Post-dot-com conventional wisdom has it that, among independent business-to-business e-marketplaces, first-mover advantage was a myth and profitability a pipe dream.
Try telling that to Paul Bourke, CEO of Altra Energy Technologies Inc. The Houston-based company launched an independent online energy trading exchange—now known as Altra Marketplace—in 1996, long before the word "e-marketplace" had been conceived. Today, the exchange is one of the few independents to have achieved profitability. In the first quarter, it oversaw $8 billion in deals. In addition, Bourke said, Altra is aiming for revenues of $65 million this year and $100 million by the end of next year. Altra even has an initial public offering target: 2003.
Altras secret to success has been to take a market that already existed in batch mode—the often kludgy and complex process of brokering energy products such as crude oil or electricity—automate it and move it online.
At the same time, like the handful of other successful independent e-marketplaces, Altra has managed to expand its revenue stream beyond just transaction fees. Beginning in 1999, the company added integration services. And, last year, Altra began licensing its exchange platform software to large energy companies launching private exchanges. Today, Bourke said, 50 percent to 60 percent of companies that do business on his exchange also purchase services from the company. Sixty percent of Altras revenue comes from services, not transaction fees.
Altras integration services essentially allow customers to transact business on its site and have the deal instantly reflected in their enterprise resource planning and other back-end systems. Customers can also use the services to automate connections between online trades and their own risk management and credit systems.
"Altra has really recognized the importance of integrating the exchange through the back- and midoffice while maintaining a lot of the flashy front-end features you need to attract traders," said Jill Feblowitz, an analyst at AMR Research Inc., in Boston. "They have a decent amount of flow-throw on their exchange, but what they really bring to the table is the integration."
This has enabled Altra to gain a huge foothold in the online energy trading market, which Forrester Research Inc., of Cambridge, Mass., estimates will reach $3.6 trillion by 2005. Today, Altras software and trading systems are used at 500 companies worldwide by more than 7,000 energy professionals who trade, schedule, transport and account for transactions in power, natural gas, natural gas liquids and crude oil.
While liquidity certainly attracts traders, its also essential for independent e-marketplaces to understand and reflect exactly how business is actually done in their industry. In addition to offering value-add services in the form of subscriptions that give traders access to risk management and credit tools, Altra, for example, lets traders compare what different brokers are buying or selling anonymously.
"The fact that they can maintain anonymity is one of the main reasons I use Altra," said Brian Grizzel, a natural gas trader at Cargill Inc., in Wayzata, Minn. "If you need to move a large package of gas, you dont want other people knowing about it."
Grizzel, a $75 million-a-month player on Altra, typically uses the marketplace eight to 12 times a month toward the expiration of futures contracts. Because Cargill is both a buyer and a seller on the exchange, Grizzel said Altras credit capabilities also come in handy. The exchange has a credit arrangement under which it acts as the middleman between two companies that may not be able to broker a deal on their own because of credit issues.
That kind of service is increasingly important in an era of energy industry deregulation such as is taking place in California, Texas and New York, among other states. In those three states, demand among regulated utilities, power producers and independent system operators for software systems that can track credit positions, profits, losses and risk in real time is growing, experts say.
To take advantage of that demand—and expand its revenue stream—Altra, like other successfully independent e-marketplaces, has begun licensing its software. In April, the company announced it would provide power-scheduling software to Californias Department of Water Resources. The companys electronic trading software was also selected by South Texas Electric Cooperative Inc. and Xcel Energy Inc., two power wholesalers in Houston, this year for use in Texas soon-to-be-deregulated market.
Altra, like other independent e-marketplaces, has begun offering software and services to energy companies that, attracted by the potential of the online trading market, have launched their own private exchanges. Last year, Altra announced a partnership with Epicentric Inc. to build customized portal applications for such enterprises building private exchanges. The private portals enable schedulers to access scheduling information and give traders access to real-time information on their positions in the market. Altra is also working to expand its role in the energy commodities market, where fewer than 5 percent of the players trade online.
While Altra plans to stay on track in the energy market, Bourke said he will eventually expand the exchanges portfolio and include trading for commodities such as water and telecommunications bandwidth. The ability to move with the market will be key to Altras ability to remain profitable, experts say.
"There are many independents in the energy space, but Altra is the leader of the independent marketplaces," AMRs Feblowitz said. "You want to participate in an exchange that moves with the market, and Altra has some real liquidity as well as some other features that create stickiness."