Penny Auction Sites Hurt by Glut of Competitors
Pay-to-bid sites, all the rage last year, are losing traffic, and profits have turned to losses.
Tons of competition is one problem
Over the last few years, Silicon Valley has become enamored of a new kind of e-commerce: penny auctions. On websites like Swoopo, BigDeal.com, and Beezid, flat-screen televisions, laptops, iPads, and other products sell for a fraction of their retail price. There's a catch: Bidders pay a few pennies each time they bid, and each bid delays the ending time of an auction by a few seconds.
The first player in penny auctions, Munich-based Entertainment Shopping, racked up torrid profits after it was founded in 2005, according to investors and entrepreneurs who studied the private company's performance. Copycat operations popped up around the world. Now traffic on penny auction sites is declining, and companies are searching for a business model that works.
Entertainment Shopping, called Swoopo.com in the U.S. and parts of Europe, has more than 150 rivals, with names like BidCactus and PriceSaver. A few are backed by venture capital. Atomico, the investment firm of Skype founders Janus Friis and Niklas Zennström, invested $6 million last month in a London-based startup called Madbids.com. Google Chief Executive Officer Eric Schmidt's venture firm, Tomorrow Ventures, also recently put an undisclosed amount into oohilove.com, a penny auction site specializing in women's luxury items, such as handbags.
The audience for this combination of shopping and gambling has not grown with the field, and the sites have driven up the price of advertising keywords on Google such as "cheap iPad." Buying key words on search sites is the primary way the auction sites advertise products for sale. Swoopo's U.S. traffic declined 62 percent between January and July, according to Web tracking firm Compete. Beezid is down 50 percent and
BidCactus is down 37 percent during the same period. "There was no other business out there generating these types of profits, and that drove competition," says Paul Tsyrlin, a co-founder of an Atlanta-based penny auction site called Wavee. "A lot of folks were unprepared for how difficult a business this has become." Wavee's traffic has declined steadily since the start of the year, partly because it stopped
Some customers decided that bidding on penny auction sites didn't make good financial sense. Bidders might spend a total of $1,500 so that one of them could win a $1,000 laptop for $50. The sites found that many customers left unhappy after paying for bids but losing auctions. Last year many of the auction sites, including BidCactus, Swoopo, Bigdeal, and Oklahoma City-based Quibids, announced that losing bidders
could "bid to buy," or apply the amount they spent bidding on an item to buying it at the retail price. That destroyed the companies' profit margins. "These companies went from minting money to making no money off the people who bid to buy, and then losing money on the person who won," says Tsyrlin. "The swing was massive, and the business became unsustainable."
Some of the larger sites are rolling back the rule changes. BigDeal, based in San Francisco, no longer offers a "buy it now" feature for popular items like iPads, citing inventory constraints. Swoopo now lets shoppers apply money they spent on losing bids toward only 25 percent of the price of outright purchases; before spring, users could apply the money toward 100 percent. Swoopo's chief executive, Frank Han, declined to comment.
The bottom line: