The new frontier of shady online gambling: The penny auction

Oct 1, 2010 10:51am


By Jeremy Gin, CEO, SiteJabber

Lawmakers who follow online gambling regulation typically fall into one of two camps – those who think online gambling should be illegal and those who think it should be regulated and taxed. Penny auctions, a new form of online gambling, have heretofore fallen through the cracks of regulation. The result: penny auction owners are profiting richly at the expense of consumers. 

What is a penny auction?  

Penny auctions look like typical eBay-style auctions. On the website, goods (often expensive electronics, designer handbags, and gift cards) are shown for sale, bids are being placed, and there is some sort of clock counting down the time left in the auction. However, something is amiss: prices are cents on the dollar. A 50” HDTV might be going for $8. A $1000 Marc Jacobs bag for $10. A $100 Target gift card for $3. 

As you can imagine, consumers visiting a penny auction site for the first time might be tempted to sign up and bid for what they think is an incredible deal. But as consumers sign up for the penny auction site, they quickly see the catch: you must pay for bids in order to participate in the auctions. Penny auction sites typically charge anywhere from 10 cents to $3 for bids and will often encourage costumers to buy “bid packs” so they do not “miss an opportunity to bid.” 

Having their heart set on the expensive electronic, luxury item or gift card, consumers are often tempted to buy a couple bids and see if they can swoop in and scoop up the bargain before the auction ends (the time is often ticking down to put pressure on bidders “not to miss the deal”). But once the consumer bids, invariably another entity also monitoring the same auction places another slightly higher bid, and the price of the item goes up by a few cents and the time of the auction is extended. And this happens again and again with the final result generally being: (1) the consumer drops out of the auction having lost the money spent on the bids or (2) the consumer stays in the auction and ends up paying much more than he or she would have ordinarily to purchase the item. As you can see, either way, the owner of the website is the only one who really benefits. 

What’s wrong with penny auctions? 

If presented with complete transparency and run ethically, penny auctions might be seen like a typical gambling outfit. Prizes are displayed. Lottery tickets are purchased. And the house takes a rake. However, something more pernicious is happening here. We at SiteJabber have three primary issues with penny auctions:

1) Disingenuous marketing: penny auctions advertise and promote themselves as fun ways to get deals when in fact they are, at best, gambling outfits. Whatever you may think of online poker sites, they at the very least are clear that they are indeed gambling. 

2) No transparency: the lack of transparency in their marketing is only the beginning of the deception around penny auction sites. From a consumer’s standpoint it is impossible to tell the odds of your lottery ticket (penny auction bid) paying off. We often liken participating in penny auctions to playing a slot machine that doesn’t list its payout odds. 

3) Fraud: one of the other issues with the lack of transparency around penny auctions is that it creates an environment highly conducive to fraud. Because consumers cannot tell who else is bidding on the items, website owners can very easily employ shill bidders or bid bots (software scripts that mimic human bidders) without consequence. A number of these cases have been reported on SiteJabber, although it is presently impossible to know how often such fraud occurs. 

Who owns penny auctions and when did they first appear? 

Penny auctions have grown like weeds because of the profitability of the business model and the ease of setting them up. New companies have cropped up that sell penny auction templates so anyone can start one at almost no cost. Many of the largest penny auction sites, started in the late 2000s, are not run by anything as flashy as brooding oligarchs or organized crime. Rather, they are venture capital financed and often run by professional American managers with MBAs from top schools and a nose for lucrative business models. 

What should be done?

In our view the general public needs to get the full story on penny auctions before more consumers are hurt by these sites. There is scant data on penny auction usage, but SiteJabber has received thousands of complaints about penny auctions in the last nine months, and penny auction sites themselves receive millions of visitors, suggesting the size of the problem is significant with hundreds of thousands of consumers likely affected. 

For regulators and law enforcement we would recommend taking a close look at penny auctions. Given their current rapid pace of growth and the issues with their business model, it’s hard to imagine they will not be regulated at some point. It’s just a matter of who gets there first and how many consumers are hurt in the interim. 

More information on penny auctions:

Understanding the Penny Auction (graphic) 

Further Explaining Penny Auctions

Sampling of customer experiences: Example 1Example 2

 

Jeremy Gin is the chief executive officer and co-founder of SiteJabber a consumer protection service which helps the public avoid fraudulent websites and find good sites. Consumers use SiteJabber to research unfamiliar websites, as well as read and write reviews of online businesses. SiteJabber is supported by a grant from the National Science Foundation and was named one of the top 100 websites of 2010 by PC Magazine.