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The eBay Economy

Washington Post Live Online Discussion

Daniel Nissanoff , author of “Futureshop: How the New Auction Culture Will Revolutionize How We Buy, Sell, and Get the Things We Really Want” (Penguin Press, Jan. 19, 2006, $24.95), discussed the new economy created by auction Web sites.

He predicts that the online auction culture will explode, completely changing consumerism as we know it, and explains in his book how you can “trade-up” for the good life with a little help from eBay. Nissanoff also forsees the creation of new jobs and businesses to support the burgeoning auction economy, such as authenticators, restorers, consultants and an increase of shops that will help consumers sell and package their wares.

A transcript follows .

Nissanoff is a Web entrepreneur who co-founded the online facilitation company Portero, which specializes in the resale of luxury goods. He has consulted with a number of Fortune 500 companies about business strategies for coping with the challenges of the online secondary markets.

For more information on his new book and to read his “Auction Culture” blog, go to http://www.futureshopbook.com/ .

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Daniel Nissanoff: FutureShop was released this Monday and is the first book to take a serious look at the sociological and economic impact that eBay is having on our consumer culture.

I thought I’d start by providing you with an overview of what FutureShop is about:

At this very moment, we live in an “accumulation nation,” a consumer culture based on a system of legacy values that was forged by our ancestors in a different time. These values have taught us to acquire new things and then grow old with them. We are socially engineered to think that “used” is inferior or bad. And, with a few very specific exceptions, we are generally loath or unable to purge our possessions, even as their value or utility begins to wane. Our cluttered homes tell this sad story of how our society lives today in its archaic ways.

The good news is we’re changing.

From Main Street to the upper echelons of society, we are beginning to, and will soon vigorously accept, adopt and embrace a new lifestyle – one predicated on the norm of temporary ownership and marked by the continuous replacement of our personal possessions. Owning and selling things second hand will become mainstream and second nature. This transition will have a profound impact on our culture and values. It will not only shape the future of consumer behavior, it will also have tremendous implications for the business world.

FutureShop tells this very story.

FutureShop reveals the hidden implications behind how the world of online marketplaces, led by eBay, are beginning to change us. In its first 10 years as the leading online consumer marketplace, eBay has made a lot of noise. Offering millions of products in hundreds of categories ranging from antiques to video games, eBay has created a venue for buying and selling goods that is miles wide. However, despite attracting more than 160 million users and processing more than $100 million in daily transactions, eBay’s marketplace is still only inches deep. While novel, convenient, often fun to use, and even addicting to some, eBay has barely made a dent on our mainstream consumer culture. The fact is that it has so far failed to offer the kind of true liquidity needed to fuel a cultural revolution. Many would like it to stay like that but the forces of change are great and already in motion.

The critical inflection point is upon us, and things are soon about to change in a big way. As eBay and its imitators approach new levels of depth and breadth, we are beginning to see the creation of a new eco-system – one that will rapidly accelerate the liquidity of these marketplaces by making them easier for mainstream society to access. Thousands of storefronts have already opened up all over the world, with their sole purpose to make auctioning off your everyday goods easy. Thousands of these businesses have opened in the last two years; they will soon be as pervasive as Starbucks. As these businesses mature, their mainstream acceptance will fuel a new level of buying and selling activity not seen before, and it will send ripple effects throughout the global economy.

The aftershocks of this phenomenon will cause a dramatic shift in behavior whose repercussions will be stitched into the fabric of our society, culture and business for years to come.

This shift will redefine socially accepted norms for consumer buying and selling behavior. We will soon live in a world where the norm is to sell our $800 Jimmy Choo shoes after wearing them twice, where Verizon will automatically send us the newest, best, most high tech mobile phone every six months, and where we’ll essentially lease our Rolex watches instead of buying them.

This new paradigm will change the very meaning of brand value and alter fundamental methods of marketing across most consumer products.

In the same stroke, it will create a universe of new business opportunities, and reward organizations that creatively embrace it. A new breed of “facilitators” will emerge with an array of innovative services that will lubricate this new-found market. Some of them will partner with the world’s largest companies to help them manage and protect their brands and navigate the treacherous waters of the secondary (used goods) markets. Others will become trusted sources for the consumer, acting as their personal lifestyle consultants while disseminating information on when and what to buy and sell.

This new system of checks and balances will shine a bright light on how consumers choose brands. It will reinforce the importance of a brand in a virtual mall where reading the label on a digital photograph becomes the closest thing to touching and feeling what you buy. Yet at the same time, it will shake-up the status-quo by re-shuffling brand values according to how well a product actually sells in the secondary market. As an “informed consumer” you will choose the brand of your new handbag based on how much it will fetch on eBay next year – which corresponds to how much it will really cost you to own it up until then.

Organizations that understand the new dynamics between the secondary and primary markets will strengthen their products inherently, and in so doing increase customer loyalty. And consumers that understand how to maximize the value-to-utility lifecycle of their possessions will be rewarded with a more prosperous but less costly lifestyle. Plainly, we’ll live better, for less — the incidental but significant benefit of a more efficient world.

FutureShop is a sophisticated book, but not a difficult book. There are sections dealing with economic theory and some moments of business-speak. But, fundamentally, it tells a simple story, and stems from a basic and highly relatable premise; it explains how and why we behave the way we do, and indicates how and why our behavior will change in the future. It’s the forecast of a new and imminent paradigm for a commonplace and necessary experience. It depicts this future vision clearly, and in a manner that will empower readers with specific tools and methods to understand, embrace and benefit from the phenomenon. It is colored with case studies and anecdotes, and real world examples of principles in action. It’s a fun read and has an important message for everyone.

It’s a book for businesspeople and entrepreneurs, for those struggling to understand the future’s implications on traditional businesses, and for those searching for the next great idea.

It’s for sociologists, social anthropologists and amateur (or professional) prognosticators.

It’s for people who sell things and people who love to buy things.

It’s a book for people who take part in the digital economy, for people who aspire to, and for those who are still waiting on the sidelines trying to decide how to engage.

It’s for the educator and the educated.

It’s for the curious.

It’s for consumers from all walks of life.

Of course, the book is also for the more than 700,000 individuals in the U.S. alone who make their primary living as sellers on eBay, and of the more than 160 million consumers who trade on their site.

O.K. – Let’s go to your questions….

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Newark, Del.: One of the large eBay store front Trading Assistants recently closed. A number of others are complaining of very small or non-existant profits. Do you still see this as a growing service? Why?

Daniel Nissanoff: The drop-off storefront business is a new phenomenon. Like any new idea, people rush to market to be first in. The general philosophy is that type of “land grabs” is to be first to market and then figure out the business later.

In the first year and a half since the first stores began to surface, we’ve seen thousands open up around the world. They consist of lots of mom and pops and many franchises. There are several major issues that exist.

1. Many of these companies are undercapitalized – people want to get rich quick and don’t realize the extent of capital they need to run a business. This is not unique to the dropshop space – it occurs with most businesses and is the #1 reason why a high percentage of new businesses fail.

2.The industry is still immature. Though the industry is constantly refining itself as it learns, businesses need sufficient capital to survive during this period of trial and error.

3.Awareness and education is still very low. Most people don’t even know these businesses exist. And those that are familiar with them don’t understand how to properly use them. As a result of low awareness, the cost of customer acquisition is still high, and as a result of lack of understanding, the average selling prices are low (people are dropping off less valuable things because they are either testing the services or are not really ready yet to let go of valuable possessions that they are underutilizing).

The good news is that with time, these problems will correct themselves. There are great companies out there that are making incredible headway in the space. The same questions you ask were asked in the late 90’s. Like in the heyday of the Internet, there will be a shakeout. And those who are left after the dust settles will be richly rewarded.

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Burke, Va.: Hi Daniel,

What has eBay found to be the inherent weaknesses of the auction approach? Any showstoppers? Lot’s of trust still involved when one bids on an item from somebody they don’t know and when they can’t see and touch the item they are bidding on in person.

Daniel Nissanoff: The evolution of the dropshops is having a significant impact in addressing the trust and safety issues. These storefront are now an additional pair of eyes and ears, proxying as an inspector of the merchandise for you. Additionally, they are legitimate businesses that are transparant and accessible when a transaction goes south.

As these eBay clearinghouses become more pervasive, they will solve many of the issues you face in dealing with strangers.

The most inherent weakness in the auction model is its inability to address the demand for an impulse purchase. The buy-it-now feature and other new products being released by eBay are helping to solve that.

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Gaithersburg, Md.: Since there is so much $$$ riding on eBay transactions, would eBay be liable (either financial or otherwise) if a computer malfunction occurred on their end? Instantly causing havoc for thousands (or more) of their customers.

Daniel Nissanoff: Your question is a legal one. eBay is a trading platform for goods, just like the NASDAQ is a trading platform for stocks. These exchanges are corporations that invite people who agree to their terms to become members and trade. I am certain that their terms clearly define (and certainly limit) the extent of their liabilities in the event of a malfunction.

While millions of businesses rely on sites like eBay to be operational on a near-constant basis (and a crash would certainly cost hundreds of millions in damage to these comapnies), it is unlikely that these type of companies would be liable unless there was intent, fraud or gross negligence involved.

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Arp, Texas: When will auto auctions have locally specified areas in key markets that display the cars on a given day for tire kickers and their husbands?

Daniel Nissanoff: I actually see the future of eBay Motors and other online auto auction initiatives going a different way. I think we will see companies pop up to provide the inspections and tire-kicking for you. Maybe they will even add a guarantee. The greatest value-added component of online auctions is the fact that you can buy a car anywhere in the world without having to physically go there.

Moving the cars around to different markets adds a layer of cost that would probably be viewed as inefficient.

These type of companies are already beginning to emerge.

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Seattle, Wash.: While online auctions appear to give the consumer more flexibility or power, professional auctioneers ensure that minimum profit margins are assured. Aren’t net margins on most auctions actually higher than when sold in a competitive retail market?

Products produced and sold by competent companies via auctions online ensure that price floors are always set above the mean market prices. For example, if a Pepsi costs $3 on the street in Manhattan, then at an online auction, someone from Manhattan will pay $2.50 for it, while the rest of the nation would have enjoyed it at the typical retail price of $1.25. So please explain, how does the average consumer benefit from “highest bidder” pricing? To the average buyer, is the online auction channel really beneficial for anything but used or rare merchandise?

Daniel Nissanoff: Economic theory tells us that in a perfect market, an item will sell to the person that places the greatest value on it.

Retail store transactions operate like an auction, but with a different format. The store owner places the “ask” on a product in the form of a price tag, and the customer either buys the product or doesn’t. As time passes and the “ask” isn’t hit, the store owner reduces the “ask” until it is hit by the customer’s bid. That’s a sale.

The reason a retail offline transaction may benefit the consumer over an online exchange is because it is an imperfect market. The imperfection is the limited reach the store has in the offline world. As a result of limited awareness and reach, it is unable to always communicate with the consumers that place the highest value on their goods. Thus, in some cases, the consumer gets a better deal.

The major stock markets are the closest things we have to a perfect market, and they have flaws.

eBay and similar online exchanges are orders of magnitude less perfect today than the major stock markets.

The winner in the online auction is the consumer who values the product he/she is buying the greatest and is able to find and win it because of the transparancy of the market.

As the auction culture becomes mainstream (and more liquid and perfect), the “average buyer” will benefit from purchases where they place the highest value on an item relative to supply (at that moment in time), and the demand of other consumers.

FutureShop explores many of these concepts.

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Franklin, Tenn.: I am a stay at home mom and have sold odds and ends on eBay for a few years. I would like to turn it into a well paying part or full time job, so far I haven’t been able to find a source for producks that sell well.I could use some advice to get up and running. Also what is your opinion on dropshipping?

Thanks

Dezarae

Daniel Nissanoff: 1. Overseas trade shows are a great place to look for product. China has one of the largest general merchandise trade shows twice a year called the Canton Fair. You can also go to the Associated Surplus Dealers show in Las Vegas (ASD).

2. Dropshipping is risky unless you know the company well. When you don’t see the product before it goes out, you are removing yourself by one more layer from your customer. If space and logistics are an issue, I would look for a fullfillment house to store and ship your merchandise. You’ll have more control.

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Washington, D.C.: What are top eBay sellers making and what are some of the up and coming auction sites?

Daniel Nissanoff: Most eBay sellers are individuals or private companies that don’t publish their sales. To my knowledge, the public companies trading on the site don’t break out sales on eBay.

When you say “auction sites” – if you mean facilitators, then:

Some of the largest are (in no specific order)-

I-soldit.com

Auctiondrop.com

Numarkets.com

Quikdrop.com

Snappyauctions.com

Portero.com (the company I am affiliated with for full disclosure)

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Philadelphia, Pa.: I must say I have a hard time imagining Americans eagerly giving up their posessions. If anything I think we’re more proprietary than ever. Can you give a current example of the “temporary ownership” that you see becoming pervasive?

