B2B: See the Big Boom Go Bust?

E-markets faulted for weak business models

Business-to-business e-marketplaces that began the year with such promise are now approaching the end of 2000 nagged by doubts about long-term viability.

Last weeks announcement that Ventro Corp. is closing its two wholly owned exchanges, Chemdex and Promedix, underscored a shakeout process that has been going on for months and will continue into next year, as venture capitalists refine strategies for funding B2B marketplaces and many marketplace owners seek exit or retrenchment plans.

Among the things holding back exchanges, observers say, is that they have been limited to simply matching buyers and sellers and delivering messages.

Although public marketplaces are facing the brunt of the problems, others, such as so-called ISMs (industry-sponsored marketplaces), are not immune to the forces pushing B2B exchanges toward more viable business plans that include services beyond simple transaction management.

As a result of this shakeout, experts say businesses considering entering an exchange should abandon the "get online at all costs" strategies that have been the rule to date. Instead, they should carefully consider not just whether to go online but also how and with whom and, most important, why.

"B2B now means back to basics at a macro level," said Rakesh Sood, general partner of Sprout Group, a venture capital company in Menlo Park, Calif., at last weeks Net Market Makers GroundZero 4 conference here. "We are in a kind of nuclear winter, and the marketplaces must hunker down, ride it out and build up infrastructure."

Like other observers, Omar Hijazi, principal of A.T. Kearney Inc.s strategic IT practice, in Los Angeles, said at the conference that he is seeing increasing demand from consortia for strategic planning services that can help extricate them from e-marketplace business models that have come up dry.

"Theres a lot of repositioning going on; many joined a marketplace on impulse," Hijazi said. "Now, both pure-play and industry-sponsored members are considering whether they should pull out or go private."

Some industry observers think the solution is to strengthen e-marketplaces by knitting together the back-end processes of the buyers and sellers.

"A lot of whats going on today is superficial connection between buyer and seller," said Matt OMalley, CEO of developer Glovia International LLC. "What is needed is back-end integration."

In February, Glovia, of El Segundo, Calif., will announce its digital marketplace platform. Key components will be middleware to integrate back-end processes across multiple companies, authentication tools, and proprietary technology that will also provide suppliers in the e-marketplace with the capability to put up virtual catalogs.

Software isnt the only answer. Adopting new business plans, finding new partners or affiliating with brick-and-mortar manufacturers could save many exchanges. "You need a strong buyer base, seller base and domain expertise," said Jeff Crowe, president of auction services company DoveBid Inc., in Foster City, Calif.

As a result, many ISMs, such as e2Open, the Big Three automakers Covisint and others, are being given a better shot at success than their pure-play upstart counterparts. But Covisints suppliers are still hedging their bets.

"Were going to work with Covisint where it makes sense, but right now, things havent solidified," said Gary Corrigan, spokesman for Dana Corp., a Toledo, Ohio, auto parts maker. "Were still going to work with FreeMarkets [Inc.] for our auctions and [others] until theres some compelling reason not to."

Despite the downturn in B2B investment, there are signs of hope. Kearneys Hijazi emphasized that many exchanges are eschewing bailout strategies for breakthrough plans that can capitalize on technological advances for better interoperability.

For instance, Nathan Clakley, president of eOutdoors Inc., a new Net market for outdoor gear in Lafayette, Calif., is bullish about his opportunity since he built his exchange with new multi-currency settlement tools from Clarus Corp. "We needed seamless integration and a global company," Clakley said.

Building successful marketplaces is "not going to happen overnight," said Jenna Pelaez, an analyst with Jupiter Communications Inc., in San Francisco. "If it did, then it wouldnt be impactful and transforming."

Scot Petersen

Scot Petersen

Scot Petersen is a technology analyst at Ziff Brothers Investments, a private investment firm. Prior to joining Ziff Brothers, Scot was the editorial director, Business Applications & Architecture,...