Take a Chance on an Auction
Swoopo and the rise of Entertainment Shopping.
Feb 23, 2009, Vol. 14, No. 22 • By JONATHAN V. LAST
On a recent Friday morning, there was an auction for a Nintendo Wii on the website Swoopo.com. At 9:45, the auction was set to end in 20 seconds, and the Wii was about to sell for $34.05--a bargain for an item that retails for $250. But Swoopo uses a very curious auction process, one that may not be an "auction" at all.
Users purchase "bids" from Swoopo for 75 cents each. These bids are only sold in packages, not singly, and must be bought ahead of time. A user might purchase, say, 100 bids from Swoopo for $75. Prospective buyers then spend these bids on items such as the Wii. Unlike eBay and other online auction houses, Swoopo is the sole seller of goods on their site--users do not sell to each other. And unlike eBay, users do not bid a specific price for goods.
Swoopo posts an item for sale with a countdown clock showing the end time for the auction. The starting price for each item is $0.15. Each time a user spends one of his bids on the item, the purchase price increases by 15 cents and, most critically, somewhere between 10 and 20 seconds are added to the auction clock. (Swoopo won't say how it determines the amount of time added.) On Swoopo auctions often go on for quite a long time after they seem just about to end.
People kept "bidding" on that Wii--which you'll recall was about to sell for $34.05 with 20 seconds left. Fifty minutes later, the price had risen to $100.20 and there were 4 minutes on the clock. After another half hour, the price was $123.15, with only 15 seconds left. And 45 minutes after that, the auction finally ended, with the Wii selling for $159.60 to someone with the screen name "tomaker."
It would seem that tomaker got a bargain, saving $90 off the retail price of the Wii. But Swoopo made a killing on the deal. The final price means that 1,064 bids were placed in the auction--at 75 cents each, that's $798 direct to Swoopo. Add the final purchase price and Swoopo managed to sell a $250 item for almost $1,000.
Based in Munich, Swoopo was founded by two German entrepreneurs in 2005. In 2007, it opened a British version, called TeleBid. This was followed by a portal in Spain, and, in September 2008, the entire family was consolidated under the "Swoopo" brand name when an American site was launched, complete with an office in Cupertino, California. The sites are all now operated under the umbrella of Entertainment Shopping, Inc.
Swoopo is just the most prominent example of a new type of Internet business which describes itself as "entertainment shopping." Websites such as Penny Cave, Yellman, and Winners24 may vary the details, but the basic formula is the same: People purchase very cheap "bids" for the chance to then buy goods at incredible discounts. And there are discounts on Swoopo. For instance, Swoopo claims that buyers have recently gotten a Playstation 3 for $100.95 (retail price: $399), an LG 22-inch LCD HDTV for $134.70 (retail price: $550), and an Apple iPod Touch for $76.20 (retail price: $230). Yet in each of these cases, Swoopo has made a great deal of money. If you assume that Swoopo paid full retail price for the goods, they turned profits of $204 on the Playstation, $258 on the TV, and $200 on the iPod.
What's more, it's not clear that Swoopo even bears the costs of purchasing and warehousing all the items beforehand. Buried in the site's terms of service agreement is the disclosure that prizes may be shipped "directly from our suppliers." And then there's this disclaimer: "Should Swoopo not be able to deliver the item ordered, Swoopo shall be entitled to substitute the item with a comparable replacement product with the same or better features, or provide a refund of the auction end price to the user based upon the user's preference." Which means essentially that Swoopo might not even possess, or have an agreement to possess, prizes at the time they are putting them up for auction.