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Forging dot-com profits

Net Markets retool into service providers, and are close to turning a profit. Cover story hed: Forging dot-com profits dek: Net Markets retool into service providers, and are close to turning a profit. by Phil Davies

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SurplusBIN.com’s prospects once seemed as limitless as its stock in trade, excess inventory. The Internet offered a fast, inexpensive way for companies to unload or acquire surplus auto parts, plastics, electronic components, and material-handling equipment. Last year the exchange, owned and operated by NetVendor of Atlanta, ranked among the nation’s top surplus-inventory Web sites. But by February NetVendor had shut down SurplusBIN and sold its components to the highest bidder, opting to focus on developing collaborative Internet software and services for suppliers. The exchange simply couldn’t get enough traction in a traditional industry where the human broker is still king, says Chief Operating Officer Steve Ely.

“In these excess-inventory/parts kinds of environments, the margins are absolutely razor-thin, and the only companies making any money are those doing extraordinary volume,” he says. “We were just very challenged to drive that level of volume into the exchange.”

Chalk up another Net market to experience in the ongoing shakeout that is rapidly thinning the ranks of business-to-business (B2B) exchanges. Touted just 18 months ago as the future of e-commerce, Net markets are fighting to find their feet in a constantly shifting, treacherous economic landscape.

Exchanges besides SurplusBIN that have folded or been absorbed by other Net markets in the past year include Chemdex (life sciences), Promedix (medical products), RedLadder.com (construction), IndustrialVortex (industrial products), BizBuyer (office supplies), and Pradium (agricultural commodities). All found themselves drowning in red ink, unable to make enough headway in a crowded, trendy marketplace to satisfy investors rattled by dot-com fallout.

Most were doomed by market inertia–the reluctance of corporations to disrupt long-standing relationships with suppliers and distributors by trading on the Web. As a result, SurplusBIN.com and other exchanges that made their living by collecting a percentage fee on each transaction never achieved sufficient liquidity or deal volume to turn a profit.

Inattention to basic business processes and back-end integration also proved fatal. Too many “market makers” were mesmerized by technology and clueless when it came to understanding the real-life needs of sales reps and purchasing agents in specific industries, says Andrew Neitlich, vice president of engagement management for Crimson Consulting Group, an e-commerce marketing firm based in Los Altos, Calif. “The key issue with all these online exchanges that are dropping like flies right now is that they put technology before thinking about what a complete solution means to a customer,” he says.

Independent Net markets–those not tied to a corporation or industrial consortium–face a dire threat in the form of corporate mega-exchanges such as Covisint (auto parts), PetroCosm (oil and gas), Transora (consumer products), and Converge (electronics components). Initially stalled by intercorporate squabbling and antitrust investigations, coalition markets have become the 800-pound gorillas of the e-marketplace.

But led by the high-tech sector, B2B markets are adapting to the exigencies of the post-dot-bomb world, intent on capturing a slice of a global B2B market that Forrester Research estimates will grow to $2.7 trillion by 2004. Independent exchanges are partnering with industry-backed consortia and new portal markets such as Yahoo! to broaden their customer bases. Software companies are developing new software tools to ease the pain of systems integration and help buyers find what they’re looking for quickly. And private collaboration–intimate e-relations among a select group of trading partners–is the current buzz phrase at B2B conferences and seminars.

Nowhere is this revolutionary process moving faster than in the computer and electronics fields. And nowhere will the new dot-com watchword–profits–become reality sooner.

High-tech exchanges retool for profit

The electronic-components market was a $250 billion industry last year, largely based in offshore locales such as northern Mexico, China, and South Korea. Searching for and buying hundreds of thousands of components at the lowest price possible is an activity tailor-made for Net markets, with their huge, globe-spanning product catalogs accessible (in theory, at least) from any Web browser. That’s why there are so many electronics exchanges–more than a dozen as of this writing–and why there’s so much market churn and experimentation in the field.

“The electronics industry business model is going to be the one that gets emulated in many other manufacturing industries,” says Leah Knight, a former B2B analyst who left GartnerGroup to direct the strategic marketing efforts of e2open, a coalition market for computers, electronics, and telecommunications. Organizations such as RosettaNet have accelerated the high-tech industry’s charge to the forefront of B2B e-commerce by working toward common industry standards for XML, the Web language used to format documents in most Net markets.

For some computer and electronics exchanges, the formula for survival is to become more than just a transaction hoster. VerticalNet, an e-marketplace pioneer that operates more than 50 information-oriented exchanges, early this year sold its profitable NECX chip exchange to Converge Inc., a coalition market backed by Compaq, Western Digital, Hitachi, and other IT heavy hitters. The deal signaled VerticalNet’s transformation into a provider of exchange technology and services, competing with the likes of Ariba and i2 Technologies; the company also signed a three-year, $107.5 million contract to supply Converge with strategic-sourcing, design-collaboration, and order-tracking software.

