityAuction, which operates on a classified advertising model. Excite's Classifieds2000 network (www.classifieds2000.com), is also free. Forrester's Kadison believes that eBay and other person-to-person sites that charge transaction fees will have to either start cutting their prices or look for other sources of revenue, from selling advertising or from licensing their technology to other sites.

CEO Whitman counters that eBay can compete against free sites by offering up more buyers, which leads to more sales and higher prices for sellers. Likewise, buyers will stick with the auction site that offers the highest-quality merchandise, argues Andy Rebele, founder of City Auction. Many free auction sites get clogged with overpriced items that will never sell, he says, adding: "I don't see this becoming a free market at all." Whitman concedes that it will be "interesting" to see if the portal sites can make inroads into the business. "Big portals have a lot of other fish to fry other than auctions," she says. But, "I am pretty convinced we will maintain our leadership position."

It's way too early to choose a winner in this new area of electronic commerce. But with so many fans, and such strong advantages for both buyers and sellers, it's clear that online auctions are already changing the face of the Web -- and may change retailing in the bargain.

By Amey Stone in New York