E-Markets: The Next Generation Emerges from the Tumult

By all indications, the great shakeout in B2B e-marketplaces has begun. To many observers, these online entities clearly offer benefits for reducing both procurement and marketing costs, as well extending a business's reach to new markets. To date, most e-marketplaces have been independent entities that offer a neutral ground for purchase decisions. However, analysts note that venture capital is drying up for many of these independent sites, while brick-and-mortar companies are launching their own ventures.

Online exchanges are the next generation in the e-marketplace phenomenon. IBM Corp. has been active in this area, with its recent alliance with Ariba, Inc. (Sunnyvale, Calif.) and i2 Technologies (Dallas, Tex.). The alliance recently announced software that supports collaborative transactions between buyers and sellers. The goal of efforts such as the IBM-Ariba-i2 alliance is to provide a viable technical means for suppliers to reach a range of exchanges and procurement services.

Lately, analysts have been predicting a massive shakeout in this nascent industry. The first generation of marketplaces used the direct sales model, with companies selling directly to buyers from their own Web sites—such as Dell.com or Cisco.com. This was followed by the next evolution, independent e-marketplaces, which provided a neutral ground for many-to-many purchases. Leading examples of such market makers include Chemdex, VerticalNet, and Altra Energy. The benefits of such markets included the ability to find lots of buyers and sellers in one place, says Jenna Peleaz, analyst with Jupiter Communications (New York). These sites reduced search costs, increased price transparency, and provided better deals than participants could have made through traditional channels, she says. However, the main weakness of this approach was that independents tend to focus on a single market, and tend not to support global strategy, says Peleaz. Worse yet, most “Net markets don't hook up to legacy systems,” she says. “They're not attractive to large companies.”

Lately, many large companies have been teaming up and announcing the formation of their own brands of e-marketplaces, or what some analysts call “coalition” or “consortium” marketplaces. Independent marketplaces typically can't hook up to back-end legacy systems, and often can only support spot buying or single transactions, says Peleaz. While many of these are still “announcementware” as opposed to functioning entities, they are adding a new wrinkle to the B2B e-market scene. Some of these markets include Covisint for the auto industry, Aerospan and MyAircraft.com for the aerospace industries, and TradeRanger and Intercontinental Exchange for the energy industries.

“Typically, these marketplaces are buy-side,” says Peleaz. “And the actual players are also the owners.” Usually, these marketplaces consist of brick-and-mortar players forming a consortium to set up e-marketplaces. Peleaz estimates that now close to 70 coalitions have been formed within the U.S. to date. More than 30 of these marketplaces represent brick-and-mortar companies teaming up with technology providers.

By their nature, multinationals give industry coalitions worldwide play, says Peleaz. However, while many have been announced, few even have names yet, let alone a CEO, separate organization, or capital structure. Plus, it is unclear what type of ownership structure these entities will take, she adds.

Other issues dog these consortium marketplaces. Cost is one—ranging between $250 million to $500 million, estimates Bruce Richardson of AMR Research (Boston). Plus, “exchanges are too optimistic about delivery dates for functionality,” he notes. Coalition exchanges “often make promises before writing any code—even before selecting a technology platform. For at least the next two years, they will have difficulty delivering more than auction, spot-buy, and excess inventory services.” Case in point is collaborative planning, forecasting, and replenishment (CPFR) applications, which have created a lot of excitement, but remain mired in the design phase. Plus, most participating companies do not have an “accurate handle on the time and expense required to integrate their existing systems into the trading exchange,” says Richardson. “The impact of exchanges on existing business processes is also unclear.”

There is also a growing movement toward the establishment of private marketplaces that are limited to hub companies and their suppliers—a new twist on the supplier extranet of recent years. There is a “lucrative opportunity for private marketplaces, those one-to-one or one-to-few relationships between a company and its suppliers that are much better suited for most types of transactions between companies than massive public exchanges,” according to Randy Weston of AMR Research. “An estimated 90 percent of all transactions will be of the one-to-one or one-to-few variety. Private exchanges offer real cost savings and minimal politics; you don't have to please 20, 30, 40 customers, just one or two.”

These markets are likely to pose serious competition to the independent market makers. However, there is likely to be intense scrutiny from government agencies as to whether these markets represent illegal collusion between dominant industry players.

Many independent market makers are responding to these new market threats by moving away from the model of relying on transaction fees alone. The marketplace value proposition must extend beyond re-intermediation to include new ways for participating enterprises to source and deploy IT resources. To this end, many are offering their e-marketplace technology as deployable packages to parties interested in establishing private marketplaces.

For example, E-Steel Corp. (New York) recently cut a deal with The Broken Hill Proprietary Company Ltd. (BHP) of Australia, whereby E-Steel offers its core functionality for a private-label site serving the steel industry down under. “We see private marketplaces as a major opportunity,” says Peter Regen, vice president of marketing for E-Steel. “We started as a marketplace for many-to-many trading. Now, we've refocused to big-to-big and known-to-known trading partnerships.” VerticalNet, Inc. (Horsham, Pa.), another leading independent market maker, also recently announced it had formed a separate division to replicate and sell its marketplace solutions to other Net market makers as well as industry alliances.

GartnerGroup (Stamford, Conn.) analysts also concur that the great e-marketplace shakeout has begun—but have a different take as to what types of e-marketplaces are emerging. Three e-marketplace business models will survive the coming shakeout—business services marketplaces, commodities marketplaces and integration services marketplaces, says Carl Lenz, research director with GartnerGroup. He defines business services marketplaces as those that provide support for business process and trading partner relationships. Examples include financing options for goods or services purchased, as well as fulfillment and delivery services offered by logistics marketplaces.

Commodities marketplaces will replace some of today's inefficient markets that protect profit margins through asymmetric information, inefficient spot markets and excess product auctions, Lenz predicts. Those marketplaces will also allow for speculation of commodities and futures in product and service categories.

Integration services marketplaces will link trading partners and processes. These e-marketplaces will meet market demand for simplified interoperation approaches, alleviating system integration strains of tying back-end systems into these marketplaces. This powerful new player will introduce a convergence of the marketplace, application software, and ASP business models, says Lenz.