Hardware engineers and component purchasers worldwide patronize the Free Trade Zone, an electronics exchange run by PartMiner Inc. of New York City. It’s public and, as the name implies, free; PartMiner charges no transaction fees. So how does the two-year-old company make money? By helping buyers find elusive parts in the gray (or independent distribution) market. A sourcing service called PartMiner Direct launches automatically when a supplier can’t fulfill an order placed in the Free Trade Zone, scouring a database of more than 12 million electronic parts in warehouses from Mahwah, N.J., to Manila. PartMiner exacts a markup on the resulting sale.

The company has signed partnership agreements with e2open, Dell Computer, and contract manufacturer Celestica to provide its online catalog and sourcing service, hoping to tap into billions of dollars’ worth of online spending. “We want to be that ubiquitous platform for component information throughout the entire electronics industry,” says PartMiner spokeswoman Christine Brate. “We’ll continue to partner with a variety of different companies and marketplaces that just proliferate our database everywhere.”

Spot trading, a still-fragmented arena that has largely been ignored by coalition markets, offers shelter from the storm for other electronics exchanges. Unlike PartMiner, USBid of Melbourne, Fla., operates like a traditional exchange, skimming a small profit off each sale. But CEO Gary Heyes claims that his exchange has an edge over other online e-markets in convenience–a purchase takes just three mouse clicks–and sophistication: Custom back-end systems provide for no-fuss inventory analysis and management, and can sniff out parts in 70 countries.

“‘Search, find, buy’–those are the three things that our customer base wants to do, and our daily thought process revolves around that,” Heyes says. In January the exchange, which boasts 17,000 registered buyers, signed a cobranding agreement with Yahoo! Inc. The latter company’s new Yahoo! Electronics Marketplace will depend on USBid (and PartMiner, which has a similar deal) to furnish its 185 million users with electronic components.

Other electronics spot marketers include FastParts.com, the official sanctuary for members of defunct ElectronicsBIN.com; and Need2Buy, which early this year planned to launch an online “part research center” offering access to a technical database of more than 7 million components.

Collaborate or rust

A recurring theme in today’s high-tech Net markets is the desire to achieve true supply-chain integration, a digital linkage that allows trading partners to swap all kinds of back-end data and collaborate on demand forecasting, order management, and product design. Computer and electronics manufacturers see closer ties as the key to producing parts more cheaply, reducing inventories, getting to market faster, and making use of human talent scattered across multiple time zones.

This notion of collaborative networking is such a no-brainer to e2open that the Belmont, Calif., exchange has based its entire business model on it. Instead of levying transaction fees, e2open sells subscriptions for the use of software and standardized business processes. Most of its applications enable partners to more easily collaborate. The result is a “richer software and services experience,” says Knight, the company’s marketing chief. “Instead of participating in the one-night stand of a purchase or sell transaction, [users] get more involved in the long-term relationships of strategic processes like design and manufacturing.”

Only the exchange’s 10 founders–multinationals such as Hitachi, IBM, Lucent Technologies, and Nortel Networks–and their trading partners currently have access to its collaborative tools. But this summer e2open plans a general rollout that will encompass smaller companies not necessarily tied to the big 10.

The logical extension of this trend toward tight supply-chain integration is private exchanges, or hubs. According to Web marketing newsletter eMarketer, 93 percent of all online B2B transactions go through private networks based on either Electronic Data Interchange (EDI) or newer Web-based technologies. Intel Corp. decided to keep its online relationships private two years ago, and has reaped the rewards: About 90 percent of its sales orders by dollar volume flow through private online channels. In February the giant chip maker opened the Intel Business Advantage Portal, a B2B e-marketplace that lets dealers earn rebates and commissions on software, hardware, and e-commerce services from third-party suppliers.

But private exchanges are clearly a work in progress. Dell Computer promoted its Net market, open only to major suppliers, as a “comprehensive e-procurement solution” at its inception last fall. But only three vendors–3M Corp., Pitney Bowes, and Motorola–signed up, and the Dell Marketplace closed down in late February.

Parallel foundries

Net markets in other industries are following high tech’s lead, offering customers their own version of a richer software and services experience, and forging alliances with erstwhile rivals. Pittsburgh-based FreeMarkets, the oldest and largest B2B marketplace in terms of market volume, negotiates set fees with buyers for a suite of e-sourcing apps that runs the gamut from full service to do-it-yourself. Full Source gives the red-carpet treatment to large companies looking to bid on raw materials, industrial parts: It offers access to teams of experts who help purchasing agents qualify suppliers, choose the appropriate auction format, and write extremely detailed, lengthy requests for quotes (RFQs). “Using full source, we can help them find items that they couldn’t dream of before, going through a single market,” says Jason Busch, FreeMarkets’ manager of strategy and business development.

QuickSource, introduced in January as a platform for private e-markets, is FreeMarkets’ sparest yet most economical e-sourcing app, leased to customers on the application service provider (ASP) model.

