Aug. 19, 2011 -- Everyone loves a deal, but how good of a deal are the online stores known as penny auction sites? Many users say they offer addictive entertainment. But states are beginning to investigate and regulate sites that market themselves as treasure troves of deep discounts after consumer complaints about spending too much without getting goods.
In the auctions, users pay a small sum for each bid on a variety of consumer auction items, including high-ticket items such as computers and flat-screen televisions. Each time a user bids on an item the price increases by a penny or two.
The twist is that if more than one user bids on an item before an item is sold, each bid adds seconds to the countdown clock, increasing anticipation of when the countdown will end -- and making it impossible to know if your bid will be the last and winning bid. Users can also choose automatic bidding options on a number of sites, choosing their price and bid threshold ahead of time so they are not required to stay glued to their computers.
That can get expensive for the bidders since they have to pay -- usually 50 or 60 cents for each bid. But the sites can reap huge profits on the proceeds of the bidding and their devoted following, as reported by the Wall Street Journal this week.
For example, an Apple iPod Touch 32 GB sold Aug. 17 on QuiBids for $18.88 -- a deal considering the retail price is about $250. With each bid costing 60 cents the auction company could collect $1,132 in bid fees, not factoring in discounted bids that it auctions to bidders, which, of course, generate their own auction fees.
Georgia now requires penny auction website owners to register for a license with the state's Auctioneers Commission. Earlier this summer, the governor's Office of Consumer Protection entered a settlement with penny auction company Wavee, in part because it did not have an auctioneer's license. The settlement required Wavee to cease operating, pay over $200,000 in consumer restitution, pay a $35,000 civil penalty, and pay $15,000 in administrative expenses.
Nicholas Boccio, an enthusiast and advocate for the industry, said there is a problem with the Georgia law's definition of an auction. He said the bidding component of an auction is similar to a game in which each person pays for bids, or participation fees.
"The Georgia laws are just too archaic to regulate penny auctions at their present state," he said. Boccio also disagrees with arguments that the sites conduct illegal gambling.
"You're not betting or wagering anything in an auction. You place the bid you paid for. It's not paid for a pool that you get back if you win. It's for an item you hope to pay for," he said. "And when you win, you still have to pay for the prize. Some sites are specifically not gambling because at any point you can take any money you invested in an auction to pay for the item. In some worst cases, you'll pay the retail cost plus shipping."
Boccio runs a penny auction forum called Pennyburners.com and an internet radio show called Penny Talk Radio.
Boccio, who said he has participated in about 100 penny auctions and won about 30, said he no longer participates in auctions in order to maintain the integrity of his forum. His site lists active penny sites and aims to distinguish between "legitimate" sites and those that misrepresent themselves.
Jeff Geurts, chief financial officer of QuiBids, which describes itself as the largest and most visited penny auction site in the U.S, said dozens of sites have launched, but few have rolled out extensive national marketing and retained customers.
"2010 was the rise and fall what I would consider the vast majority of the bad penny auction sites," Geurts said. "There were sites during 2010 that would have shield bidders and bot bidders so customers would not know if they were real or fake. Scripts were sold on Internet through which you could build a site and have bots built in."
Geurts said the first penny auction site of which he is aware launched in Germany in 2005. Swoopo eventually expanded around Europe and came to the U.S. in 2008.
Geurts said Quibids.com, based in Oklahoma, expanded on Swoopo's idea with features such as a "Buy Now" option. Swoopo, which did not use bots and raised millions in venture capital funding according to Venture Beat, filed for insolvency in March 2011 in Germany.
Quibids.com launched in October 2009 with five employees. It now has 120 employees and has expanded to Canada, with plans to expand to Australia and Europe, and so far has no outside funding. It was voted fourth best place to work in Oklahoma City, a city in which the energy industry dominates. The company name combines the words, "quick" and "bids."
QuiBids conducts about 10,000 auctions a day, a portion of which are bids on vouchers for additional bids. But Geurts said the company prides itself on having hundreds of millions of bids on millions on auctions and shipping millions of tangible products to customers in less than two years.
The company also asked auditor Grant Thornton to test its business and services. The auditor's report from July 18 confirmed QuiBid's controls provide "reasonable assurance" that "bids on auctions are placed by bona fide users, that QuiBids does not manipulate the bidding process to inflate the bid price or affect who wins the auctions, and that winning auctions and "Buy Now" orders are fulfilled (i.e., shipped)."
