Fri, Feb 10, 2006 page12

• E-commerce's trust system could become its weakness

  • THE OBSERVER
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  One of the more interesting news items of last week was the report that Tiffany and Company, the celebrated New York jeweler, is suing eBay, the online auction company, for "facilitating the sale of counterfeit goods" over the Internet. It turns out that undercover agents working for the company secretly bought 200 "Tiffany" items in eBay auctions and found that three out of four were counterfeited.

  The case will go to trial in the US later this year.

  The key to eBay's astonishing growth is that other people did the work, while it took a cut from everything they did. EBay merely provided a place in cyberspace in which people could buy and sell items. Within the limits of taste, decency and the law, it was not terribly interested in what people traded -- caveat emptor and all that.

  From the beginning, of course, trust -- or lack of it -- has been the ghost at this particular feast. After all, the overwhelming majority of those millions of buyers and sellers are total strangers.

  There's a celebrated New Yorker cartoon which captures the situation nicely. It shows two dogs in front of a computer, one saying to the other: "On the Internet, nobody knows you're a dog." Yet on eBay, one dog is purporting to be offering something for sale, while another is purporting to be willing to buy it.

  Trust is a willingness to rely on the actions of others, to be dependent upon them, and thus be vulnerable to their actions. Without trust, e-commerce would have been impossible. Ditto the growth of eBay. The company tackled the problem by adapting an idea that had evolved in the early days of trading on the Internet in the pre-web days. This was the notion that an individual could acquire a public "reputation" on the basis of how people rated his/her performance as a trading partner. EBay's adaptation requires both vendor and buyer to rate one another after completion of a transaction. After a time, both build up publicly visible reputations which prospective trading partners can consult before deciding whether to proceed with a bid or a sale.

  The system has now been running for years and my impression is that it works pretty well. Nevertheless, the point worth noting is that the reputation system apparently hasn't been particularly good at dealing with Tiffany's problem. And if the court finds in the jeweler's favor, the implications for eBay could be dire: imagine the costs of policing all those auctions. All of a sudden, the overheads of the operation would balloon to a level beyond imagining.

  Meanwhile, over in another part of the forest, Google has been wrestling with another problem related to trust. The company makes colossal amounts of money from selling "Adwords," the words that generate the paid-for ads which appear on the right of every search results page.

  Suppose you run a stretch-limo hire service in London. You buy Adwords from Google, which puts your site on the page whenever someone types "stretch limousine London" into Google. If someone then clicks on the link, Google bills you and you are happy to pay because you may make a sale from the click. It looks like what business schools call a "win-win" situation.

  Er, not necessarily. According to a fascinating investigation by Wired magazine, there is a downside to Google's fabulous moneymaking machine. If your unscrupulous competitors start clicking on your Adwords-generated ads, then they wind up costing you money without the offsetting consolation of making a sale. And we're not talking peanuts here -- according to Wired the cost of a click can be anywhere from a few cents to US$30. So your competition can happily sit there and click you into insolvency.

  Neither Google nor eBay will talk publicly about the threats posed by fraud to their businesses.
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