Friday, June 6, 2008

Auctions on eBay: A Dying Breed

By Catherine Holahan Tue Jun 3, 8:08 AM ET

Bruce Hershenson, who auctions vintage posters online, is hanging up his eBay gavel. For almost a decade, Hershenson's business epitomized the e-commerce that made eBay (NasdaqGS:EBAY - News) famous. He sold rare, collectible, sometimes kitschy memorabilia in online auctions that had a starting bid of 99%. But as the business of buying and selling over the Internet has matured, the thrill and novelty of auctions have given way to the convenience of one-click purchases. Hershenson will hold his last eBay auction June 3. "The auctions are nothing like what they once were," he says. "They won't ever come back." if Auctions were once a pillar of e-commerce. People didn't simply shop on eBay. They hunted, they fought, they sweated, they won. These days, consumers are less enamored of the hassle of auctions, preferring to buy stuff quickly at a fixed price. Hershenson is emblematic of the legions of small business people who built their livelihoods on eBay but -- like eBay itself -- are having to rethink their whole approach to online sales.

Sales at (NasdaqGS:AMZN - News), the leader in online sales of fixed-price goods, rose 37% in the first quarter of 2008. At eBay, where auctions make up 58% of the site's sales, revenue rose 14%. "If I really want something I'm not going to goof around (in auctions) for a small savings," says Dave Dribin, a 34-year-old Chicago resident who used to bid on eBay items, but now only buys retail.

E-Commerce Continues to Evolve

Executives at eBay have gotten the message. Since taking the helm in March, eBay Chief Executive John Donahoe has made it clear that fixed-priced items are key to future growth. EBay's "Buy It Now" business, where shoppers can purchase items at a set price even when the merchandise is also listed in an auction, makes up 42% of all goods sold on eBay. It's growing at an annual 22% pace, the fastest among eBay's shopping businesses. "As (Web) search has developed, you can get a great deal in a fixed-price format," Donahoe said in an Apr. 16 interview after his first earnings call as eBay's top executive. "We are going to let our buyers choose." Donahoe did not comment for this story.

At the current pace, this may be the first year that eBay generates more revenue from fixed-price sales than from auctions, analysts say. "The bloom is well off the rose with regard to the online-auction thing," says Tim Boyd, an analyst with American Technology Research. "Auctions are losing a ton of share, and fixed price has been gaining pretty steadily."

To hasten the growth, Donahoe is spearheading changes to make eBay more friendly to users who favor one-click shopping. While former CEO Meg Whitman ended her tenure amid an ad campaign that championed auctions, urging consumers to "Shop Victoriously," Donahoe has taken steps to increase fixed-price inventory. In May, eBay announced a partnership with to sell a large swath of the retailer's inventory for set prices. "EBay has significantly de-emphasized dynamic-priced items in favor of fixed-price listings in the last six months," says Cantor Fitzgerald analyst Derek Brown.

EBay Fees Favor Fixed Prices

Perhaps the biggest example of eBay's new fixed-price focus is the new fee structure, announced in January. The changes gave breaks to many large vendors who sell fixed-priced goods on the site, while hiking fees for many eBay users who sell using a traditional auction structure (, 1/29/08).

EBay executives say auctions will always have a place on the site. In the future, the company plans to alter fees so that auction sellers don't feel so pinched, though executives have not provided details. The company also intends to showcase additional features that meld auctions and fixed-price listings during and after the annual eBay Live event, to be held this year in Chicago, June 19-21. One possible new feature is a split screen that shows an auction on one side and the Buy It Now price on the other. "Auction-style listings are what keeps the site unique, but fixed price is growing much faster," says eBay spokesman Usher Lieberman.

What happened to auctions? Not only do shoppers want convenience, they're also looking for value. And the proliferation of pricing information online has made it easier for consumers to bargain-hunt and lessened the need to risk overbidding in an auction. Hershenson recalls when a new $40 toaster could fetch $80 on eBay, thanks to a bidding frenzy. Now, a buyer can figure out the retail price with a few mouse clicks. A study earlier this year by the Pew Internet and American Life Project found that 81% of Internet users research products online before buying. "People have a lot of information at their disposal and that sets a reserve price of what they are willing to pay," says John Horrigan, an associate director at Pew. "It makes sense for eBay to set prices to appeal to that."

Auctioneers Up in Arms

But as eBay aligns its focus with the majority of buyers, sellers like Hershenson lose out. When he first heard of the fee hike, at a seller meeting in Washington with eBay management, Hershenson says he stood up and complained. "I said 'I am exactly the kind of seller who built eBay and brings people to eBay on a daily basis. And it seems to me your changes are hitting me hardest,'" he says, adding that his annual fees would have jumped from $120,000 to nearly $180,000.

Rather than pay the fee hike, Hershenson decided to move his business onto his own Web site, He auctions 1,000 to 1,500 items on his own site every Tuesday and Thursday. Because Hershenson's merchandise is popular among a specific set of collectors, he feels confident that his customers will follow him and says that most already have. He believes he can attract others with some well-placed ads, purchased with what he saved for not paying the higher fees on eBay.

Not all eBay sellers have the luxury of branching out on their own or moving to a third-party site. When it comes to auctions, eBay is one of the few games in town. Even though growth is slowing in eBay's auction business, the site has nearly 90 million active users. Other auction sites such as (ubhi.ob.OB) have far fewer visitors. Ten-year-old Ubid had 181,000 active bidders in the first quarter, according to its quarterly report.

EBay sellers organized a weeklong sales boycott in February protesting the changes announced in January. "Everybody is mad because they feel that this company got built on them, and when eBay felt that they no longer needed them, they tried to get rid of them," says Maggie Dressler, an eBay seller who has auctioned antique trains and toys on the site since 2001. "It is deplorable."

Many auctioneers may have no choice but to close shop, says Hershenson, adding, "Their latest changes will have the result of ending auctions as we know it on eBay."

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