Daniel Nissanoff: As a society, we have already adopted a temporary ownership culture with cars. When you buy a car, do you think you will own it for the rest of your life? Most don’t. Most car buyers know the very moment they purchase the vehicle that there will be a day in the near future – maybe 2,3 or 5 years out – that they will sell the car. In fact, they take the resale value of the car into consideration when buying it.

The lease is a financial instrument that was developed to make temporary ownership easier to practice in the car market.

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RE dropshop failures: As sellers become more sophisticated and the equipment needed to sell on ebay becomes even cheaper, won’t that just make it harder for dropshops to survive? I know I have looked into them and don’t think their service is worth 25% of the auction price as it isn’t that much of a drudgery to take a picture and write up a description and ship the item out myself.

Daniel Nissanoff: Today, less than 5% of all eBay users have ever sold something on eBay. That is after 12 years of eBay being in business. There is a reason for that – people are busy, lazy or they place a high value on their time. I explore your very question in my book, and it may surprise you that it is more economically efficient for most to use dropshops as opposed to doing it themselves.

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Bowie, Md.: Auctions might be the “optimum” form of price-setting; but eBay’s format leaves unsettled the question of distribution.

I think it’s fair to say that online sales of things that can be DELIVERED online (like music file swapping and stock brokerage services) have grown much better than online sales that require another form of distribution.

I can’t imagine caring enough about buying cheap bulk staples like toilet paper that I’d want to do it online. And whenever I do order from Amazon, the first thing I wonder is “what about the fact that no one will be home when the UPS driver arrives.” Isn’t online a lot more limited than people think?

Daniel Nissanoff: The promise that ‘online’ delivers on is making the entire world transparent. The value to the consumer of that promise varies based on many factors, including the cost of delivery. Your observations are accurate for certain staples – until we develop the technology to beam toilet paper, the Internet may not be the best solution for certain inexpensive and bulky commodities.

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Laurel, Md.: Is the Auction Culture phenomenon related to the “Coupon Culture” — that is, businesses attempt to sell identical products to different consumers for different prices.

It’s always been possible to buy the same shirt for less at Wal-Mart than Lord and Taylor (substituting different retailer names in different eras). But shopping today includes a maze of membership cards, online discounts and instant rebates that are obviously designed to charge a higher price depending on tolerance for hassle.

Are auctions and coupons/rebates just different sides of getting the best price?

Daniel Nissanoff: What you are referring to is price discrimination.

With the dawn of auction culture, eBay will soon become a mainstream channel for many products. As that begins to happen, companies will embrace the platform to use the channel for specific purposes. To some companies, it may be to liquidate excess inventories.

To others, it may be to create buzz and awareness.

Coupons are typically used as customer acquisition tools – not as price discrimination tools.

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Columbus, Ohio: I’ll give you an example of “temporary ownership” made feasible by eBay. I wanted to do quality scans of my 35mm negatives and film scanners are expensive. I spotted and bought a pretty good looking one on eBay, scanned all my negs, and then sold the scanner on eBay. I think it cost me a total of $20 at the end of the day. I consider this almost a form of renting.

Another great thing about eBay is that you can find out of date items, such as parts, that otherwise would have been nearly impossible to find. I have a half dozen things that would have gone in the trash had I not found critical parts on eBay.

I think your thesis is dead on!

Daniel Nissanoff: That’s a great example of how to leverage the new auction culture! Thank you.

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Arlington, Va.: Does someone who sells something on eBay have to pay taxes on their earnings?

Daniel Nissanoff: That’s a great question and one that I am sure will get some serious airtime as the auction culture that I describe in my book becomes pervasive.

Technically speaking, you have a basis in your personal assets. The basis is the price you originally paid for the item. If you sell it for below the basis (which would be the case in the sale of most used goods that have declining value) there should be no tax consequence since there is no gain.

If there is a gain (let’s say you sell a baseball card collection for more money than you paid for it 20 years ago), there is likely an obligation to report the gain and pay taxes as you would with any capital appreciation.

Qualifier on my comments above:

I am not a tax expert, and since the laws are constantly changing, I would recommend you consult one if you have a specific transaction you are contemplating and want a more precise answer.

