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FutureShop: How the New Auction Culture Will Revolutionize the Way We Buy, Sell and Get the Things We REALLY Want Excerpt from FutureShop: How the New Auction Culture Will Revolutionize the Way We Buy, Sell and Get the Things We REALLY Want

by Daniel Nissanoff

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The Game You've Got to Have

Exclusive luxury items aren't the only goods for which the secondary market has been shown not only to have no corrosive effect on retail sales but to actually offer manufacturers some benefits.

The ultramodern handheld Nintendo DS video gaming console has two screens for different perspectives on the action, touch screen capability, voice recognition software, and built-in wireless communication so gamers can compete against someone in the same room or someone on the other side of the globe. "In DS games, you can move sailboats around with your breath, push game characters with your finger and play wirelessly with other DS-toting friends who don't even own the same games," the Rocky Mountain News reported shortly after the gadget's debut in 2004. When the reviews came back, the console was frequently called "the funnest." Originally, Nintendo shipped only one million of them to North American retailers in late November 2004, but in the course of a few weeks, it was clear that more were needed. Many more. Nearly every retailer in the country was sold out. Nintendo DS gaming consoles began selling on eBay for almost double their $149.99 retail price -- and as holiday deadlines neared, they were snatched up by desperate parents as quickly as they were offered.

Nintendo eventually did respond to the increased demand, shipping 400,000 more of the sought-after consoles. As a result, the price on eBay fell, but not to levels you would expect. Consoles bundled with extra games and accessories are still moving through eBay at close to retail price, with some sellers continuing to unload them for more.

In the gaming space, there's always something sleeker on the horizon as manufacturers continually push the limits of technology. In March 2005, Sony debuted its first handheld portable version of the PlayStation 2, which contained technologically enhanced features. Though the company tried to step lightly in the balancing act between overproducing and underdelivering and produce just enough units to satisfy demand (while still watching over profits by keeping manufacturing costs down), actual demand surpassed expectations. The Chicago Sun-Times reported long lines outside electronics stores that stocked it. Predictably, eBay sales of the PlayStation 2 took off and the device sold there for nearly $100 more than the retail price. Hours afterwards, one twenty-five-year-old who bought a portable PlayStation 2 told the Sun-Times that if it turns out he doesn't like it, he'll just sell it on eBay.

It sounds like retailers are getting the short end of the stick, right? Actually, this type of resale behavior doesn't really affect retailers at all. Many of the people who line up at a store hours before it opens on the day of a new toy release are similar to scalpers who buy sports or concert tickets with the intention to resell them at a higher price. What drives the market is the difference between the value the seller places on his time as he waits on line for hours to buy a game console for resale, and the value the buyer (or his parents in this case) places on his time.

Take the case of Brian, a sixteen-year-old high school student who is more than happy to wait in line at a store for three hours to buy the new $150 Nintendo DS gaming system. The store limits each customer to one unit because of the enormous demand, but Brian isn't buying for himself -- he feels confident he can sell it on eBay for $300, leaving him a profit of $150. Assuming he spends two hours in the auction process to sell the item, he has invested five hours to make $150. This enterprising sixteen-year-old is making $30 per hour for his time -- or more than $60,000 per year, if he could do this eight hours a day for five days a week.

On the other side of the transaction is Jonathan, whose nine-year-old son has been asking for the new Nintendo system for his birthday. Jonathan is a successful orthopedic surgeon whose annual income of more than $500,000 places a $250-per-hour value on his time. Jonathan is delighted that he only has to click once on eBay to buy his son, Jason, his new toy. Had he waited on line for the privilege of paying retail, he would have saved $150 in cash, but paid a theoretical $750 in lost time value. So everybody comes out a winner in this transaction. Jonathan wins by saving $600, Brian wins by making $150 and Jason wins by receiving the instant gratification of being one of the first kids at school to have the hot new game system.

The retailer also wins. It has the exact same experience it would have had without the secondary transaction. It would have sold the exact same quantity of units with or without the scalpers (remember, there was limited supply) because while retailers could charge more in the first place for their products when demand is high and supply is scarce, they don't for fear of creating bad will with their customers and, in many cases, to protect their flow of product from the manufacturers, who frown upon price gouging.

A closer look at the situation reveals that manufacturers actually benefit from the profiteers trading in their goods. By releasing too few units into the primary market, the manufacturers create a frenzy as gamers clamor to secure scarce items. However, if stock of their favorite brand is out, they may lose their patience and migrate to an alternative brand that is more readily available. Once that occurs, the original brand not only loses that sale but a stream of future sales as the customer adopts the new brand. With Jason's birthday coming in a week and the DS nowhere to be found, his desperate father may have decided that the new X box was an acceptable substitute, and once he had the opportunity to play it, Jason might have agreed. Think of how many Nintendo customers were saved by eBay traders coming to their rescue.

Okay, you might say, I can buy that the resale market is a good thing for companies when their goods are in short supply, but that's not always the case. Aren't the Birkin bag and the latest hot video game product extreme examples? Who, retailers might ask in a panicky voice, is going to buy a Louis Vuitton handbag at Bloomingdale's or a Callaway driver from the local boutique golf shop when the same ones are available on exchanges like eBay for a lower price? While the intuitive answer seems to be "no one," it's actually not. A robust secondary market will actually be great for the primary-goods market for leading-brand products in general -- for Louis Vuitton and Callaway, and for Bloomingdale's and the golf shops -- just like the explosion in used-car sales had a positive impact on the market for new cars. Consider Mercedes. Its certified pre-owned car program made it possible for more people to drive out of the lot with one. Over the past ten years, the company's sales have more than tripled. Its sales figures for 2004 marked the highest sales volume in the car company's history.

Excerpted from FutureShop by Daniel Nissanoff. First published in 2006 by The Penguin Press, a member of Penguin Group (USA) Inc. Copyright Daniel Nissanoff, 2006.

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