InformationWeek
Defining The Business Value Of Technology
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December 11, 2000 |
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B2Bs Go Bust
Some exchanges are falling to competition and flawed business models
undits warned that the world couldn't sustain the hundreds of online marketplaces slapped together in the business-to-business land grab of the past year. Now, some independently operated E-marketplaces are shutting their virtual doors, victims of low customer adoption rates, retreating venture capital, and too much competition--particularly from well-heeled, powerful consortia of brick-and-mortar businesses.
E-marketplace pioneer Ventro Inc. last week said it will shut down its two wholly owned sites, Chemdex and Promedix, laying off 235 employees. Ventro, which has launched six exchanges in the past three years, reported third-quarter losses of $76.3 million in October. Hsupply.com, an online marketplace for the hospitality industry, closed its doors last month, despite having signed up 440 hotel and management companies as buyers.
The future looks uncertain for PlasticsNet, another venture-capital-backed marketplace that was supposed to have a critical first-mover advantage. Co-founders Tim and Nick Stojka recently stepped aside (both remain on the board), and parent company Commerx Inc. has shifted its strategy to building private exchanges for other companies. The fate of e-Chemicals, which in November lost most of its top managers, including CEO Peter McCullagh, is also in question. And Sciquest, which competed with Chemdex in the life sciences market, laid off 40 employees in a restructuring last month in which its president, Andy McKenna, stepped down.
What went wrong? Many companies don't see enough value in paying fees to participate in independent marketplaces that mainly let buyers solicit bids, search standard product catalogs, and place and track orders. "We had a solid technology," says Ravi Kalakota, former CEO of Hsupply. "Nobody wanted to pay for it."
The results of a new survey conducted by InformationWeek Research underscore the challenges faced by all E-marketplace operators. More than a quarter of respondents whose companies don't participate in an E-marketplace say it's because there's no business case for joining one, and 23% believe there's no clear return on investment. Of 157 respondents that do participate in online exchanges, 79% found that using them to complete a request for quotation was only somewhat effective or not effective at all.
Dow Chemical Co. says many of the independent chemical E-marketplaces it thought about using or investing in charged too much and provided too little. "The startups made a mistake," says Paul Janicki, executive finance director of E-business at Dow. "They assumed they could take a 5% to 7% spread [on each transaction]. This industry doesn't have that much slack."
Few E-marketplaces today offer what companies might be willing to pay more for--tools to facilitate relationships with valued trading partners and integration of automated ordering and planning processes with their internal business systems.
Industry-sponsored E-marketplaces are hoping to fill the void. They say they're preparing to give participants a better way to work with established trading partners through online production-schedule and product-development collaboration, fulfillment-tracking tools, and integrated, automated transactions.
That's why Dow is putting its money on Elemica and Omnexus, exchanges that also have the backing of the Midland, Mich., company's rivals, BASF, Bayer, and DuPont. Dow made its first sale through Omnexus--$40,000 worth of polystyrene--on Nov. 30. Though Omnexus mainly offers auctions and Elemica isn't operating yet, Janicki believes both will eventually facilitate supply-chain collaboration.
Although most industry-led exchanges aren't delivering that kind of collaboration today, operators say such capabilities are just around the corner. EHitex.com, an exchange for electronics components launched this year by Hewlett-Packard, Compaq, and 13 other high-tech vendors, enables online requests for quotes and bidding capabilities. By month's end, it will roll out logistics optimization and order collaboration capabilities to let companies automate orders with existing trading partners and integrate their internal business systems with the exchange. By the middle of next year, the venture expects to offer its first demand-planning application.
"Facilitating trade is all well and good," says Bob Lewis, CEO of eHitex. "But the real value of using the Web to collaborate comes in creating better management of order flow and providing information about where inventory sits, and better planning for design, assembly, and movement of final products."
Industry-sponsored exchanges are typically backed by the top companies in their markets. That's an advantage that many independents don't have--and they've struggled to attract buyers as a result. Chemdex had signed on 2,200 suppliers but only 200 buyers, for example, and Ventro says that wasn't enough to sustain the business.
Volume is another issue. The InformationWeek Research survey shows 62% of respondents send 10% or less of their requests for quotes through E-marketplaces. And while 81% of companies planning to participate in E-marketplaces will be looking to sell, only 59% plan to buy on the sites.
