The Truth About a $3 iPad by Kelli Grant Friday, March 18, 2011
An iPad for $3.20? A designer handbag for $41.80? It is possible, due to a new and growing segment of online auctions. Yet it's not as likely or as cheap as sites would like you to think.
They're called "penny auction" sites, because bidding typically starts at zero and goes up by a penny, and in the last two years, they've moved from the novelty fringe firmly into mainstream. Unheard of in 2009, there are now more than 120 such sites, according to Technology Briefing Centers, a consulting firm that tracks the sites. Like with other online auctions, the sites offer the possibility to buy, or win, gadgets, designer accessories or gift cards for a fraction of the retail price, and plenty are finding that alluring: Fifteen-month-old site BidHere.com, for example, boasts 1.1 million members in 22 countries and estimates that it gains 1,200 new users daily.
Complaints about the industry, however, are growing nearly as fast. The Better Business Bureau is still tallying 2010 figures, but a spokeswoman says that just four local branches reported more than 1,500 complaints about penny auction sites more than the total number of complaints logged nationally about internet auctions the year before. And the sites' biggest critics say they're no better than playing the lottery or the slots without the regulatory oversight. "It looks and smells like gambling to me," says Joseph Lewczak, an attorney at Davis & Gilbert LLP, which specializes in sweepstakes and lottery law.
For their part, the sites say the auctions aren't gambling at all. Rather, they're a new twist on retail sales. BidHere CEO Rick Day notes that on his site, auction participants have the option to buy the prize, whether they win or lose the auction. And some sites refund part or all of the fees participants pay as credits toward future auctions.
The potential for problems lie in the very structure of the penny auctions. For each one- or two-cent bid, participants must pay a fee, typically 50 cents to $1, depending on the site. In comparison, eBay (NYSE: EBAY - News) users bid for free although each bid typically $1 or more to the previous bid. Another difference with penny auctions: Each new bid extends the auction time by 15 seconds, similar to a real-life, going-going-gone scenario. So while an eBay auction with two minutes left will end in exactly 120 seconds, a penny auction with 15 seconds left could go on for several hours. A penny auction winner doesn't collect the object with his winning bid, either: He wins the chance to pay the final price for the prize on offer. Some sites will let the losers use their fees as a credit toward buying the item, but not always.
It's a structure that can be incredibly lucrative for the sites, while still enabling them to offer goods at prices that seem low. On QuiBids.com, a Canon digital SLR camera recently sold for $194.16 at least $1,000 less than retail prices elsewhere on the internet. But that final price represents 19,416 bids. At 60 cents per, that's as much as $11,650 in fee income for the company. "It's simple arithmetic: if sites weren't getting more for an item than it's worth, there wouldn't be so many of them out there," says mathematician Glen Whitney, the executive director of the Museum of Mathematics in New York.
The winner doesn't come out quite as far ahead. In this case, he shelled out almost $825 on bids, plus the additional $194.16 for the camera $1,019 in total for the camera, or about an $80 discount off the price of the same model offered elsewhere on the web. Auction losers who applied their bids toward buying the camera from QuiBids paid that site's price of $1,417.50. It's not uncommon for prices on penny auction sites to be higher than on other sites: BidHere values a 32GB iPad with 3G and WiFi at $729; Apple (NYSE: AAPL - News) stores sell it for $100 less. Pricing is based on what the site pays its suppliers, says BidHere's Day.
For their part, sites say users have ample opportunity to avoid bidding fees, including sign-up bonuses and special auctions that refund a portion of fees. "We want everyone on our site to absolutely know what they're doing," says Joel Fan, chief executive of LuckyChic.com. "There are signs all over the site telling you how many chips you're used, and how many you have left."
Paradoxically, the frustration of shelling out so much with nothing to show for it spurs users to try their hand at still more auctions, hoping to ease their losses with a big discount on something else, says Jack Vonder Heide, the president of Technology Briefing Centers. This, along with the fact that the sites sell chances to buy an object rather than the object itself contributes to the allegations of illegal gambling.
A class-action lawsuit filed in November against QuiBids.com alleges its pay-for-play format essentially constitutes an illegal lottery, and that the site engages in deceptive marketing by selling bids without disclosing the likelihood of winning. QuiBids says it's not gambling because every participant can apply fees spent toward the purchase of the item at the site's full retail price. "No customer has to walk away empty handed," says a spokeswoman. The suit is pending.
Of course, people do occasionally win at very low prices, which can be a boon. With the cost of bidding, that $3.20 iPad sold for less than $25 a bargain under any circumstances. Spokespeople for penny auction sites say general auction strategies work in these situations too, in particular, knowing the value of the item and how much you're willing to spend. It's possible to review recently-ended auctions to see what similar items have sold for, and also the names of past winners. Seeing the same names next to lower winning bids may indicate a small set of users, which is a good thing; next to relatively higher winning bids, the same names over and over could signal a big subset of highly-skilled veteran bidders. BidHere.com's Day says his site, like others, has a subset of "super users" who have the bidding down to a science, and love to compete. Site newbies don't stand a chance. "Don't go for the MacBook Pro right away," he says. "You're not going to win it.