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An online auction for businesses

An online auction site for manufacturers, distributors, and resellers of computer products highlights a growing phenomena.

This week's public launch of an online auction site for manufacturers, distributors, and resellers of computer products highlights the growing phenomena of Internet auctions for businesses targeting specific markets.

FairMarket, with 12 employees, is auctioning off excess inventory of manufacturers and distributors, including such items as brand-name PCs, peripherals, and computer components.

"This is one of the most interesting and exciting aspects of e-commerce--it's not just an auction but online market-making," enthused Erica Rugullies, an e-commerce analyst with Giga Information Group.

"It's an example of new types of intermediaries on the Internet," she said.

FairMarket is not alone. Forrester Research recently did a report on 50 online auctions, many of them in closed environments or extranets for specific partners. Forrester estimates business-oriented auctions did $2.5 billion in business last year.

"This is already a very big market. It's surprising how extraordinarily large they are," said Forrester analyst Varda Lief, noting many business-to-business auctions are conducted in closed communities like extranets, not on the public Internet, so they haven't been very visible.

"We act as a market maker bringing buyers and sellers together," said Scott Randall, FairMarket's founder and CEO, who is a former executive with online resellers NECX, Internet Shopping Network, and Yahoo. "The closest parallel is the New York Stock Exchange--we're not a retailer."

Ed Rich, owner of A-Z Used Computers in St. Louis, has bought 100 items on FairMarket since November, bidding more than 30 times.

"The other auctions have too many people buying in there. They're bidding the machines up to the retail price. In fact, they bid it higher than retail," Rich said. Bidders at consumer-oriented auction sites often live in areas with few computer stores.

FairMarket falls into what Forrester calls "independent auctions," which sell other companies' surplus or new manufactured goods. Computer products are the most popular category among independent, business-oriented auctions, where other sites include CyberSwap.

The company falls into what Forrester calls "independent auctions," which sell other companies' surplus or new manufactured goods. Computer products are the most popular category among independent, business-oriented auctions, like CyberSwap. Another site, FastParts, specializes in selling new automotive parts.

The biggest category in online business auctions is what Forrester dubs "commodity sales"--online auctions of oil, gas, and electric power. In fact, the Federal Energy Regulatory Commission requires that surplus electricity be sold among utilities and traders in auctions that use Internet technologies.

In California, for instance, ACE Market runs an online auction for state pollution emission permits, with transactions cleared by the Pacific Stock Exchange. In New Zealand, radio spectrum has been auctioned off--a move reportedly being considered by the Federal Communications Commission in the United States.

A number of companies are selling off their own goods using their own dealers and distributors in what Forrester calls "private auctions."

FairMarket's buyers include several thousand resellers and systems integrators that registered to bid in what Randall calls "a new channel for end-of-life products," or computer products that are about to go out of production.

The site lets vendors sell products in lots (typically at least 2, but often 5 to 200 units) and then has buyers bid for them in a real-time auction that runs during eastern time business hours. In exchange for acting as an intermediary, FairMarket collects 9 percent of the purchase price from sellers plus 1.5 percent from buyers. But it doesn't own any inventory itself, a differentiating practice from other online auctions.

The process is anonymous, and Randall aims to make FairMarket a one-stop selling shop where large manufacturers--Compaq, 3Com, IBM, and Hewlett-Packard hardware was sold during FairMarket's months-long beta period--can unload products without going through physical-world intermediaries who typically take a larger bite of the proceeds.

FairMarket's initial categories include PCs, peripherals, monitors, printers, scanners, hard drives, modems, network interface cards, memory, and chips. But Randall expects to offer 100 or so products, unlike online resellers that offer tens of thousands of products at fixed prices. By requiring buyers to bid on bigger lots, FairMarket intends to screen out consumers looking for a single modem or sound card.

Online auctions like Onsale and eBay have proven popular with consumers, and they're adding auctions that go beyond computer products.

Onsale, which began today running a ticker of its prices on Yahoo's new computer marketplace, also serves business buyers. Sixteen percent of its sales are to resellers, an Onsale spokeswoman said, and half its customers are buying for business purposes. About 75 percent of products auctioned off via Onsale are items the company itself has purchased.

Online auctioneers have their sights on the $10 billion a year market for surplus computer parts.

"It's an outsourcing vs. in-house decision," said analyst Rugullies, who views FairMarket as an electronic middleman.

FairMarket has a key partnership with CMPnet, which has print publications that focus on resellers and distributors. CMPnet gets a percentage of FairMarket's revenues on business it refers, and FairMarket is pursuing similar links with other affiliates.

The auction site now sells motherboards, add-on cards, and more finished products. Randall's next step will be to expand in-board products and then add more components like chips.

He sees promising markets in other industries, probably with niche-savvy partners in pharmaceuticals, office equipment, and consumer electronics, but all for distributors and manufacturers selling to businesses, not consumers.

A number of vendors sell software that let companies set up their own online auctions; Rugullies lists WebVision, OpenSite, Moai, Trade'ex, and Banzai Software.

In January, FairMarket raised $1.5 million in private funding, which is enough, according to Randall, to carry him through most of 1998.