March 22, 1999

IMHO:
Wanted: Better Auctions

By Jason Busch
Jason Busch is a consultant with Northeast Consulting Resources, which examines the strategic implications of technology. He can be reached at busch@ncri.com.

ou would have a difficult time finding anyone who hasn't already been exposed to the hype of online auctions. Chances are that they're familiar with either the business-to-consumer (Onsale.com, uBid.com.) or consumer-to-consumer auction models (eBay, Yahoo). But in the coming years, the killer application for online auctions will be in the business-to-business sector, when any manufacturer will be able to clear excess inventory by holding a live, private Internet auction with a handful of distributors-without dumping products at a low price.

One major hurdle in consumer Internet auctions has been trust-and for good reason. When no relationship exists between a buyer and seller-and when anyone with a browser can place a bid-auctioning goods more valuable than Furbies becomes an issue. Sellers remain wary of getting paid; buyers are concerned about the shipment of an item and its quality. But a business-to-business auction setting is, by nature, a controlled environment-one in which buyers and sellers can screen each other to ensure the quality of goods, timely payment, and, if desired, anonymity between participants.

Several vendors already offer prepackaged auction software for companies that want to put goods up for bid over the Internet. OpenSite Technologies Inc. is probably the largest of these, claiming 50% market share and 200 customers.

OpenSite's return on investment speaks for itself: 80% of OpenSite customers have recouped their initial investment in the first year, 70% in the first three months. While nearly all of OpenSite's customers represent business-to-consumer early adopters, the company expects the business-to-business market will soon begin to take off.

So far, only early adopters have entered the business-to-business online auction space. FreeMarkets OnLine, one of the first business-to-business online auction services, links buyers and sellers of industrial goods. FreeMarkets offers a Web-based procurement service for buyers of goods. It provides a real-time Internet bidding engine that engages a handful of suppliers in a "reverse" auction: Suppliers anonymously bid down the price of an order. Giga Information Group forecasts that the market for Internet-based procurement software and systems such as FreeMarkets OnLine will increase by more than 1,000% over the next two years.

Another online business-to-business auction, the FastParts Trading Exchange, anonymously links buyers and sellers dealing in electronic components. Users negotiate prices for specific items in real time through the site. FastParts prequalifies sellers and manages the physical transfer of goods auctioned through its site.

So far, Internet sites have used only a handful of auction models. The English, or ascending-price, auction has been the dominant type; in this model, the seller announces a reserve price or a low opening bid and buyers bid up the price until demand falls, with the winner paying the highest valuation. Another type, the traditional price-sealed bid auction-where bidders remain anonymous and the high bid wins-hasn't caught on. But a modified version of this might be the ideal auction type in a business-to-business online setting.

The late William Vickrey won the Nobel Prize in economic sciences in 1996 in part by introducing the theory that a "uniform second price" sealed-bid auction, where the winner pays the second-highest bid price, actually generates genuine bids and, usually, the highest price for an item. Vickrey suggested that buyers adjust their bids upward because they're not afraid that they'll pay too high a price for the auctioned item. A Vickrey-style online business-to-business auction would be simple from a technology standpoint and an easy sell to CFOs worried about their bottom line and the privacy of Internet auction markets.

In My Humble Opinion is an occasional column expressing the opinions of InformationWeek readers. Submissions of up to 750 words can be sent to imho@cmp.com. Only writers being considered for publication will be contacted. To read other IMHO columns on InformationWeek Online, go to www.informationweek.com/imho.


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