Event Summary
FairMarketSM,
Inc. (NASDAQ: FAIM proposed) and Microsoft, Inc (NASDAQ: MSFT) announced the
addition of auctions to the Microsoft bCentralTM portal for small and growing
businesses. Product categories range from Business Machines to Uniforms/Business
Dress. Auctions are only one aspect of bCentral, which also provides information
to small businesses on subjects ranging from how to build a web site to how
to recruit employees. The auction capability is linked to other Microsoft and
FairMarket auction networks.
Market
Impact
Auction
capabilities are a small addition to bCentral. The link is one of sixteen on
a two-inch by four-inch section of the bCentral home page. While the categories
themselves have a small business orientation, a quick trip through some listings
suggests that the auction list has been seeded with a variety of items from
other auction sites. Of course the beauty of an auction site is that many unlikely
goods will find the person or company who needs them.
At
present, however, we think there are too few items of real value to small businesses
among the hodgepodge of games and CD's whose photos are stamped "Bundled Software
Must Not Be Sold Separately From Approved Hardware." We believe that this kind
of content is not likely to endear the site to potential small business users.
This
may be a startup phenomenon that will disappear as the site gets a more focused
population of goods and services. However, if the product listing does not focus
naturally, it would be quite labor-intensive, and a difficult public relations
problem, to try to monitor it to focus the content manually, even with automatic
aids.
While
a drop in the bucket for Microsoft, the announcement may be quite important
for FairMarket. Currently preparing for a public offering, any mention of the
company's name in the news is good, especially when that name is linked with
part owner Microsoft. (Microsoft owns 21 percent of Fair Market, of which 17
percent is in warrants.) However, in the long run FairMarket needs transaction
revenue rather than name recognition, thus involvement with any site that does
not efficiently convert visitors to buyers can be doubly costly. The obvious
cost is the opportunity cost of devoting resources to a low-value site.
The
subtler cost is in the fine print of FairMarket's contracts with Microsoft (and
with Excite, Inc, a 15% owner). These call for sharing of transaction revenue,
with enforced minimums based on Internet traffic. That is, if Microsoft sends
a certain number of visitors to FairMarket then, regardless of whether they
generate transaction fees, FairMarket will owe Microsoft a minimum transaction
fee. In total, these fees - taking both Microsoft and Excite into account -
range from approximately $5.8 million in 2000 to approximately $28.4 million
in 2004.
Given
that FairMarket's revenues in the first three quarters of calendar year 1999
were $900,000 and essentially zero for the preceding two years, these agreements
do represent some real risk. Note that for Accounting reasons FairMarket will
not recognize transaction revenue generated from visitors sent from Excite or
Microsoft until the minimums have been paid or the traffic levels have been
unable to meet the trigger points. This makes the first few quarters especially
hazardous. If FairMarket doesn't generate the transaction revenue from Microsoft
and Excite very early in the year, they will be in an uncertain position - the
kind that Wall Street analysts and investors particularly dislike.
User
Recommendations
For the small business that wants to make use of an auction site for buying
or selling, the only risk is the time involved to decide whether this is the
one that seems likely to provide the buyers or sellers you need.
For
a company that wants to create its own business-to-consumer or business-to-business
auction sites, the industry is so new that there is no risk free option. Our
greatest concerns about FairMarket are its ability to build its revenues quickly
enough to make the minimum transaction guarantees irrelevant, and the related
question of whether their reliance on Microsoft technology will allow them to
scale their network smoothly. (Their current search subsystem performs quite
poorly, but an upgrade to a more powerful product is already in the works.)
The FairMarket software is quite functional and we believe that many businesses
- especially those for which E-commerce is not their core business --will prefer
FairMarket's hosting approach to an out of the box solution such as the one
offered by competitor OpenSite Technologies, Inc. So FairMarket belongs on your
short list for close evaluation .