Amazon's auction options were limited

What does it take to compete with eBay? Up to 12 months and $12 million, say industry observers, who estimate Amazon.com put that much into developing its new auction site.

Despite the time and expense, the analysts believe the online retailer had good reasons for developing auctions in-house, rather than buying an off-the-shelf solution or buying eBay outright.

Amazon won't confirm whether it developed its auction capability entirely on its own. The company declined to discuss the development process, how long it took, or the costs involved.

But all indications are that the company developed the project on its own, said Fiona Swerdlow, analyst at Jupiter Communications. Amazon hasn't acquired any auction companies, and unlike its recent investments in Pets.com and Drugstore.com, it hasn't revealed any auction-related investments or partnerships.

To add auctions to its site, Amazon could have taken any number of paths. But its decision to develop them in-house is evidence of its desire to maintain control over the customer experience, and it points up the drawbacks of existing alternatives.

Perhaps the easiest solution would have been to buy an existing auction site outright, giving Amazon an instant presence in the market and control over that presence.

But aside from the enormous expense of buying an AuctionUniverse or eBay, whose market capitalization is hovering around $18 billion, Amazon would have found it difficult to mesh its site with an existing auction site, according to Lauren Cooks Levitan of BancBoston Robertson Stephens.

"Amazon has focused on a really positive user experience," Levitan said. "It's really hard to control the user experience when it's being handled by two individuals."

Tweaking an existing auction site to fit with the rest of the Amazon site could have taken more time than developing an entirely new site on its own, Levitan said. By doing it in-house, "it's possible that they could get there faster, with the outcome they wanted," she added.

But buying an auction site outright wasn't Amazon's only option. According to Susan Zaney, vice president of marketing for auction software maker Fair Market, there are at least four other ways to enter the market. These include:

• Buying off-the-shelf auction software and integrating it with the rest of the site
• Partnering with an online auction company like Fair Market--which hosts sites that can be integrated into the company's Web site--and maintain the site's brand name
• Partnering with a site such as AuctionUniverse to create a co-branded auction site
• Partnering with an auction site, like eBay, to send traffic there.

For Amazon, the latter two solutions wouldn't make sense, Zaney said, because they might diminish the company's brand and send users elsewhere, perhaps permanently.

Derek Brown, senior analyst at Volpe Brown Whelan, said Amazon is interested in maintaining both a consistent user experience and the quality of its back-end systems. By handing users off to a co-branded or partner site, Amazon would lose control over that experience.

"Without a doubt, it is incredibly important for Amazon to maintain the integrity of its service and maintain the same look and feel with its customers," Brown said.

But if Amazon's goal was to maintain its brand name, companies like OpenSite Technologies and FairMarket say they could have helped Amazon do just that--and saved the company time and money.

Dick Wilde, vice president for business development at FairMarket, said it would have taken his company less than 30 days to build an auction site for Amazon. The cost? About $2,000 to set up the site and about $10,000 a month to host it, including answering user feedback.

According to Zaney, FairMarket approached Amazon in mid-January about working on an auction site, but "they were too far down the road."

FairMarket could have handled the high volume of traffic that Amazon's auction site is expected to have, Zaney said, and could have designed a site that would be easily integrated into the rest of Amazon.

"They are our perfect target customer," Zaney said.

Amazon's decision to go it alone puzzles Michael Brader-Araje, CEO of OpenSite, which makes off-the-shelf auction software. (CNET, the parent company of News.com, is an investor in OpenSite.) OpenSite could have had Amazon Auctions up and running in a couple of weeks for less than $100,000 in start-up costs, with all the features Amazon has.

"I don't think it was necessary for them to do it," Brader-Araje said.

But Ken Allard, a site operations analyst at Jupiter, said that although packaged auction software works well for most sites, it probably couldn't handle the kind of traffic that would be flowing into Amazon's site.

"Amazon's quite different from most sites," Allard said. "I'm doubtful that most software could handle the current number of users Amazon has."

Online auction software is still in its infancy, Allard added, and may not have all the features Amazon wanted now or down the road. Also, because auction hosts like FairMarket provide a similar look and feel for all of their customers, using their products would have hampered Amazon's ability to differentiate itself from its competitors.

"Amazon's difference would be eliminated," Allard said.