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.
Still, not all auctions end profitably for Swoopo. Occasionally a real steal will pop up--one user recently bought a $60 computer mouse for $3.75, meaning that Swoopo lost $37.50 on the transaction. In another super bargain, a user named "canton" won an Apple MacBook Air, an $1,800 computer, for $66.96--meaning that Swoopo got taken for $1,400. It would seem that Swoopo's biggest weakness is time periods when not enough users are on the site simultaneously to keep pushing the auction prices up. Which is why international expansion is so important to the company: The German, Austrian, Spanish, British, and American versions of the site all run the exact same auctions, meaning that people from different countries--and, more important, time zones--are bidding against each other, round the clock. It seems to be working. CEO Gunnar Piening says that the company has 1.7 million registered users and had revenues of $29 million in 2008. The company's number of transactions has tripled, hitting 11,000 for December 2008. Swoopo claims on their website that they have now passed the start-up phase of their business and are generating "solid profits." In the long run, as we all know, the house always wins.
Which raises the question of whether Swoopo's auctions are actually legal. The company makes money by dangling the possibility of a sharply discounted product in front of users, enticing lots of people to pay a little money for the chance to win it. It resembles nothing so much as a private lottery.
Nonprofit lotteries--church bingo, PTA raffles--are generally allowed in the United States, but private lotteries are generally not. Legally, a lottery has three elements: (1) consideration, which is to say, a monetary buy-in; (2) a reliance on chance instead of skill; and (3) a prize.
I. Nelson Rose, a professor at Whittier Law School and coeditor of Gaming Law Review, is generally recognized as America's top gaming lawyer. He's undecided as to what Swoopo really is. "I think it's a close call," Rose says. The model definitely involves consideration and a prize, Rose notes, but whether or not it is dependent on chance, from a legal standpoint, isn't clear. "If you make this into a regular land-based auction where people sit in a room, but conduct the auction the Swoopo way, is it a true auction as opposed to a lottery?" he asks.
Rose thinks the more pressing issue is monitoring. Neither Swoopo nor any of the other entertainment shopping sites have verification systems that prove that genuine bidders are participating: "tomaker," the individual who Swoopo said won the Wii, could be anyone, or no one. Because Swoopo does not allow participants to interact with one another, there's no way to tell who is what. Piening says, "All bidders on swoopo are real users, who have registered and paid for their bids. There are no exceptions. There have never been any exceptions." Nonetheless, entertainment shopping without regulation is like playing a non-certified slot-machine. As Rose notes, "[Y]ou could set up something like this and not have anybody ever win."
Even if Swoopo is running afoul of gaming laws, it's unlikely authorities will pursue them. Law enforcement typically doesn't investigate Internet gaming unless the operation is linked to organized crime or the source of consumer complaints. If entertainment shopping takes off, however, individual states may decide to issue legislative clarification as to whether or not they consider it gambling. For his part, Piening insists that "Swoopo is neither gambling nor a lottery" because "chance does not play a role at all for determining the winner of the auction." It may be telling, though, that the company recently retained Tony Cabot, a prominent Las Vegas attorney and specialist in gaming law.
Either way, the odds seem to be in Swoopo's favor. "The characteristic that makes it so inviting," Rose explains, "is that it has what all successful gambling has: the near miss." The biggest indicator of success is, of course, imitation. Laughs Rose, "I am now getting calls from people who want to copy it."
Jonathan V. Last is a staff writer at THE WEEKLY STANDARD.