Here's an Honest Penny Auction Site

I've been using this lazy Labor Day to take inventory of all the penny auction sites out there. I want to see how many old ones are still active and how many new ones have sprung-up, at last count the field stood at 52. I'll post the full report later, but in the meantime I thought I'd share this landing page announcement from Hasteno, perhaps the last honest penny auction.

I don't know what it was about Hasteno that caused it to fail, the name and the color scheme are two obvious choices. However, if one thing is clear it's that in this industry there will have to be lots of losers. With more than 50 penny auction sites currently in existence and more starting-up all the time the market is simply too small to support all these sites. Economies of scale and credibility should allow the top few sites to dominate the industry while others fail and die out. Credibility might be the largest barrier to entry and if this is the case Swoopo should be just fine - I think the guys over at August Capital who plunged $10mm into Swoopo should breath easy - although, I really don't know what their exit strategy is. I can't imagine seeing SWPO on my Bloomberg Terminal anytime soon.

I'll post the full report later today, and FYI the Swoopo Mini auction is now at just under $4,000 with no sign of stopping anytime soon.
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Reader mail

My co-blogger and I have been make gallows-jokes about "our many faithful readers", but it looks like we are actually getting readers. Wow, this Internet thing actually works! In honor, we've created a new logo for posts where we answer user emails. It's called The Penny Auction Post.

One reader, Jack Simmons, writes:

I'm relatively new to the pennyauctionsphere. I have placed a few bids on Swoopo and looking at Bid Cactus. One of my buddies was telling me both of these sites are a scam. Essentially since neither wants to lose money, they won't allow an auction to end before breaking even on the item. therefore, both Swoopo and Bidcactus both use bots or ghost bidders (pick your lingo) to keep the auction alive until at least they break even. To the best of your knowledge, are all of the bids on swoopo and bid cactus real? Do they often lose money on auctions?

The problem you mention is called "shilling", it's been a problem since primitive man first started auctioning off mammoth tusks, and it's particularly insidious in bid-fee auctions, since it's possible to defraud your customers much more thoroughly than in ordinary auctions.

A few years back, the government of Turkey broke up a highest-unique-bid scheme auction that was shilling. 30 people went to prison. Turkish prison.

Are Swoopo and/or Bidcactus doing the same thing? It's possible, but I sincerely doubt it.

First of all, by my observation, they lose money on most auctions. (Of course, the winners might be shills, but that is much more risky -- it's easy enough to conceal "ghost bidders", but if there are a lot of ghost buyers, everyone inside the company would become aware of it.) They make their money on those comparatively rare auctions that zoom up to 300% or 500% profitability.

Which brings us to the next point: they are making a lot of money at this, even if they're honest. Risking serious jail time (you know if the somewhat lackadaisical Turkish government can catch shillers, the frenetic Bundeskriminalamt in Swoopo's home country of Germany would be after them like the hounds of God) just to increase an already healthy profit margin would be phenomenally unwise.

In addition, Swoopo has serious investors: August Capital (who invested in VideoEgg and SixApart) and Wellington Partners (who did Xing). Even if Swoopo's people are willing to go to jail for a few extra bucks, these guys are not and they are in a position to watch, very carefully.

So, yes, there are plenty of scammers out there, and yes, it isn't impossible that Swoopo or BidCactus has its hand in the cookie jar, but no, it strikes me as very unlikely.

Correction: An earlier version of this post incorrectly attributed first usage of the word "penny auctionsphere" to Jack Simmons. It was actually first used by Pennyauctionguy here on a post at Penny Auction Insider.

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Swoopo in the Mainstream News

Better late than never: EU based Swoopo, one of the most, if not the most popular penny auction site on the web and GoBid.com (know less about this one) were in the San Jose Mercury News earlier this spring.

Not too much to note in this article; the most noteworthy point is probably that there was a news article about the penny auction sites. The writer interviews a few e-commerce experts and the Swoopo exec. and showcases a few arguments on the topic of penny auctions. 1. Are they gambling? and 2. Is it fair? I would love to talk to a lawyer about what explicit language governs gambling and what precedent has been set in similar cases, if any. However, given the number of penny auction companies I would say that at least some of them must have asked an expert. Also, venture capital firms do extensive research before making an investment so I must conclude that before August Capital plowed $10 million into Swoopo earlier this year they probably called a lawyer.

Game on! I think penny auctions must fall under the definition of entertainment shopping, which is not exactly rolling the dice or picking lucky numbers.
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