By Morgan Beard

NEW YORK - The gem industry is experiencing an e-boom as competition heats up to become the premier industry online trading site.

The business they're vying for is still underdeveloped, however, and it remains to be seen who has what it takes to be successful in a tight market. Established sites like Polygon and GemKey are facing stiff challenges from new rivals such as GemConnect.com and JNet.com, the business-to-business trading site of the newly-created JA/MJSA Net Inc.

All of the companies mentioned above sport impressive resumes. JNet.com, for example, is being backed by Jewelers of America (JA) and Manufacturing Jewelers and Suppliers of America (MJSA), two of the largest and most respected trade organizations in the country. GemConnect.com is being run by the same management team that helped to build Ticketmaster Online-Citysearch Inc., while it draws its industry experience from advisors who have been trading gemstones for decades.

Polygon and GemKey, meanwhile, have already established themselves as trading destinations. GemKey in particular has been expanding aggressively, hiring talent from across the industry and setting up new services for members.

All of these ventures are based on the assumption that the Internet can revolutionize the way the gem and jewelry industry does business, and that once companies experience online trading, they'll make it an integral part of their business.

Certainly online networks offer a number of advantages. For buyers, these sites make it much easier to locate and buy the merchandise they are looking for, especially if they have very specific needs. For sellers, it opens up a whole new market of potential customers, and reduces the need to develop a time-consuming site of their own.

But the jewelry industry has traditionally been slow to embrace new technology, and the Internet is no exception.

“Most jewelers are in test mode,” says David Pillow, senior vice president of product acquisition and quality assurance at GemKey. In June, GemKey rolled out a number of new services, including an online catalog of merchandise it sells on behalf of its suppliers, and users seem to be approaching it cautiously.

“It looks like most of the hits are going into the basics,” Pillow continues. “They want to make sure we are in line with the price. The reason [they focus on the basics] is it's the easiest thing for them to equate to what they know.”

Network entrepreneurs factor that caution into their business models, and they report that they're getting a very positive response from all segments of the industry. A more serious question is, how well do wholesale trading networks really work?

While items like jewelry and diamonds - easily compared and with fairly standardized prices - are easy to sell online, the dealers interviewed for this article reported little success with colored gemstones. Even Thaigem.com, which lists on GemKey and contributes the vast majority of the color found there, has had less-than-stellar results.

“[GemKey] is essentially an advertising medium on which you can post merchandise,” says Gavin Linsell, marketing and communication executive for Thaigem.com. “Also, as the site is not regularly updated with listings, it is really little more than a presentation of the range of typical merchandise provided by a seller. From our perspective, it is therefore not presently structured to handle volume corporate e-commerce traders such as us. As the site is trade-locked, it really limits the amount of buyers who utilize the site.”

Traffic is the common issue that sellers have with wholesale trading networks. Most of the companies interviewed for this article are experienced in online trading, and several sell gems through their own e-commerce sites. While they all feel that wholesale networks are a good idea in theory, in practice it simply doesn't work for them.

“I would love to do business on GemKey,” says Molly Christian of Pebble Designs by Molly, who does between a third and half of her total sales online. She has made a few attempts to sell her merchandise there, but has yet to make a sale. “The only thing I can think of is they're just not generating the traffic . . . I think what GemKey has, [being] strictly for the trade, is a great idea. I'm just not sure how they would generate the traffic.” Among dealers who sell online, far and away the most popular trading center is eBay, a public auction site.

“By far the best results [we've had] are through online auctions, like eBay or Amazon,” says Ken Shumake of Northwest Diamonds and Gems, who has been selling in online auctions for about three years.

“There's just so many individual buyers out there on eBay, you find your buyer. There hasn't been one item [we posted there] that hasn't sold.”

He's found that eBay is valuable not just for making sales, but for building a reputation for his company. “We've done quite a bit of business with jewelry stores in the Midwest [who] would never have found us unless we were advertising on eBay.”

“We were exposed with eBay to selling our product to the public,” says John Tuncer, owner of BestGems.com, a site that sells gems retail to consumers. The site currently gets approximately 20,000 hits per day, and Tuncer estimates that 20 percent of the visitors end up buying.

Online auctions effectively get a company's name out there, drawing traffic to the company's site without expensive marketing. “That's the misconception of a lot of individuals when trying to become a dot-com enterprise,” says Shumake. “In relative terms you don't make a lot of money unless you have somebody really marketing your site. . . . We got more hits in a week or even in a day [selling through eBay] than having somebody marketing our site for us.”

“As most of the non-proprietary sites on which we list are auction based, we find that many serious gemstone/jewelry e-consumers migrate to our site so they can purchase fixed items from us directly,” notes Thaigem.com's Linsell. “Clearly, if you're a jewelry designer who needs a specific stone, getting out-bid at the last moment is not an option.”

Although eBay is open to the public, there is also wholesale trading on the site, and occasionally dealers will connect with new suppliers that way.

“Usually what I do [when I'm looking for a gem] is I cruise the auctions,” says Barbara Smigel of Artistic Colored Stones, who sells her own gems as well as merchandise from other dealers on her site. “Usually anyone who has an auction has their own site. I've found a number of people who have quality [products that way].”

In fact, many gem retailers got their start buying and selling through online auctions, when they wouldn't have been allowed access to a wholesale-only network.

In addition to good traffic and an established name, eBay offers customers the ability to give feedback on sellers. Positive feedback can help businesses build trust in a medium that is essentially anonymous.

“We try not to buy from someone who sells a lot of junk,” says Christian. “The only way you can really tell is if they have a good volume and good feedback. Other than that, you can't really tell.”

Of course, there are disadvantages to online auction sites. As Linsell points out: “A problem we frequently face on non-proprietary sites is difficulties in listing large volumes (i.e., over 5,000 unique items) and the fact that some sites attract very inexperienced buyers. We must remember that gemstones are not books or CDs and require a level of experience to purchase confidently.”

Trade-only networks address that problem and have the potential to offer all of the advantages of online auction sites. The fate of individual sites depends on whether or not they can capture enough of the online market to make the site a destination. In the Internet world, success is all about traffic.

Companies hope to attract users to their site by distinguishing themselves from the competition. Although the sites mentioned in this article offer the same basic services - ability to post and search for individual merchandise, financing options to insure payment, shipping and insurance, etc. - each stresses its own unique angle.

“I don't see we have a lot of competition,” says GemKey's Pillow. “Technologically we're superior - we've spared no expense developing this site. Our investment in technology is close to what [other companies] got in funding. [Also] we really focus on bringing key people in, people who are recognized in the industry.”

“What makes us different is that we are independent,” emphasizes Sanjay Pandit, CEO of GemConnect.com. “We are not owned or controlled by any one entity in the jewelry trade. Other sites are owned by single gem families,” whereas GemConnect.com is supported by financing from a number of different companies, some outside the gem industry.

“I think our biggest distinction is that we're set up by the industry, for the industry,” explains JNet.com's newly-hired CEO, Steven Kravit. “The goal is first to support the industry and second to make money. This is going to separate us from the other sites out there. It makes us completely neutral - we don't have a [financial] incentive in mind. It's not the intention of the company to go public.” No matter what their angle, however, at this point they all have the same goal: to get more of the industry doing business online. After that, they'll have to rely on word of mouth and reputation, which online gem sellers say is the most effective way to draw traffic to a site.

“We do banner advertising on other sites,” link exchange, and other promotions, like trade shows, says BestGems.com's Tuncer. “We tried to put the name out everywhere we can possibly think of. [But] actually the best way of marketing is word of mouth.”