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eBay's second try
The big recent news for eBay (Nasdaq: EBAY) is its Round Two in the ring with the online fine art, antique, and big-ticket collectibles auction business. The company will merge its eBay Premier site -- a virtual ghost town -- with Sothebys.com, the online presence of the venerable Sotheby's (NYSE: BID) auction house, into a new Sotehbys.com site to replace both its parents. eBay will manage the new site, and Sotheby's will use eBay's Live Auctions technology to enable online real-time auction bidding for some auctions in New York and London.
The 258-year-old Sotheby's and arch-rival privately held Christie's have built large worldwide businesses bringing together buyers and sellers, creating the premiere marketplaces for their luxury items. They are the Coke and Pepsi of their world, with titles changing hands back and forth, but publicly traded Sotheby's has not rewarded its shareholders with the drink makers' returns. And both trusted auction house brand names have been tarnished recently by federal government antitrust investigations and settlements, as well as the conviction of former Sotheby's Chairman and still-majority shareholder A. Alfred Taubman for price-fixing with Christie's.
Rumors of an eBay-Sotheby's venture have swirled and been denied for years, but in 1999 the two chose sides. eBay bought distant number three auction house Butterfield & Butterfield, and Sotheby's allied online with Amazon (Nasdaq: AMZN) to create sothebys.amazon.com. So why the new changes?
Because the deals bombed, and the companies can't seem to stop making bad business decisions in this unique, idiosyncratic arena.
They've looked at art from both sides now
eBay wanted a piece of the higher-end art auction market when it snapped up distant number three auction house Butterfield & Butterfield (B&B) in 1999 for $260 million. Perhaps eBay failed to interest Sotheby's, Christie's, or up-an-comer Phillips, de Pury & Luxembourg, so it can hardly be faulted for buying an also-ran if the others had said ix-nay or proffered unreasonable terms. Bought in order to headline the eBay Premier business, B&B lacked the cache and the inventory of its bigger competitors and didn't grow into critical mass on eBay either. In July 2000, eBay laid off 5% of B&B staff and curtailed vocal live B&B auctions. Not quite the return eBay got from buying half.com.
Today, the eBay Premier auction house page contains a bunch of linked houses, but paltry wares. Over half have nothing currently for sale, and the rest -- save B&B and one other -- link to another online flailing auction house aggregator. Despite links to other individuals and dealers from its home page, the eBay offering has never become a must-visit destination for the serious collector nor eBay's own huge customer base. Lose-lose.
Premier has failed, and the new joint eBay-Sothebys.com site will replace it. eBay told members on its site that the deal "represents the next step in eBay's evolution of creating an online destination for high-end arts, antiques, and rare collectibles." More like, "Our next try to see if it works since it didn't the first time."
The flip side
Sotheby's has little choice, because the auction house giant is going South-by's. The economy's dive has reduced the market for luxury goods. The partnership with Amazon failed to help either party and ended in October 2000, after Amazon's reported expenditures of $45 million. Sotheby's sports five years of flat to declining revenues, and had negative free cash flow of $116 million for the nine months to September 2001. In fact, the company hasn't generated annual positive free cash flow since fiscal year 1998. Though Sotheby's breaks out only its Internet expenses and not revenues, managements' comment in the 2000 10-K that they expected the operations to continue to be "dilutive to earnings" says it all.
Competitor Christie's has done well in response by publishing all its worldwide auction catalogs online and opening all live auctions to electronic bids from its website. Live bidding must still be in person or by phone, but you can place your opening bid and ceiling online, and the auctioneer bids it up (very much as you can do on eBay currently). Oddly, Sotheby's still acts as if the catalog business is a profit center, putting very few catalogs online and using Sothebys.com only for eBay-like, time-limited auctions.
Why it won't work
eBay and Sotheby's have different market constituencies, and both want what the other has. Good luck. Sotheby's thinks that eBay's 42 million registered users will flock to the Sotheby's brand for middle-to-low end purchases. Though they can't be truly compared, why would eBay users --admittedly more numerous but probably not more affluent -- do what Amazon's did not?
eBay purportedly views Sotheby's as an entree to bigger ticket and bigger fee income. It hasn't worked before, and even the addition of Sotheby's marquee name is unlikely to help now. Auction houses -- online or offline -- compete for sellers of high-priced art. It's an individualized, idiosyncratic business world where competition for sellers has reduced and often waived the seller's commission ("premium" in auction house parlance), based upon a number of individualized factors. Sellers also consider a dealer or auction house's abilities in such non-eBay niches as seller short-term financing, staff expertise (such as in authentication), and tax and insurance appraisal.
Worse, eBay's strength -- its rating system and town square market approach -- can only go so far to attract buyers and sellers of fine art when the system is occasionally abused. In April 2001, three eBay sellers were charged with shill bidding to up the ante to over $135,000 for a fake Richard Diebenkorn painting. Two pled guilty and made restitution to buyers. This is not the kind of news that attracts conservative, high-end buyers and sellers. They know that Sotheby's will make them whole without a federal prosecution and before a seller's resources are gone.
Conclusion
In short, eBay's business model is, with limited exceptions, about scale and volume and time-limited auctions, with frenzied bidding at the last minute. The high-end international art market is about the world of the very rich, discretion, individual relationships, and auctions that extend for as many days as there are bids. Sothebys.com tries to fit a square peg in a round whole. Christie's has recognized that -- but then, it has no pressure to serve public shareholders.
The dream of the joint venture is to marry Sotheby's trusted brand with eBay's customer base. eBay and Sotheby's may succeed in a niche market of lower-end fine art, antiques and collectibles, but this will at best add marginal revenues and profits to each. eBay's presumptive long-term hope that this may be a reverse slippery slope upwards to the larger ticket items will, I believe, be dashed, just as they were with Butterfield & Butterfield.
So there's the gauntlet. Please join the discussion about this deal and all things eBay on our eBay discussion board.
Bye-the-bye in biotech
Meanwhile, we note last Thursday's IPO of Seattle-based Zymogenetics (Nasdaq: ZGEN), another company in the race with Human Genome Sciences (Nasdaq: HGSI) to develop successful therapeutic protein drugs. Join the conversation at the brand-new Zymogenetics discussion board. We're also glad to hear that the FDA approved Amgen's (Nasdaq: AMGN) Neulasta, a less-frequent-dosing version of its white-blood-cell boosting Neupogen. So are the folks on the Amgen discussion board.
More on Zymogenetics and Amgen in future columns.
Please Break some Rules today.
Tom Jacobs (TMF Tom9) bought a book on eBay-owned half.com from Jeff Fischer (TMF Jeff), even though he sits steps away. Ooops! He owns no stocks mentioned here, which you can see in his profile, aligned with The Motley Fool's disclosure policy. He welcomes roses and spitwads at [email protected].
