Profiting off 'eBay economy'
SAN RAFAEL, Calif. -- The storefront operated by AuctionDrop is an odd addition to the Montecito Plaza, a Bay Area strip mall. Unlike the Trader Joe's and the smoothie shop that are its neighbors, at AuctionDrop, there's nothing to buy from the two employees behind the counter.
Instead, they want you to bring in your old golf clubs, laptop computers, Calphalon cookware, and Murano glass -- and let AuctionDrop sell it for you on eBay. It's an old-fashioned consignment shop, reinvented for the online era. On a recent Friday afternoon, a man strode up to the counter and asked whether they'd be interested in taking 24 pairs of his wife's barely-worn Manolo Blahnik shoes. "Her feet got too big," he explained. The answer: Bring 'em in.
AuctionDrop is just one of dozens of software and services companies that make up what has been dubbed the "eBay economy." Like the remora fish that feed off the scraps from a shark's dinner, these companies survive by helping buyers and sellers on eBay, the wildly profitable, San Jose-based website. EBay racked up almost a half-billion dollars in earnings last year, on revenue of more than $2 billion. Some companies, like AuctionDrop and Picture-It-Sold, list items on eBay for prospective sellers. Others sell software to manage multiple auctions simultaneously, and keep track of the correspondence received from bidders and buyers. Research from companies such as Andale Inc. allows sellers to determine the average selling price of items, and on which day of the week auctions should end in order to get the best price. At least a dozen small companies are in the "sniping" business, running services that enable buyers to post bids at the last possible second, edging out buyers who aren't as quick.
"Third-party services related to eBay have ballooned in the last two years," says David Steiner, president of AuctionBytes, a Natick website that analyzes the online-auction industry. "But they're making only a fraction of the money that eBay makes. People understand why they should pay eBay listing fees to run an auction, but they don't always understand why they need all these extra services. It's a challenging business to be in."
One Boston company, MyEZSale, raised $7 million to set up consignment operations inside existing pack-and-ship stores, but ceased operations in 2002. Accenture, the multinational consulting firm, launched a service called Connection to eBay in 2002, aimed at helping businesses sell surplus merchandise through the site, but ended the program last month after failing to attain a foothold.
And the eBay economy doesn't exactly work like a free market. It's more like a Soviet-style planned economy, with eBay chief executive Meg Whitman serving as the head of the Politburo. EBay determines the prices that so-called "third-party" companies must pay to interact with its website, and it occasionally threatens or pursues litigation against companies that it believes are misusing information from its auctions.
"They do operate in a near-monopoly situation, where they are by far the largest of the auction sites," says Ina Steiner, the publisher of AuctionBytes. "That gives them a lot of power." EBay has the same kind of influence over its partners online that Wal-Mart wields in the offline world.
In 1998, eBay sued a Burlington company called Bidder's Edge for maintaining a directory of live auctions across several sites, including eBay, and allowing visitors to search for items of interest. That suit contributed to the demise of Bidder's Edge in 2001. Earlier this month, eBay officials contacted a California site called GoHook, which had been offering a service that allowed eBay sellers to maintain an archive of past auctions, and asked them to stop doing so. GoHook, which hadn't paid licensing fees to eBay to gain access to its data, complied.
EBay wants to support the third-party software and services firms that pay it for access, and also those that help generate listing revenues, like AuctionDrop, which targets people who don't have the time or technical sophistication to conduct auctions on eBay.
"We are happy to see this universe of different kinds of companies offer services that extend the eBay marketplace in new and innovative ways," says Hani Durzy, an eBay spokesman. But Durzy says it is in eBay's best interest to ensure that tools offered by third parties work well, and that data from the site is used in a way that protects "the integrity of the marketplace."
Many third-party companies, like AuctionBytes, Andale, and a sniping service called eSnipe, have figured out how to make a profit within the eBay economy.
Others, like AuctionDrop, are still searching for the right formula. AuctionDrop raised $6.5 million in venture capital last year, and operates five drop-off locations like the one in San Rafael. Customers who drop off their wife's Manolo Blahniks cede anywhere from 20 to 38 percent of the final sale price to AuctionDrop -- in addition to paying eBay's standard listing fees. All the merchandise is trucked to a central warehouse in Silicon Valley, where the authenticity of items like watches and purses is verified, and electronics are tested. Photos are taken, descriptions are written, and the items are stored on shelves until they are shipped to the winning bidder. Items that don't sell at auction are either returned to the seller or donated to charity.
In many ways, it's the exact inverse of the business model that made eBay so successful. EBay operates a website, leases no retail locations, and never takes possession of merchandise. Its sellers handle the hassles of packaging items, shipping them, and communicating with buyers. AuctionDrop, on the other hand, is a labor-intensive model that requires retail and warehouse space and copious customer service. I'll be astonished if it's still in business this time next year.
AuctionDrop chief executive Randy Adams says that his company is "doing $4 million in gross merchandise sales annually, and our commissions average 33 to 34 percent." That means AuctionDrop, which has 75 employees and a 20,000-square-foot processing center, brings in a whopping $1.3 million of revenue a year.
Adams has plans to start franchising the AuctionDrop concept -- but he'll have a lot of competition there, from companies like PostNet and iSoldIt, which are doing the same thing. AuctionDrop isn't yet profitable, but Adams is optimistic about getting a piece of the $20 billion of unsold, unused junk sitting in people's attics and basements.
Who said the dot-com days were over?
Scott Kirsner is a contributing editor at Fast Company. He can be reached at skirsner@verizon.net. 