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Can Onsale win with razor-thin margins?

The online auction service sells computer gear at cost. To make money, it will need a big boost in traffic and sales.

Online auctioneer Onsale wants to bring Costco-style retailing to the Internet by selling computer products to the public at wholesale prices. But with margins being sliced ever smaller, its success will depend on its ability to attract millions of new customers.

In what the company is calling a radical approach to Internet retailing, Onsale's new AtCost program offers more than 35,000 computer products for the same price Onsale pays to distributor Tech Data. Onsale claims it can make a profit. CEO Jerry Kaplan is projecting 8 percent gross margins by the middle of this year by charging customers only for shipping, payment processing, and a transaction fee between $5 and $10.

Onsale also plans to use ad revenue to boost its bottom line, and is anticipating more padding from vendor co-op advertising, lease programs, and warranties.

The model is a move away from auctioning excess and close-out computer goods on the Web, a category Onsale dominates. It is also a drive for a much larger customer base. Onsale plans to launch an offline advertising campaign on February 1. Advertising auction sites is tough, Kaplan said, because it's difficult to predict what products will be available at any given time.

"I want to create a Costco-like image for our company," Kaplan said, referring to the discount retailer. "When you go to Costco you just assume that the prices of the goods will be the lowest."

"In the auction business, Onsale's revenue growth is limited by the supply of excess goods, a problem that led to flat computer-goods sales in the fourth quarter, compared to the previous quarter. Onsale hopes the wider selection of at-cost goods--including products from Hewlett-Packard, IBM, and Compaq--will keep its nearly 1 million registered users coming back and spending more when they do.

Onsale predicts the extra volume will make up for the tight margins in the at-cost business, which the company says will be about 1 percentage point lower than for auction sales.

"Can they make it up on greater volume? That's uncertain," said Everen Securities analyst Tony Blenk. But Onsale's customer base and the at-cost model do provide significant barriers for other Web retailers, Blenk added.

Those barriers, and the lackluster results Onsale has gotten from deals to provide auction services to other sites including Yahoo, and, in Japan, Softbank, have made Onsale confident that it can become a dominant retail destination site on its own.

"The Yahoo deal is not a tremendous source of revenue now," said Kaplan. Fewer than 15 percent of Onsale customers visit the site as a result of Web advertising or partnerships with other sites.

If Onsale is to go it alone, much will depend on its ability to build its brand in retail, both online and offline. The company is anticipating $100 million in at-cost sales this year, a goal Blenk said isn't impossible.

But investors will have to wait for profits, which the company had expected to appear in the third quarter of this year until the at-cost program was launched. Now the company expects to be in the black sometime in 2000, Kaplan said. But in the long run, he added," At-cost will be more profitable than the auction business."