Our view of online auction sites in 2013 - We are considering a play in this space at the moment. I'd love to know your thoughts on online auctions good and bad. Where they can be improved, where they are awesome at the moment. Giant auction sites, once viewed as the future of online retailing, are no longer the marketing phenomena they used to be. Shifting consumer preferences, competing business strategies (such as penny auctions), fragmentation of the market and low barriers to entry have created an uncertain future for traditional internet auction models. The Background Online auction websites have been a part of the landscape since 1995, when both OnSale and Auction Web (soon to become eBay) were launched. Within five years, eBay had become an internet giant and e-commerce competitors like Amazon and Yahoo scrambled to add their own online auction operations in order to compete. The early 2000s were the "golden age" for auction sites with enormous growth in traffic and revenues. However, online auction growth began to slow in 2003. Over the next five years annual growth dropped from 39% in 2003 to 11% in 2008, according to a study by the Broad College of Business at Michigan State University. Yahoo Auctions and other, smaller competitors closed down. The auction site slowing continued; in 2009 Amazon traffic (based largely on fixed price sales and not auctions) surpassed eBay for the first time ever and in 2010, eBay's auction site revenue increased by just 3% from the previous year while its revenue from PayPal increased 23%. eBay continued to diversify with increased emphasis on other businesses such as PayPal. They also found that online buyers were becoming much more likely to use the "Buy It Now" button to buy goods at a fixed price, than to participate in traditional auctions. The eBay "marketplace" was redesigned to place a much greater focus on fixed price sales than ever before. This signaled a quantum shift in the dynamics of online auctions - a shift which altered the competitive playing field. Rather than trying to beat eBay at its original game, Amazon and other major players refocused on refining and building their fixed price sales organizations. Meanwhile, new competitors with their own twists on online auctions arose. The Current Landscape Traditional Online Auction Sites eBay and remaining major competitors such as uBid and eBid continue to operate and, for the most part, make money. However as noted above, the space is no longer a growth industry and each site has been forced to alter the original traditional model. eBay places much more emphasis on fixed price sales, uBid only allows "trusted merchants" to list items for auction, and eBid has a "no fee" policy. Even with these changes the old auction model has seen better days. eBay still has an average monthly reach of approximately 80,000,000 visitors according to Quantcast, but according to a study done at Stanford University in 2011, well under 30 percent of eBay's total revenue came from actual auctions and that percentage continues to drop. Scot Wingo of the e-commerce consulting company ChannelAdvisor estimates that by 2016 less than 10 percent of eBay's business will come from online auctions. The number of visitors to eBay still seems impressive, but the actual popularity of eBay has dropped considerably over the past ten years. Once ranked in the top five of all worldwide sites by Alexa, eBay is now ranked 21[SUP]st[/SUP]. And more than 15% of eBay traffic now arrives from search engines, indicating that more visitors than ever come to eBay looking for a specific product, rather than using the site as a destination in and of itself. The news is even bleaker for competitors; even though they're still in the top eleven online auction sites ranked by traffic, overall uBid is ranked by Alexa at around 15,000 in worldwide traffic and eBid is around 22,000 - both down considerably from several years ago. With sales increasing by about 10% annually in the "online sales and auction industry" as measured by the research firm IBISWorld, it's clear that traditional auction sites are underperforming drastically. Analysts suggest a number of reasons for the decline of traditional auction sites. â— The "hedonistic benefit" wore off. That is, auctions were entertainment options for many participants and over time, they found other sources of entertainment. â— Auction "sniping." Bidders jumping into auctions at the last minute, some with automated programs, made it harder to win. â— Reserve prices continued to rise due to sellers' declining profit margins. That made bidding almost as expensive as purchasing at the "buy it now" price. â— High shipping prices. That often meant auction purchases were no cheaper than buying at online stores offering free shipping â— Increased sophistication of search engines. It became easy to find rare or unusual items without having to surf auction sites. â— Increased sophistication of consumers. Most people have learned that they can usually find the lowest price for an item with a quick internet search. â— Increased use of smart phones. eBay has found that users on smart phones spend 25% less time on the site and view 50% fewer pages. â— Emergence of new online auction models and alternatives. These possibilities help explain some of the more successful sites operating in the auction space today. Penny Auction Sites The first penny auction sites actually appeared online in 2005 and 2006, but didn't gain traction until a few years later, thanks largely to ad campaigns and growing notoriety. In 2011 there were 165 of the sites operating online according to the Technology Briefing Centers, and that number has grown in recent years. In penny auctions, items are offered at a very low starting price. Participants place incremental bids (usually in one-cent increments) until a short time limit passes with no more bids placed. The "catch" is that people must pay a small fee for each bid they place. This system makes it possible for participants to purchase an item at a very low price. However, losing bidders often spend a lot of money without anything to show for it. And it's also quite possible that the winner ends up paying more than the actual retail price of the item, because of the number of bids he had to buy. Many have called penny auctions a form of gambling, and by their very nature they may be supplying the "hedonistic benefit" no longer being provided by traditional auction sites. There are currently many hundreds of penny auction sites operating online, with hundreds more having failed according to the industry website PennyBurners. The most popular is QuiBids, which began operation in 2009 and is currently in Alexa's top 5000 worldwide - although it was in the top 1000 just one year ago. Other major competitors are Beezid and BidCactus, but they don't approach the traffic levels of QuiBids which has spent millions of dollars advertising in major media. Many penny auction sites are now labeling themselves as "entertainment auction" sites due to the continuing threat of litigation. Sites have been sued for allegedly violating consumer protection laws, committing fraud through the use of shill bidders, or operating an illegal gambling or lottery business. One formerly successful site, Zeekler, was shut down after its owners were accused by the Securities and Exchange Commission of running a $600 million dollar