INC2inc, a start-up e-market for the procurement of bulk ingredients in the food and beverage industry, merged with coalition market Dairy.com last November. The alliance created a stronger, better-financed vertical market–and a new firm, Momentx Corp., that provides food companies with e-commerce services and software. The Dallas-based company has licensed a back-end integration suite from webMethods and collaboration software from Syncra Systems to lease to customers who want to automate order entry and coordinate production schedules. Momentx also charges for system integration and strategic sourcing applications to supplement transaction fees flowing from the two exchanges.

In the same vein, Pantellos, a coalition marketplace for utility and energy services, has licensed project collaboration and e-commerce services from construction exchange Cephren, which merged in October with another ailing Net market to form a new engineering and building e-marketplace called Citadon. In addition to electronic components, private e-procurement networks are gaining a foothold in an array of industries: home improvement (Maytag, DeWalt), consumer goods (Procter & Gamble, Wal-Mart), aerospace (Boeing, United Technologies) fast food (IPCnet), and agriculture (Cargill).

Forging ahead

In theory, Net markets represent what e-business seeks to ultimately achieve–a seamless, globe-spanning Web of business relationships through which transactions are consummated by computers freed of the yoke of human interaction. But realizing this vision of e-Nirvana will take awhile; very few exchanges today operate in the black. The Great Net Market Shakeout will continue for the rest of the year and into 2002 as exchanges grapple with back-end integration and the reluctance of many companies to commit to Web-based e-commerce.

Solutions to integration problems are emerging with the drive by RosettaNet, BizTalk.org, and other organizations to standardize XML, coupled with the increasing popularity of Java 2 Enterprise Edition (J2EE) as a cross-platform development tool. Clearing away the supply-chain mines that blew up SurplusBIN.com and its ilk is a tougher proposition; each industry must find a way to win over end-users and avoid disenfranchising distributors, resellers, and other middlemen.

When the ground stops shaking there will still be a place for neutral, third-party exchanges such as FreeMarkets, FastParts, and USBid that offer unique capabilities–or that simply do business in market sectors overlooked by consortia. In the long run, coalition markets may prove to be the rusted hulks of Net market evolution, too ponderous and internally riven to seize advantage in a rapidly changing environment. Many analysts believe that, despite Dell’s experience, private marketplaces will supplant coalitions as a dominant force in B2B because they give corporations total control over purchasing and sales data. “By about 2005 the majority of B2B Internet commerce will be over direct–that is, private–marketplaces and extranets,” declares Evelyn Cronin, research director of Gartner’s London office.

In time, an overarching B2B universe may emerge in which independent exchanges, coalition markets, and private extranets link together, letting companies trade and collaborate in ever widening networks according to their needs.

To Louis Columbus, a senior analyst with AMR Research Inc. in Irvine, Calif., the current upheaval in Net markets is all about getting back to the basics–doing business with companies you know and trust, and using information technology that actually works. “It’s getting to true value, not that almost messianic belief that the Internet’s going to solve everything,” he says. “It’s returning to the fundamentals of good business relationships, the ability to deliver sustainable value over time and make a contribution to the company that’s doing business with the exchange.”

Net Market tips

For all the tribulations that Net markets are suffering, small-to-midsized businesses ignore an e-business phenomenon of this magnitude at their peril. Those who decline to participate risk being left on the outside looking in when B2B finally gets its act together–about 2003, according to Internet pundits such as IDC and Forrester Research. Midmarket manufacturers and service firms nationwide are feeling pressure from Fortune 1000 customers that want them to join public or private trading portals–pressure that will soon come to bear on their vendors.

But no business should jump into the contracting but still vast universe of online exchanges without careful thought and due diligence. “I think companies have to be really selective about which marketplaces they can really play a role in,” says Jason Busch, senior manager of market strategy for independent exchange FreeMarkets. “They have to look to where their buyers are, and where the liquidity is.”

To reap the rewards of e-marketplaces while minimizing the hassles, consider this approach:

Dip your toes into Web exchanges as a buyer, starting out with mundane, operational supplies from sites such as Commerce One.net and Grainger, then moving on to more complex industrial products and services.

Once you’re comfortable with the technology and protocol of Net markets, pick two or three in your industry to sell into. Concentrate on markets where existing customers or hot prospects shop, and patronize independent, coalition, and–assuming you’re invited–private marketplaces. “For most companies it makes sense to do more than one thing, because you can’t really be sure which one is going to work,” observes Tim Clark, a senior analyst in Jupiter Media Metrix’s Silicon Valley office.

Sweat the technical details of listing products and services on exchanges, integrating Enterprise Resource Planning and other back-end systems, and getting paid. Pick an XML flavor that your IT department can support, and seek out markets that can either lend a hand with integration or provide access through a standard Web browser. New applications from companies such as Microsoft, Haht Commerce, and NetVendor make it easier for small suppliers to publish catalogs, track sales data, and take part in multiple marketplaces.

Don’t get too attached to your close-knit, ultra-efficient trading community. Next week, or next month, it may have gone the way of 16-bit code and the Newton Messagepad, a victim of inexorable economic forces in the ongoing evolution of Net markets.

Phil Davies is senior contributing editor of ComputerUser.

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