Ventro is giving it another go as an application service provider, hosting trading exchange apps from Ariba Inc., WebMethods Inc., and others. It already hosts the software platforms for four E-marketplaces that it launched jointly with companies in the food, energy, health-care, and financial services markets. Ventro hopes that the expertise it gained in integrating diverse E-marketplace components will appeal to other market makers. Whether they'll turn to a company that is itself unable to run a profitable exchange remains to be seen.
Ventro also faces as much competition in the ASP arena as it did in the online-marketplace space. ASPs offer hosted E-marketplace applications from Commerce One Inc. and others, and several E-marketplace software developers, such as PurchasePro Inc. and Idapta Inc., offer their tools via the hosted model.
Ventro must also compete with other exchanges, including AviationX, Commerx, and BigMachines.com. BigMachines this month signed its first deal to provide business-to-business E-commerce apps to industrial equipment companies, rather than act as an online intermediary for that market. "For most manufacturers, step one is selling online through their own site," says Godard Abel, CEO and president of BigMachines. "It will be at least two to three years before they think about selling on a marketplace."
But it's not all doom and gloom for the independents. ChemConnect and Altra Energy are carving out niches by providing commodity exchanges for trading chemicals and energy, respectively; they operate like a stock exchange used by traders that may not ever take possession of the products. E-marketplaces such as DoveBid and SalvageSale.com fill another niche, providing auctions for used, excess, or damaged goods. And analysts say exchanges such as Logistics.com and National Transportation Exchange, which provide specialized services such as shipping and logistics optimization, have a shot at survival, too.
DoveBid officials say the trick to staying afloat is to constantly rework the company's business model. It just started organizing auctions as live Web events so that participants can view the goods up for bid. "You have to assess yourself constantly and ask, 'Is it working?'" says Jeff Crowe, president and chief operating officer of DoveBid.
While many independent E-marketplaces grapple with identity crises, industry-sponsored exchanges such as Covisint and Transora are finding themselves. A new report by Net Market Makers, an arm of Jupiter Research, says that out of 63 industry-sponsored exchanges, 41% are handling transactions and 33% expect to be doing so by year's end. Thirty percent have owners that are both buyers and sellers. "Brick-and-mortar companies are moving faster than anyone thought they would," says Kevin Jones, a founder of Net Market Makers.
Covisint founders DaimlerChrysler, Ford, General Motors, and eight other automakers last week created yet another consortium exchange with technology partner Bell & Howell Co. The new venture will initially focus on providing real-time quote and catalog services for collision-repair parts for dealers, fleets, and repair shops.
The complex collaboration applications that industry-led exchanges hope to offer will likely take time and money to implement among the many companies participating in an exchange--resources most independent exchanges don't have. "In late 1999, we realized this sector was done," says Ravi Mohan, a general partner at VC firm Battery Ventures, which now funds companies that make software and enabling-technology infrastructure such as XML. (For more on venture capitalists' funding preferences, see "VCs Find Plenty Of Cash For Tech Investments").
Hsupply's financial backers didn't have the patience to sustain it, particularly when they saw how costly supplier integration was. "You can't automate everything in one shot," Kalakota says. "You're dealing with such a diversity of products, it killed us. Every supplier has a different back-end system."
Meanwhile, both independent and industry-led E-marketplaces seeking to improve supply-chain efficiencies must also face the fact that some companies aren't willing to run such critical processes through a third party. Cisco Systems, Dell Computer, Intel, and Wal-Mart, each the top player in its market, have stayed away from public exchanges in favor of maintaining their competitive advantages through private supply-chain projects.
Even companies that don't wield so much power want to keep supply-chain integration efforts close to home. Eastman Chemical Co. has embarked on Web-based integration with trading partners by using software from WebMethods. "People have underestimated the difficulty and slowness" of this process, says Mark Klopp, Eastman's director of digital business ventures. "We believe this will happen by system-to-system integration."
And for industry-led E-marketplaces, the prospect of government regulation and inspection to ensure they don't engage in anti-competitive practices still looms. The Justice Department is investigating an as-yet-unnamed E-marketplace formed by six large meat and poultry producers, and the Federal Trade Commission and the European Commission only recently gave Covisint the green light. The FTC is still keeping an eye out to make sure the auto exchange doesn't raise competitive concerns.
Even with government approval, industry-backed exchanges blessed with the deep pockets and commitment of founding members will have to prove their value over time, says Ian Toll, an analyst at Credit Suisse First Boston. Only some, he says, will get it right.
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