"We wanted everyone to help understand QuiBids is a solid, long-term business," Geurts said, who explained that employees and their immediate families are prohibited from bidding. Even if they were able to bid, he said the system would prevent them from having an advantage over other users.
While smaller sites have come and gone, authorities have shut down some sites for scamming customers.
Washington state's attorney general investigated a small site called Pennybiddr last year. Jake Bernstein, assistant attorney general in Washington, said documents filed by the state in King County Superior Court accused PennyBiddr of using phony bids to artificially increase prices and sometimes make it impossible for consumers to win an auction. The owner of PennyBiddr settled and paid full restitution to about 86 customers of about $7,700 total.
The attorney general's office also investigated another small site called bid4millions this past spring for its failure to deliver products won and paid for in auctions. The defendants signed an Assurance of Discontinuance, an agreement not to engage in specific types of behavior in lieu of any civil charges being filed. The settlements of those two companies did not include an admission of wrongdoing.
"The big problem is that it's really difficult to tell if you are being cheated," Bernstein said.
Roughly 165 penny auction sites can be accessed from the U.S., according to Jack Vonder Heide, president of Technology Briefing Centers in Illinois.
Three auction sites started a trade association called Entertainment Auction Association "with the sole purpose of promoting integrity within the entertainment auction." Two of the founding companies, Swoopo and BigDeal have since shut down. The remaining company, BidCactus, calls itself the oldest U.S. based company in the industry. The association did not return requests for comment.
While Geurts said the intention of the trade association is a "good start," QuiBids has not joined because he said the member criteria is not stringent enough. He thinks penny auction sites should not just have an outside auditor scrutinize its business but also require a "Buy Now" feature for its auction items.
Geurts said the company plans to start its own trade association in coming months.
As the company has grown, so have its followers and critics.
A 23-page class action complaint was filed in November 2010 against QuiBids in an Oklahoma district court claiming the site does not properly disclose the low probability a customer will receive a "financially positive outcome from using the website."
The suit, with named plaintiff Lawrence Locke of Oregon, claims the site fails to disclose the fact that the overwhelming majority of customers will lose money by using the site and the percentage of money returned constitutes violations of the Oklahoma Consumer Protection Act and common law fraud by omission under Oklahoma law.
Roger Mandel of Lackey Hershman, LLP in Dallas, is one of the attorneys representing the class suit.
"It's essentially a lottery," Mandel told ABC News. "You're paying money to buy a bid, and you lose money if you lose your bid. It depends upon chance. There are all sorts of factors beyond your control, including how many people bid, how much they will bid."
He said the class is planning to file a second amended complaint accusing QuiBids of commercial gambling in violation of Oklahoma law.
Mandel said every penny auction site is guilty of the "same problems" but the lawsuit highlights QuiBids because it is the largest.
QuiBids filed a 31- page motion to dismiss the suit in February saying it properly discloses that users may lose money and it is best to bid in the last 20 seconds of an auction, when users' bids add seconds to the countdown clock.
"There's absolutely no merit to the lawsuit as can be seen by reviewing our motion to dismiss the suit," Geurts told ABC News, adding that it is "clearly not gambling" especially because of its "Buy Now" option. Geurts said there is plenty of disclosure in the website, including in its QuiBids 101 section.
"It's in our interest for our customers to be well informed about QuiBids, because if we do a bad job, customers will have a bad experience and not come back."
Stephen Silverman, an avid penny auction player in Phoenix, Ariz., said he prefers the site Beezid.com for its user interface and options, though he has used a number of sites, including QuiBids. He told the Wall Street Journal he has won more than 60 auctions on Beezid since learning about penny auctions in December.
He has won a 50-inch high-definition plasma TV worth $1,800 that he got for $425 and a Nikon D90 camera priced around $1,100 that he got for $300. But he told ABC News the auction item he enjoyed winning the most was spending $50 for a toy train set that his two children love.
Silverman said he hopes new players do not make the same mistake as he did, including bidding too early, bidding on a high-ticket item first without understanding penny auctions and expecting to win the most popular items. Silverman said he first bid on an X-box game system and lost. He said he lost over $350 during his first week.
"It should be like going to county fair. When you buy tokens and don't win, you don't get upset there," he said. "This is the same deal. I learned how to enjoy the experience."
He said users should view penny auction sites as entertainment, much like a carnival game, but not spend more on something than it is worth.
Fans of the sites say they are not negative-sum games if you don't spend more than you plan on the entertainment aspect of the auction.