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Portland, Ore.: eBay dominates the existing online open marketplace. How do you propose that other marketplaces will succeed?

Daniel Nissanoff: Despite its size, eBay is still only scratching the surface. There are many other companies that control equally impressive communities. Consider Amazon, Google, Yahoo and Craigs List. As the auction culture I describe becomes a mainstream way of living, there will be incredbile opportunities for these and other companies to provide niche services and platforms to serve the demand.

Look for example at www.audiogon.com – they control a community that trades in high-end audio equipment, and have carved out a nice niche for themselves.

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Takoma Park: The question above that mentioned not being home when the UPS man comes brings up an interesting point. Do you think we’ll see shipping services changing to cope with more and more online buying? Things like evening and weekend delivery becoming standard, being able to set a delivery time online, etc. (Of course, some just ship to the office or live in doorman buildings.)

Daniel Nissanoff: Great question.

The auction Culture is beginning to have implications on all kinds of businesses – not just online companies. The shipping industry has already evolved as a result of the Internet (look at the integrated tracking tools now available and the faster and less expensive services).

They will continue to evolve as auction culture becomes pervasive. Amazon already offers an all-inclusive rate for “free” 2nd day air. Like Amazon, we might see eBay or the drop-off store sector step in to bridge the gap between what the shipping companies are currently offering and what the public will demand to make it work for them.

Stay tuned.

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Bay City, Mich.: Many manufacturers refuse to sell their products outside of their authorized dealership network. However, they are beginning to realize that they are not only competing against new products sold by competitors, but also their own products sold in a used condition on secondary markets.

Will the maturation of secondary markets (eBay) prompt manufacturers to build more robust products in the future? Do you believe that a strategy of offering products that retain their value is going to be more prevalent? Or is it more likely that the Wal-Mart model, offering the cheapest and least durable goods, will ensure that secondary markets do not harm sales of new merchandise?

Daniel Nissanoff: I have an entire chapter dedicated to your exact question.

The short answer is that manufacturers will have to choose between building more robust products that have residual value or go the opposite way and build products that are disposable. Consumers will soon consider (on a commodity by commodity basis) whether they want to buy a better product with the expectation to resell it or whether they just want to buy a product that they can dispose of in the future. Check out my blog for an example of this – www.futureshopbook.com

The companies that produce low quality, non-branded, non-disposable products will be the ones that lose out.

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Lake Jackson, Texas: Phases come and go. Recently, an increasing number of sellers on ebay are listing items at unrealistically low prices (99 cents) while setting the shipping fee at their true base price. This forces the potential buyer to go to the listing instead of “window shop” using a search. Such shopping becomes time prohibitive and unproductive; i.e. not fruitful for anyone. Is there some benefit to this approach that I cannot see?

Daniel Nissanoff: Its a typical bait and switch tactic – the bait is what you see in the “window” – the switch is what you see in the listing. These sellers figure that a percentage of people that view the listing will buy. Its a numbers game.

Look for tools and platforms in the future that will filter products by standard characteristics. eBay is already moving in that direction in commodities like fashion, where they require the seller to fill out a form that has many parameters. One of those parameters in the future may be shipping. Once that happens, this problem will be resolved.

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Charlottesville: I’ve been buying/selling my own clothing on eBay for years (all but two of my 20+ sports jackets are from eBay). When I lose weight, I sell the old ones in good condition, and buy new ones. I’ve done the same with cowboy boots, and also sold off a drawer-full of levis.

I’ve not sold to make a profit — merely to get some cash for cleaning out the closets. I’ll donate clothes too — but would rather get $45 for a cashmere jacket than giving it to Goodwill.

Daniel Nissanoff: Clothing in a prominent topic in FutureShop because most people underutilize their clothes.

Your post is great example of how in the future, we will live more efficiently by leveraging the benefits of this new paradigm.

In the future, we will learn how to purge pieces of clothes the moment we acknowledge that we are no longer interested in wearing them. These pieces will re-enter the market to be found by people that place value in them.

Thanks for our post.

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Daniel Nissanoff: Thanks for your great questions.

I hope you get to read FutureShop and begin to leverage the new auction culture!

Check out my blog at www.futureshopbook.com to learn more about living and doing business in the post-eBay economy.

Bye for now.

Dan Nissanoff

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Editor’s Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

How the New Auction Culture Will Revolutionize the Way We Buy, Sell, and Get the Things We REALLY Want

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