Going, going, gone? QXL once excelled, now it's getting hammered

The auction site that lost its way may beat a path out of the stock market, says Clayton Hirst

Lot number 8794647 promises "the greatest money-making system ... ever seen". For just £2, the seller, named Stinking, offers to "provide information on how to make money online with ease" - a formula the vendor claims to have just "stumbled upon".

It's a shame that QXL, the internet auction site on which this get-rich-quick scheme is advertised, hasn't happened upon a similar system. The British company, a one-time high-flyer during the dot-com boom, is worried that it could soon run out of cash and is beginning to question whether it should still be quoted on the Stock Exchange.

"If we have to, then we have assets to sell," says chief executive Mark Zaleski. "It could be one of the foreign operations."

Floated in 1999 with the backing of venture capitalist Apax Partners, QXL rode the dot-com wave to perfection. At its peak it was worth £1.7bn and was spoken of as a serious challenger to America's eBay. But today, when it has a market capitalisation of just £1.2m, Mr Zaleski says: "For a company of our size there are a lot of overhead burdens in being a public company. [Going private] is an option and right now it would not be a bad thing. But we won't have anything in the pipeline."

QXL, which still operates in 12 European counties, is unlike most of the other dot coms born in the late 1990s. Companies such as Boo.com and Click-mango were doomed from the start. They took advantage of the internet madness that gripped the markets but had no real business plan to speak of. Profits, earnings and dividends were dirty words, confined to old-economy companies.

But QXL was different. It had tapped into what the internet was really good at - matching millions of buyers with sellers and making a small transaction charge in the process.

The success of eBay, the giant American online auction site, which was one of the first dot coms to actually make a profit, shows what could have been at QXL. EBay has become the de facto site for bargain hunters, just as Google has for internet searching.

Back in the mid-1990s when eBay was just another start-up, it acted as the inspiration for QXL's founder, Tim Jackson. A former journalist on The Independent and the Financial Times, he set up Quixell (later shortened to QXL) in 1997. At that point, the online auction market was there for the taking. "QXL had the opportunity to be as big as eBay," says Hellen Omwando, an analyst at research group Forrester.

In 1999 QXL hired Jim Rose, a former executive at Lord Hollick's United News & Media, to become chief executive. The fast-talking American gave the company its prerequisite new-economy swagger. He boasted of surviving on four hours' sleep, spent most of his time jetting between European cities, and made liberal use of the word "cool". With the company's founder now taking a back seat, Mr Rose hired Hugh Scully, presenter of the BBC's Antiques Roadshow, to be the face of QXL (though how Mr Scully was "cool" confused many) and spent millions on promoting the brand. QXL used its highly rated shares to buy up European rivals, the biggest being Germany's Ricardo, which cost it a "cool" £668m.

However, Mr Rose fell out of fashion and was replaced by Mr Zaleski, who moved from the now-defunct American dot com Webvan in November 2001. Mr Jackson later moved to the secretive finance house Carlyle Group.

Like most dot coms of the era, QXL attracted Wall Street and City analysts who believed the company was about to become the next big thing. Its biggest cheerleader was Thomas Bock, an analyst at stockbroker SG Cowen. In April 2000, when QXL had a listing on America's Nasdaq exchange, Mr Bock predicted that QXL's shares would reach $333 (£201), valuing the company at $25bn. This was more than 10 times its already over-inflated share price. Today, a share in QXL, which is listed in London, can be bought for 135p.

So where did it go wrong? Unlike its American rival, the company chopped and changed its business plan. EBay stuck to the idea of being a middleman for consumers buying and selling goods. QXL first copied eBay, then became a retailer by holding its own stock, then switched back to auctioning. By this time, its US rival had established "first mover advantage" and become dominant in Europe.

"QXL's business model was just too wishy-washy," says Ms Omwando of Forrester. "Where QXL failed, eBay cashed in because there was no ambiguity in what it was about."

Most analysts believe that the power of eBay and the success of online retailer Amazon, which has also branched out into online auctions, mean the future of QXL is bleak. "It will struggle to survive. I really question its ability to get out of its quagmire," says Ms Omwando.

And as the likes of eBay grow stronger, so they will attract more business partners. Internet portal Yahoo!, for example, last month agreed to promote eBay on its site. Yahoo! was a one-time partner of QXL.

Even QXL's Mr Zaleski admits that times are tough. He describes competing against eBay as a "daunting task" but claims that his company still has some opportunities to beat its rival.

"Don't forget that not everyone wants to deal with a monopoly," he says. "We also have the ability to be more flexible with partners. We can, for example, co-brand the site. We are not going to put up our hands and roll over."

He adds that while eBay is stronger in the UK and Germany, QXL is ahead in other European countries. "EBay is not in Sweden and we are the market leader in Switzerland," says Mr Zaleski.

But as Jonathan Steinberg, a consultant at Cap Gemini Ernst & Young, points out, the success of eBay and Amazon means they are now more than just internet retailers. "They are a great information base. If I want to buy something, say a pair of skis, then I know that there'll be a good selection on eBay. I'll use the site for research, but while I'm on the site there's a chance I may also buy."

Last Friday there were 634 ski items for sale on eBay. There were none on QXL. This explains why eBay's market capitalisation is $32.7bn (£19.7bn) - 16,400 times as much as QXL's.