BtoB

Hubs ponder what went wrong

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Almost a year to the day after its triumphant tour of Silicon Valley, where it landed VC money to claim its piece of what was then trumpeted as a trillion-dollar opportunity, Chicago-based Fob Inc. last week retreated from the business of operating b-to-b e-marketplaces.

The Fob story-with its make-or-break board meetings, job cuts and drastic shifts in strategy-is becoming a familiar one, as executives at leading independent Net market-makers wrestle with the reality that business is not taking off as hoped.

For Fob, change began in late October, when it shuttered its high-profile public marketplaces, Fobchemicals.com, Fobpaper.com and Fobplastics.com, to concentrate on building a private marketplace platform, dubbed ProSource, to let companies buy direct industrial materials online.

But last week, Fob bailed out of that business as well. It's now focused on helping companies comply with federal Occupational Safety and Health Administration standards, based on technology from a small company, MSDSonline.com, it acquired last March almost as an afterthought during the heyday of public e-marketplaces.

A year ago, "the world was good, the anticipation for b-to-b was unbelievable," Fob CEO Pat Blake said last week, one day after he laid off more than 30 of his 84 employees as part of repositioning his company.

But as the Nasdaq slumped and big companies awakened to the e-market opportunity, "the wheels came off, not just for us but for all marketplace businesses, I would argue," Blake said.

"It's fair to say that marketplaces are completely unproven at this point. Even those with decent amounts of traction, the knock on them is that their transaction fees will be pushed so low nobody will be able to feed the family on those margins. We're not alone, but that's a small consolation," he said.

Indeed, Fob isn't alone. In just the past two months, practically every pioneering independent Net market, many now public, has been forced to shift gears:

• Commerx Inc., best known for its PlasticsNet.com e-hub, appointed a new interim CEO, Jeff Garwood. Commerx also accepted the resignations of the company's co-founders, brothers Tim and Nick Stojka. Tim Stojka resigned as CEO but continues to serve as the company's chairman. Nick Stojka resigned as exec VP but remains a board member.

Commerx has been changing its business model for many months, focusing on selling hosted procurement and collaboration services.

• PaperExchange.com said it will now focus on building e-business applications for the paper industry, including online order, contract and inventory management solutions, in addition to running its existing excess paper exchange. PaperExchange's first tool, StockMover, will be introduced later this month and will help suppliers manage their inventories. PaperExchange also reportedly laid off 17 of its 125 employees.

• BuildNet Inc. cut 170 of its 955 employees, in part, to streamline operations following a series of 10 acquisitions over the past 15 months. BuildNet recently shelved a planned IPO.

• SciQuest.com restructured its business to focus on building private marketplaces and selling software and services to companies in the life sciences industry. SciQuest also laid off about 40 of its roughly 400 employees.

• SciQuest competitor Ventro Corp., which runs the Chemdex and Promedix marketplaces, is making an even more drastic move, planning to sell off its six public marketplaces and focus on providing software and services to other e-marketplaces.

"A lot of these exchanges were just ahead of their time," said Jon Ekoniak, an analyst with U.S. Bancorp Piper Jaffray Inc. "If you talk to some of the independents, they'll tell you they have 200 or 300 or 400 customers. But these people aren't doing transactions because they're not integrated."

Without transactions, independents could never reach the liquidity, or a critical mass of transactions, needed to make their marketplaces really hum, Ekoniak said.

But the challenge of technically integrating hundreds, if not thousands, of suppliers into e-marketplaces was just one of the indie shortfalls, according to Tim Clark, a senior analyst with Jupiter Research. Large companies also "despised" paying a third party a fee to run their own supply chains, and they came to question whether these dot-coms really understood their industries, he said.

That led to the formation of so-called coalition marketplaces, or what Jupiter calls industry-sponsored marketplaces. (See, "Indies forced out by huge coalitions," above.) These massive industry efforts put the nail in the coffin of many independents.

"There was too much focus by independents on matchmaking, bringing together a buyer and seller," Clark said. "There's a lot more to a b-to-b transaction than that."

No doubt, these are tough times for the independents, Clark said. "The ones that are public, in particular, are feeling a little beaten down," he said. "Most of them are repositioning themselves in some way, and there's some discouragement."

Ventro, perhaps best known for its Chemdex marketplace, is reinventing itself on the fly, building a business around providing services to other e-marketplaces-helping them set up shop, getting their first transactions running and enabling buyers and suppliers to integrate with the market.

Ventro ran into problems with its public marketplaces because it could not get companies integrated into the market quickly enough to start generating transaction revenues.

"Buyers and sellers won't spend a majority of their energy on a marketplace unless there's a major savings and efficiency gain," said Martha Greer, Ventro's VP-marketing. "These technologies are deceptively complex. But when you set up the right conditions, you are going to get adoption."

Ventro's new model can be found in MarketMile, an e-marketplace it set up earlier this year for American Express Co. Ventro owns a much smaller equity stake in that market than in past efforts, with more of its fees coming in up-front product and service fees, revenues it can book right away.

Ventro believes it has found the right business model. What does it have to say about its former business of owning and operating public markets?

"Can a single marketplace survive? I don't know," Greer said. "I don't think anybody knows."

Meanwhile, SciQuest, a Chem-dex competitor, is not giving up on e-marketplaces but is continuing its focus on private markets rather than public sites.

"We're still working with exactly the same customers, buyers and suppliers, with the same services," said Peyton Anderson, SciQuest's VP-business development.

The company is, however, changing how it charges for its services. "The early Net market-maker model was very simple: Process orders and take a cut off the top," Anderson said. "What we're finding now is that it's not quite that clean and simple."

SciQuest is evolving to provide an array of e-commerce services to its lab products and pharmaceutical customers, from basic order management and catalog creation to asset management and data mining, Anderson said.

Count Commerx as another early Net market changing its revenue picture. This month the company, which recently shut down its PlasticsNet public site, will collect its final transaction fee.

From this point on, and after more than a year of planning, Commerx will run like an enterprise software provider, selling hosted versions of procurement, collaboration and fulfillment applications. It will collect upfront service fees and monthly software subscriptions, Garwood said.

"We made some early assumptions in our business that maybe weren't quite accurate," Garwood said of the company's shift from public markets to enterprise software. To recover, the company has gone through two major executive shake-ups this year alone, but Garwood said the company's new model has legs. "Going forward, I think we have a whale of a business model," he said.

Analysts say that as with any new sector, there will be some winners and some losers. Only time will tell which is which.

"I think the [b-to-b] sector is still very healthy," Ekoniak said. "If you talk to large companies, they know that in order to be competitive, they need to adopt e-commerce. The question is, what is the winning business model? The jury is still out."

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