So far we’ve argued that auctions are unique–often exciting–shopping experiences that build in a time constraint. Time constraints are a standard sales tactic that force a buyer to a decision, and depending on the length of the time constraint, it may also limit his ability to coolly deliberate about a purchase. From the perspective of the auction house, the hope is that these impositions erode buyers’ restraint, and propel them to a purchase.
Of course, Ebay is the premier auction house in the United States, and perhaps, the world. Other important, specialty auction houses include Christie’s (founded in 1766) and Sotheby’s (circa 1744). Clearly these are businesses with staying power. Consequently, we think that, as a class, auction houses represent unique business models worthy of additional scrutiny.
For example, in addition to the characteristics already noted, an online auction house like Ebay, contrary to other retailers, does not have to evaluate, purchase, store, or exchange the merchandise that it sells. For Ebay, the “merchandise” shows up as computer code. The seller lists the product, prices the product, and markets the product. It is hard to overstate the significance of this observation. One just has to examine an Amazon warehouse to appreciate the abundant layers of complexity that goes into that business. And for all that complexity, do they get compensated with a much larger gross margin? Hardly so! To be sure, Amazon does fine as a retailer, but as a business, I would argue that it is grossly undercompensated for its complexity compared to Ebay’s auction model.
Obvious too are the wealth of ancillary benefits in Ebay’s model. Ebay does not need a distribution network, purchasing agents, or merchandise suppliers. Its corporate headquarters can be at a single location—streamlining efficiency–and its location could be virtual or anywhere. Its merchandise never needs to seen, nor excessively scrutinized for optimization (see Wal-mart). Forget about inventory turnover, hard-to-move items, inventory management, and most of your customer service…
The simplicity is profound and elegant. Selling without goods—almost zen.
I don’t mean to imply that what Ebay does is easy, but it surely is simple.
Coming up tomorrow—Ebay and Inventory, Part II.
Disclosure: I, or persons whose accounts I manage, own this security at the time of this writing.