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Special Report: E-marketplaces come full circle

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What a difference a year makes.

Last January, the e-commerce world was set on its head by the emergence of dot-com e-marketplaces full of promise for more efficiently bringing together b-to-b sellers and buyers. These e-markets, such as Chemdex.com, PaperExchange.com, PlasticsNet.com and others, rang a wake-up alarm for corporate America to get on the b-to-b e-commerce bandwagon.

And wake up they did.

Not 12 months later, the dot-com independent marketplaces are hurting. Some are closing up shop; others are remaking their business models. Setting off this mad scramble were the same brick-and-mortar businesses that were earlier viewed as laggards.

But rather than give their business to the upstart dot-coms, the world’s largest corporations—from Sears, Roebuck and Co. to The Boeing Co. to General Electric Co.—decided to own and operate their own industry marketplaces. And when they wanted to keep these b-to-b efforts less public, they built mega-private exchanges as well, forcing their biggest trading partners to come on board as well.

Strength in numbers

"The consortia really hurt a lot of the independents,” said Jon Ekoniak, analyst with U.S. Bancorp Piper Jaffray Inc. "Even if they were not directly competing with the consortia, they were still impacted by them. They froze the market."

"We radically underestimated how quickly these consortia would be able to move," said Kevin Jones, Jupiter Research analyst and founder of Jupiter’s Net Market Makers, one of the earliest trackers of e-marketplaces. A December Jupiter study found 65% of large, industry-led e-marketplaces would be conducting transactions by the end of 2000, a much quicker takeoff than expected.

Jupiter surveyed the independent Net markets and their customers to find out what went wrong. For starters, independent marketplaces simply focused on the wrong problem. They emphasized helping buyers meet new sellers, when what companies really wanted was to work with existing suppliers in a better, faster way. Brick-and-mortar companies also despised the idea of paying fees for purchases they would make anyway. The common thinking was, why should this dot-com make money off "my supply chain?" Jones said.

Industry-led marketplaces solve all these problems by focusing on supply chain integration above all else, and by placing large chunks of equity in the hands of their Global 2000 participants.

Indeed, market watchers say it’s not the idea of e-marketplaces that has been discredited, but rather certain early approaches that appear now to have been focused more on getting out an initial public offering than helping customers improve how they buy and sell.

"In order to be competitive, companies need to adopt b-to-b e-commerce, there’s no question," Ekoniak said. "There’s no doubt. But figuring out in the long run which models will win, private marketplaces, public consortia or independent dot-coms, I think we’re still not sure."

The year 2001 looks to be more about block-and-tackle execution than flashy startup launches.

"Last year, there was an emphasis on speed over getting it right," said Chris Davis, managing director at systems integrator Lante Corp., which has helped build some of the earliest e-marketplaces. "First mover was the mantra, but first mover

didn’t necessarily mean first prover. These guys had very little time to think strategy; they gave it lip service and said they’d get back to it but most never really did."

Most important will be demonstrating to customers that working through an e-marketplace will have tangible business benefits, Davis said.

"A supplier can’t sell below marginal cost for long," Davis said. "The opportunity is in process integration and cutting communication costs between companies. We need to get beyond dating services to creating a value network for a customer and its suppliers."

For that to work, Davis said, a new truth will emerge: Independent and industry-led e-marketplaces need each other.

"I don’t think frankly that either one can survive without the other," he said. "Independent dot-coms have a liquidity crisis, but they have the ability to focus and experiment with new business models. On the other hand, brick-and-mortar guys, once they sign the press release, they sometimes can’t decide when the next meeting is going to be."

Partners in crime

And indeed, deals between dot-coms and industry e-markets are beginning to bloom. Davis points to Global Healthcare Exchange L.L.C., which last year acquired CentriMed.com, a dot-com provider of health care e-procurement technology.

Other acquisitions and alliances have come down the pike as well. High-tech e-marketplace e2open.com tapped independent Net market PartMiner Inc. to help its customers source hard-to-find electronics parts. Consumer packaged goods market Transora.com inked deals with Novopoint.com and Foodtrader.com Inc. to bring new customers to its site.

Meanwhile, strong independent e-markets may also gobble up brick-and-mortar companies to strengthen their positions. For instance, chemical e-marketplace ChemConnect Inc. acquired Universal Chemical Brokerage Ltd., a brick-and-mortar petrochemical brokerage last fall.

The ChemConnect marketplace bumps up against a wide variety of industry-led e-market competitors, including Elemica, Envera L.L.C., Trade-Ranger and Omnexus Corp., to name a few, ChemConnect President-CEO Phil Ringo said.

"If you would have talked to me six months ago, a lot of people felt we would all be at each others’ throats," Ringo said. "But we’ve worked [with industry-led markets] more than we’ve competed. It’s been a learning experience for me. It’s such a large industry, one size doesn’t fit all."

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