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December 15, 2008

"Pure, Distilled Evil in a Business Plan"

This comes under the heading "Morally Questionable, But Not Illegal" and I'm not sure it should be made illegal. It certainly is an interesting system, designed to prey on those who don't know any better.

I was fascinated to discover the auction hybrid site swoopo.com (previously known as telebid.com). It's a strange combination of eBay, woot, and slot machine. Here's how it works:
  • You purchase bids in pre-packaged blocks of at least 30. Each bid costs you 75 cents, with no volume discount.
  • Each bid raises the purchase price by 15 cents and increases the auction time by 15 seconds.
  • Once the auction ends, you pay the final price.
I just watched an 8GB Apple iPod Touch sell on swoopo for $187.65. The final price means a total of 1,251 bids were placed for this item, costing bidders a grand total of $938.25.

So that $229 item ultimately sold for $1,125.90.


But wait -- it gets worse! Swoopo also offers

  • Penny auctions, where each bid only increases the price of the final item by 1 cent, while still costing you 75 cents.
  • FreeBids auctions, where the item up for grabs is Swoopo bids. Near as I can tell, this is swoopo printing their own money.
  • 100% off auctions, where the "winner" (and I use this term loosely) pays nothing for the final item, regardless of what the final price is bid up to. Imagine the bidding frenzy on this one at 75 cents a pop.
  • Cash auctions, where you win actual real money at the end. It's like they're not even trying to pretend they don't run a gambling site with these.

It's not clear that Swoopo even has the items they auction; they appear to sell first, then use the money they gain from the completed auction to buy and ship the item.

Swoopo started in Germany in 2005, then extended itself to the UK, Spain, and---in September---the U.S. and Austria.

As Jeff writes, it's more of a lottery than an auction. For each user, a single losing bid isn't that costly. But they can really build up fast and at the end all folks who made losing bids end up with nothing. As long as the winning bid is one sixth of the retail price, Swoopo breaks even (*you may want to check my math). But many users are going to be willing to bid the price up higher than a mere sixth of retail.

From a legal standpoint, this is a contract for services---the privilege of participation in the bidding---rather than for goods. Ergo, this is not an auction and no one has a right to complain about anything. Swoopo has done even more to protect itself from legal challenge by giving each winning bidder an "unconditional" right to cancel (which actually has conditions on it; heh) the so-called "order" and return the merchandise.

I don't object to lotteries because there is no coercion involved. For the same reason, I don't object to gambling or casino-ventures. But even if I did object, that doesn't mean they should be made illegal. What do you guys think?

*My math to find the break even:

At break even the following condition obtains:

Retail price ($) = Winning Bid Price ($) + Amount spent on bidding ($)

Amount spent on bidding = Winning Bid Price ($) / (.15$/Bid)

Solve where 1 Bid = .75$

Solution: Retail price ($) / 6 = Winning Bid Price ($)

There must be a more elegant way to do that, though. I admit, law school makes one's math skills kinda rusty. Somebody put some mathematics to me.

digg this
posted by Gabriel Malor at 01:11 AM

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