InformationWeek

Egged on by such "arms dealers" as Ariba, Commerce One, and Oracle, the Boeings, Chevrons, and General Motors-once apathetic toward the Internet but now energized to defend their eroding market valuations against the over-hyped dot-coms-played the early market more effectively than did their Internet foes. Within two months, industry-sponsored marketplaces stopped the upstarts in their tracks, mobilizing traditional allies such as The Wall Street Journal to their cause and decimating the upstarts' market caps.

What are we to make of things, 75 or more rapid-fire, industry-sponsored announcements later? In a fierce race to build many-to-many markets, which model has the best chance of winning-industry-sponsored marketplaces or independents? And can any vertical market support more than one competing marketplace?

Let's accept today's conventional wisdom that both industry exchanges and independents can succeed in different market situations. The Dow crowd looks strong, mainly in consolidated industries such as aerospace, automotive, petrochemical, and telecommunications. Nasdaq companies flex their muscles in fragmented industries, such as life sciences, construction, food service, and health care. What might be instructive is to assess the factors that could cause failure for either side. A less rosy scenario points to threats surrounding each of the industry-sponsored marketplaces, as well as the 600-plus Net market makers funded to date.

Many industry-sponsored marketplaces will fail. Why? They lack vision, an effective strategy, and execution. In most cases, the industry-sponsored marketplace initiatives sound too much like The Em-

pire Strikes Back responses to an upstart competitor that has succeeded in distracting the market's attention. Unless they substitute a longer-term vision for this response, such joint ventures will soon lose steam.

If E-business is to change the course of economic and industrial history, it has to be about more than just cost savings. Mankind does not get up in the morning and go to work with the sole purpose of reducing how much things cost. We should look deep into each industry-sponsored marketplace's business plans for evidence that the consortium really means to add new value for its constituencies. For example, if the auto exchange really means business, it cannot succeed as just an electronic version of Ignatio Lopez, the former procurement czar at GM. To their credit, the founding members of Covisint, the auto industry's E-marketplace, recognize that they must offer their already-pressured suppliers a chance to participate in a collaborative trading network that affords them an opportunity to achieve growth or profits. In a historically adversarial industry, this is a challenge. If the other exchanges are to become more than mere procurement syndicates, they will also have to create added value for their buyers and sellers.

Continuing the Covisint example, in an industry known for its ferocious competitiveness, how will DaimlerChrysler, Ford, and GM pursue a collaborative approach? How will they deal with pricing and cost information that might help their competitors build a cheaper or higher-quality automobile? Will they be capable of working with their top three suppliers in a manner that inspires trust and confidence? In its first months of existence, Covisint has had three interim co-CEOs, with no sign of a single leader. Acting on their own, most large companies are accustomed to competing in relatively stable markets and to making decisions by committee. In the new, disruptive world of E-commerce, they band together, choose the name for their joint venture, appoint their CEO, and streamline decision-making in time to get their industrywide trading exchange to market before the lean-'n'-mean Net market makers beat them to the punch.

Likewise, many Net market makers will fail in establishing E-marketplaces because of an absence of vision, ineffective strategy, and poor execution.

Too many Net market maker management teams appear focused on achieving megaprofits from an initial public offering or acquisition by a larger company. While this was acceptable when preaching the vision during the early market stage, before the capital markets corrected their expectations, it's now a recipe for failure. CEOs who persist with this fixation will distract their companies from the mission of crossing the chasm toward the critical goal of achieving marketplace liquidity by connecting buyers and sellers in profitable and repeatable transactions. Today's investor wants to see critical mass in each online marketplace before renewing his covenant and investing further.

Industry experts predict that there will be more than 2,500 funded digital marketplaces by December 2001. Unless they focus on a specific niche within their target industry or horizontal market for which they are uniquely equipped to create a successful network of buyers and sellers, many of these players will go bankrupt or be acquired for a pittance. This would happen even without the emergence of the industry-sponsored marketplace threat. And, while acquisition might sound like an attractive outcome, things are not so glamorous when your company is acquired at fire-sale prices.

During the recent early market phase, investors did not care to verify how Internet marketplaces proposed to deliver on the promise of huge returns to buyers and sellers. The time of accepting that every Net market maker order will be executed via fax and telephone are over, and the winners are going to be those that implement end-to-end services online. Those that don't won't survive. So the race is on for Net market makers to include supply-chain links that provide for logistics management, product tracking, simpler electronic data interchange, credit facilities, and financial settlement.

For those industry-sponsored marketplaces or independents that don't get their vision, strategy, and execution acts together, there is an alternative path: Some industry-sponsored marketplaces will acquire Net market makers, resulting in hybrid organizations capable of serving their target market effectively and profitably. It's impossible to predict how many industry-sponsored marketplaces and independents will succeed autonomously, but it's unlikely to be more than 30% of the total. That leaves 70%-around 50 industry-sponsored marketplaces and 400-plus independents at current levels-to be consolidated through mergers or to go out of business.

Internet business-to-business commerce requires a balanced combination of leading-edge technologies and deep industry expertise delivered via advanced systems, accompanied in many cases by workflow and process reengineering services. These attributes won't be available in equal measure in any single E-marketplace. Perhaps only the right combination can provide the market value that buyers and suppliers everywhere are hoping for. This suggests that each Net market maker-independent or not-should consider adopting an immediate strategy to assess the opportunities for a successful acquisition, whether as the acquired or the acquirer.

Finally, we should assess whether buyers or sellers will use more than one type of marketplace for their needs-and whether they will prefer to work with an industry-sponsored marketplace or Net market maker. Provided a digital marketplace can build compelling momentum in a specific subsegment of its chosen industry-for example, chain restaurants of a certain size, within a given location, in the food-services sector-there's no reason they will not survive against a larger exchange that might be focused more broadly in the same industry. Customers have varying needs and, although they like one-stop shopping as much as possible, they also appreciate having more than one choice.

The next three to six months will provide strong signs of which model and which players can succeed. Several independents should soon report increasingly spectacular quarterly revenue and operating profits. And one or another industry-sponsored marketplace should soon start making a dent in its industry. A significant shakeout will occur in both camps soon.