Europe has just witnessed its first billion-dollar car boot sale, following the merger of online auction houses QXL.com and ricardo.de.

But the $1bn does not relate to sales as you might expect - the value of goods sold through QXL and ricardo each quarter barely tops £20m. Instead, it relates to the value of the car boot, or put another way, ricardo. The deal was announced on 16 May and is expected to be completed by the end of August.

Madness? Not according to the money-men, who see electronic auctions as a natural money-spinner. Tom Anthofer, managing director of global investment bank Broadview International, says: "The online auction has clearly crystallised out as a viable long-term segment of the internet. Its ability to generate revenue growth and attract very high capitalisation on the stock market indicates that significant value is being created."

The internet is an ideal medium for auctions, he says, adding: "There's a real raison d'etre to electronic auctions. The internet tends to create level playing fields, speed up delivery, and even out unevenness in supply and demand. By combining flexible pricing and location-independent purchasing, electronic auctions fit very well into that model."

Consumer interest in online auctions is also picking up. By last November, although only two per cent of UK internet users had bought or responded on auction sites, 14 per cent had browsed them, says Forrester Research.

In the US, Forrester predicts that consumer online auction sales will be worth $19bn by 2003, which accounts for more than 13 per cent of all US online retailing revenues. Allowing for the usual 12 to 24-month time-lag in crossing the Pond, that could mean significant auction traffic in Europe within five years.

Shobhit Kakkar, a Forrester analyst, says: "Online auctions have empowered a whole new set of people who would never have visited a conventional, offline auction."

Stan Laurent, QXL's senior vice president for sales and marketing, says the company's customers are also just ordinary punters. "They're mainstream internet users," he says. "It's not the yuppie market. We don't have an over-representation in London, and a lot of our customers are quite rural."

How online auctions work
Despite the hi-tech image, online auctions are not very different from the small ads in the back of local papers, except that buyers are invited to bid online instead of doing a bit of haggling outside of their neighbour's garage.

Sellers set a time limit to each auction and also a starting price. Some lots attract hundreds of bids, others none. If buyers and sellers live near each other, they can meet to complete the sale. Long-distance sales can be arranged through the auction company, which - for a fee - can act as mediator for payment and delivery.

While most of QXL's sales are small-ad type second-hand goods - so-called consumer-to-consumer (C2C) sales, both it and ricardo also run auctions of new goods, or business-to-consumer (B2C) offerings. These enable new customers to cut their teeth in the auction market while having the reassurance of buying from a company.

This, says Anthofer, has really kick-started the auction market in Europe. QXL had more than half a million registered users by 31 January, and ricardo two-thirds of a million by 31 March.

The combined group, which will be known as QXL ricardo, will operate in 12 countries across Europe, having dominant positions in the UK, Germany, Switzerland, Denmark, Sweden, Norway, Italy and Spain. It will be by far the biggest indigenous e-auctioneer in Europe.

Unsurprisingly, the company's main perceived rivals are based in the US: eBay, Yahoo and Amazon.com. But the biggest single threat is eBay, the clear market-leader in the US market. eBay now has localised sites in the UK and Germany, although it only deals in C2C sales.

The European battleground
Like QXL and ricardo, eBay has recently decided that the European e-auction market is now mature enough to begin charging commission on sales - as all e-auctioneers eventually must, unless they want to rely purely on banner advertising or payment and delivery services. eBay's US service has been a paid-for one for some time.

But QXL is pursuing a strategy of setting up a local presence in individual markets and has recently bought its way into the Danish, Swedish and Norwegian markets. It even has a small e-auction site in Poland. This is the right strategy, say analysts. Although eBay bought a German e-auction house, it has built its UK operation from scratch and appears to be a long way behind its indigenous rival.

Being 'local' is a big advantage, even in the anonymous world of the electronic auction.

"It's crucial to get the localisation right," says Forrester's Kakkar. "Customers have different buying habits, payment methods and so on. In some countries, credit cards are almost unknown. So buying an established company with an established subscriber base and an understanding of local issues is a big advantage."

France is now the biggest European market up for grabs, with two indigenous e-auction houses still leading the market. But these may already be in QXL's sights.

"The auction market is a condensed version of what's happening in the internet as a whole," says QXL's Laurent. "There's been a wave of local first-movers, including ricardo and ourselves. Last summer, there seemed to be a new one popping up every day, and there are at least 50 or 60 sites in Europe now. But we've clearly entered a stage of consolidation. There's scarcely any site that's not for sale now."

Perhaps the most interesting thing about the QXL/ricardo deal - apart from it being the biggest of its kind yet seen in Europe - is that it represents one of the first true mergers to take place in the internet world.

Ricardo has extremely high brand recognition in Germany, yet its attempts to compete with QXL on its home ground were largely unsuccessful despite heavy expenditure on advertising. So instead it has decided to join forces with its rival, enabling the merged businesses to combine their market reach and bringing about 'traditional' savings and efficiency gains such as economies of scale.

These are exactly the issues that drive conventional bricks-and-mortar businesses to merge, which is another indication, perhaps, that the e-economy is a little nearer to maturity.