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Consumer sites adopt barter model

A new crop of start-ups and their heavyweight financial backers are betting that the next wave in consumer e-commerce will have people trading their belongings without cash.

A new crop of start-ups and their heavyweight financial backers are betting that the next wave in consumer e-commerce will have people trading their belongings without cash.

Coinciding with a rash of business-to-business barter start-ups, the consumer-oriented swap sites aim to let users unload goods they no longer want in exchange for things they do want. The sites--which include Swap.com, WebSwap.com, Intellibarter.com, MrSwap.com, and SwapRat.com--typically plan to charge transaction fees, though most are waiving them while building their user bases.

The swap sites launch as entrepreneurs and investors alike try to break new ground in e-commerce, following the successes of retail and auction sites such as Amazon.com and eBay.

Perhaps most striking about this quintet of nascent sites is the degree to which they've already differentiated themselves.

Swap.com has narrowed its market to kids under 18 years of age. SwapRat, initially offering only CDs, will add more categories but only for items with which they can offer users licensed catalogs, such as books and videos.

MrSwap.com--launching first with music, movies and games--resembles the business-to-business barter firms by providing an intermediate virtual currency so that users don't have to negotiate item-for-item trades. Unlike most of its competition, it will charge only for shipping and handling, making most of its money through advertising and mailed promotions.

Intellibarter will distinguish itself by creating a section for bartering expertise on collectors' items.

Backing up the new wave of cashless trading sites is a ton of venture funding.

WebSwap was first out of the gate in November with $13 million in a first round from Sequoia Capital and Accel Partners. WebSwap plans to launch this quarter.

Swap.com is launching under the auspices of Bill Gross's Idealabs, a start-up incubator that claims eToys, GoTo.com, NetZero, and Ticketmaster Online-CitySearch among its successful ventures. Swap.com has the investments of "a handful of pretty big name VCs," according to Barb Wade, vice president of creative and production for the start-up, but she would not name them.

SwapRat is also keeping mum about its funding. Chief executive Michael Lin said the firm is waiting to settle with "a major Silicon Valley VC firm" that he would not name.

MrSwap.com said it was in the process of closing a $12 million round with two "A-list, top-tier VC firms."

The barter sites are pinning their hopes on the phenomenon that propelled eBay to ubiquity and profitability: people trying to get rid of more stuff than they need.

MrSwap.com, for instance, decided to focus on CDs, video tapes and computer games after its research showed that the average person owned 109 CDs, 25 video tapes, and 13 computer games. Just over half of the music and movies, and three quarters of the games, were not in active use, according to company founder and president Patrick Ford, a former Microsoft product manager.

MrSwap.com will launch Feb. 8, initially targeting the college student market.

SwapRat, too, is counting on a culture of pack-rats to drive its business. Chief executive Lin estimated that there were between 16 billion and 20 billion CDs "just sitting on people shelves."

By and large, the sites are carving out roles as middlemen, most charging nominal fees for exchanging goods without having to carry any inventory.

In addition to transaction fees, most of the sites are planning to sell advertising. SwapRat, for one, will establish partnerships to sell retail items alongside swap offerings.

The market--the start-ups and their investors believe--is vast and untapped.

"The idea was to capitalize on what companies like Amazon and eBay and Priceline did, reinventing the way buyers and sellers came together," SwapRat's Lin said. "We thought we could use the Internet to revolutionize traditional swapping by adding liquidity and letting people go across the entire Internet."

Lin envisions expanding the swap site to encompass community features.

"It's more than just the simple transaction itself," Lin said. "It's in the nature of the swap transaction that you're both a buyer and seller at the same time. And entertainment goods are good predictors of common interests. So it becomes a great model for community. As we collect information about what people are swapping, can group people together."

Teen- and child-oriented Swap.com thinks it has found the ideal market, one with little money to spend and lots of junk to trade.

"Kids are still growing so they move through merchandise pretty rapidly, and wind up with bedrooms and closets full of junk they don't use anymore," Wade said. "And don't have any pocket money. With Swap.com the kids get their opportunity to take their stuff and use it as currency."

While the kids' market appears ripe for a swap site, it carries its share of challenges and liabilities, Wade acknowledged.

"Focusing on kids is a handful. We have to be COPA (the Child Online Protection Act)-compliant, we have to get the approval of the parents, we have to protect the kids' identities--adult sites don't have to deal with that," Wade said.

Swap.com has gone to some lengths to hide users' identities. Users currently are not permitted to share information with each other apart from what goods they want to trade. It also offers a paid service to ship goods anonymously through the company for users who want to hide their addresses. The company expects to make a slight profit on that "secret shipping" service.

Other revenue will include a 77 cent charge for each completed transaction, following an official launch on Feb. 14.

Swap.com, which will launch officially Feb. 14 with a national advertising blitz, has seen heavy pre-launch traffic following some Los Angeles-area publicity.

In addition to investors' and users' enthusiasm, Swap.com has attracted the interest of major movie studios, Wade said, including three she would not name that have approached Swap.com about becoming sponsors in exchange for promoting their products.

"Trading goes way back for all of us, back way before the Web," Wade said. "It's a quintessential behavior."

Two additional sites offering consumer-to-consumer swap services are Tradeaway.com and Trade-N-Swap.com.