Ponzi scheme. Another, PennyBiddr, was shut down by the state of Washington for allegedly using phony bids to push prices higher. Still more have been shut down for failing to deliver products that had been purchased. To counter the threat of lawsuits and consumer backlash QuiBids began offering a "Buy Now" option to losing bidders, allowing them to purchase the item at list price, minus the total price of the bids they purchased. Many other penny auction sites have implemented the idea. Although the potential legal issues and declining web traffic to penny auction sites would theoretically prevent companies from entering this market, the potential profits are enormous. All existing penny auction sites are run by private companies so no revenue figures are available publicly. However, many journalists writing about the subject have looked at bid histories, comparing the total amount spent on bids to the price of the item being sold. And they have all concluded that on big-ticket items, the website often makes a profit anywhere from 10-100% per item. This potential for enormous profit makes it unlikely that the space will be abandoned until outside forces make operating penny auction sites untenable. Niche Auction Sites The real growth in the online auction space has come in the area of niche auctions. As Wired.com has observed "today, online auctions are a niche service." One of the best examples may be eBay whose car auction site is ranked fourth among all auction sites on Alexa, which measures web traffic. 80 percent of eBay's used car sales are conducted through auction, compared with less than 30 percent of their overall sales. Even more instructive is the site listed just above eBay's car auction site on Alexa: GunBroker.com, the internet's third most popular auction website. GunAuction.com is also in the Alexa auction top 25, as are sites auctioning classic cars, rare wines, and yachts. Bidz revitalized their business by abandoning a traditional auction model and focusing solely on jewelry, and is now in the Alexa top ten. If you can name any item at all, you can probably find an auction site devoted to it. Sports, art, collectibles and entertainment memorabilia are common niches for online auction websites, but there are sites specializing in government surplus, antique trading cards, and even used aircraft. Goodwill Industries, the charity organization, now offers auctions of donated merchandise and is eighth in the Alexa rankings among auction sites. In 2005, an estimated 95 percent of all online auctions took place on eBay. Today, there is a myriad of auction alternatives aimed directly at specific target audiences. Other Auction Models and Alternatives One auction model gaining popularity is the live online auction, often with a streaming video component. The world-famous British auction house Sotheby's has added live auctions to their site and is now the seventh most popular auction site online. Proxibid also offers auctions with live streaming audio and video and has moved into the Alexa auction top 15. Other recent online sales alternatives which have cut dramatically into auction site transactions are "flash sales" and "group sales." Flash sales, conducted by sites such as Rue La La and Gilt Group, generated more than $2 billion in sales in 2012 by emailing members to tell them of a limited-time low price offer. There's no evidence that this model will fade anytime soon. Group sales are offered by companies like Groupon and Living Social, who work with companies offering services or products to sell them at a reduced rate for a short period of time. Groupon alone billed well over $1 billion dollars in the third quarter of 2012. But there are signs that this bubble may be bursting. Growth and per-customer billings have dropped over the last year, and Groupon's stock is trading 75% below its IPO price while Living Social has recently laid off ten percent of its workforce. The group sales market may be suffering from saturation as local newspapers and broadcast outlets, among many others, have jumped on the bandwagon to offer cut-rate deals from their advertisers. Future of the Online Auction Space In 2008, Slate.com proclaimed "Online auctions are past their prime." They may have been overstating the case. Traditional auction sites have certainly peaked and are on the decline. Yet IBISWorld reports that the combined online sales and auction industry did nearly $220 billion dollars in revenue during 2012, with increases of 8.8% likely to continue through 2017. Clearly, the overall online sales industry is in a growth phase. The relatively short history of online auctions shows that innovation has been the key to success in the industry, from the early days of OnSale and eBay, through the technical innovations of the early 2000s, to the development of penny auctions, niche auction sites and online video auctions. The history has shown there is a short product life cycle for auction "products" and that will likely continue to be the case. But it has also shown that there is no shortage of innovators in the space, and the next successful variation on online auctions is probably yet to be launched. Several things are certain, however. Going forward, successful auction sites will likely be small operations, and the barriers to entry are quite low. IBISWorld reports that in 2012, Amazon and eBay accounted for 11.2% of all online sales revenue, with no other entity above 5% and small firms making up more than three-quarters of the market. Becoming an industry giant in the online sales space is more difficult than ever before - and the wide-scale "niching" of auction sites makes it unlikely that another success the size of eBay in its heyday will ever be viable. In fact, it appears that eBay is more than ready for the day when its large-scale auction business is over; eBay Vice President of Global Management Dane Glasgow has told Wired "eBay does not have a selling format of choice. We're indifferent to format." They seem to see the writing on the wall. Data and legal trends indicate that penny auctions may soon be on the way out as well. Traffic has fallen and the number of lawsuits filed against penny auction sites continues to grow. It's likely that the profit motive will keep companies operating in that space as long as legally feasible, but it's also clearly not a long-term growth segment of the market. Niche auction sites, however, appear to have staying power over the short-to-medium term. Their traffic continues to grow, the number of niches ripe for exploitation is enormous, and barriers to entry are quite low. Full-scale auction software packages are available for well under $10,000 - and wordpress plugins which can run small but functional traditional or penny auction sites can be purchased for less than $100. Traffic is always an issue, of course, but niche visitors are much easier to acquire than mainstream consumer traffic. One of the biggest challenges for auction sites in the future will be fighting off newer internet sales models such as the flash sale. Competitors who are able to offer products to their members at median prices close to those at auction sites will be difficult to defeat. The biggest question of all is what the next auction innovation will be. Developing the "next best thing" - or jumping on the trend early - will be the golden ticket to the next wave of online auction riches.