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AOL Veers Into eBay's Turf By NICK WINGFIELD and
JULIA ANGWIN
For years, America Online has watched as one of its biggest advertisers and partners, eBay Inc., raked in growing profits by taking a cut of all transactions on the eBay site. Now, America Online plans to get its own cut of the action. America Online, the world's biggest online service and a unit of AOL Time Warner Inc., is developing an Internet marketplace that will allow the company to earn commissions on the sale of goods, a departure from its traditional strategy of charging "rents" to online retailers such as QVC and L.L. Bean that want to ply their wares to its vast audience, according to people familiar with the matter. If successful, the marketplace could give America Online a way to more fully reap the rewards of electronic commerce -- a need that has become more urgent as its ad sales have slumped. But the new marketplace is likely to put America Online in competition with eBay, one of the most profitable companies on the Internet and one of the few longtime America Online advertisers to survive the bursting of the Internet bubble. The eBay relationship has been lucrative: This year alone, eBay will pay $18.75 million to advertise on America Online as well as in Time Warner print and broadcast outlets, according to an eBay regulatory filing. In addition, America Online's advertising force sells all of the ads on the eBay site, reaping an undisclosed amount of commissions.
People familiar with the matter say America Online won't compete against eBay in auctions -- something forbidden by their partnership agreement -- but instead will create an online marketplace where any individual or company will be able to post goods for sale for a fixed price -- an option that also is available to eBay sellers and is becoming increasingly popular on that service. America Online expects most of the sellers on the marketplace, which it hopes to launch in the first quarter of next year, will be small and medium-size businesses offering items such as apparel, consumer electronics, furniture and services such painters and contractors. America Online executives have begun courting a number of eBay's largest sellers, which help big-name manufacturers and retailers move goods, often surplus ones, over the auction service. "We have some very good partners in fixed-price [sales] who are looking to have big-scale liquidation capabilities," says one America Online executive. America Online's advertising sales are in a steep decline -- they could be low as $1.6 billion this year, down from $2.7 billion last year, the company says. In addition, its accounting for advertising sales is under investigation by the Securities and Exchange Commission and the Justice Department. EBay's business, in contrast, is thriving. Second-quarter profit at the San Jose, Calif., company more than doubled to $54.3 million on revenue of $266.3 million. America Online executives have debated for years how to get a bigger piece of online commerce. During the boom years, it made money by charging retailers for space on the service, but in recent months retailers have become more reluctant to pay the many millions of dollars in fees America Online was asking. America Online's own data show that e-commerce is taking off. The service says its subscribers spent $33 billion online in 2001 (though of course not all via America Online's merchants), 67% more than the year before. "AOL has facilitated a lot of e-commerce but hasn't participated in that revenue stream as significantly as I think it could and frankly should," AOL Time Warner Chairman Steve Case said Tuesday at a Goldman Sachs investor conference. Mr. Case added that e-commerce expertise was one of the attractions of the new chief executive of the online operation, Jonathan Miller. Mr. Miller, who joined America Online in August, is a former top executive at USA Interactive, the e-commerce giant run by Barry Diller. Mr. Miller has said he envisions America Online's possibilities in e-commerce to be some mixture of the "tremendous availability" of Amazon.com and the "tremendous ability to merchandise" of Home Shopping Network, a USA Interactive company. In August, America Online licensed software from OneMade Inc., a closely held Saratoga, N.Y., company. The software will allow sellers to list large volumes of items on the new America Online marketplace, which the company plans to promote throughout its service. But America Online has to tread lightly for fear of alienating the hundreds of tenants in its existing "AOL Shopping" area. It says it plans to integrate some of these tenants' offerings into the new marketplace. EBay is closely watching America Online's efforts. "Given our partnership, we are very curious as to how this will work," a person close to eBay says. An America Online spokesman says "we have a strong and continuing partnership with eBay." Despite controlling a share of the online auction market that has been estimated at more than 90%, eBay isn't invulnerable, some analysts believe. In the past, Yahoo Inc., Amazon.com Inc. and others failed to copy eBay's success in auctions. But more recently, Amazon has seen encouraging growth with a service called Amazon Marketplace through which independent parties sell books, DVDs, electronics and other items at fixed prices and Amazon takes a cut, a service similar to the one AOL plans to launch. Some large eBay merchants say they would welcome America Online's marketplace, in part because it is proving difficult to sell mass quantities of some products solely through eBay. "If you have 10,000 Palm Pilots, you can't sell them on eBay -- they just don't have the demand to soak them all up," says Alec Peters, chief executive of Auctionworks.com Inc., a company that helps Home Depot Inc. and others sell goods on eBay. "We're always looking at new marketplace opportunities" including America Online, says Scot Wingo, CEO of ChannelAdvisor Corp., which provides services to eBay sellers such International Business Machines Corp. One of America Online's key advantages is the huge amount of traffic it can generate from its 35 million subscribers world-wide. Some eBay sellers believe America Online could better advertise their products. The service has already begun experimenting with commission sales with a promotion called "Deal of the Day," which began last fall, through which executives say they sell thousands of items like bed sheets, cookware and laptops. America Online also has the credit-card numbers of most of its subscribers on file so they can just click to have items billed to their accounts. Using that technique, America Online raised more than $16 million in charity contributions from subscribers after the Sept. 11 terrorist attacks. The Internet provider also plans to start selling music singles, CDs and a subscription music service through this billing method early next year. Write to Nick Wingfield at nick.wingfield@wsj.com and Julia Angwin at julia.angwin@wsj.com Updated October 2, 2002 REPRINTS INFORMATION: To distribute multiple copies of this article, visit the Dow Jones Reprints site. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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