Survival Course

A few independent e-markets bucking the trend, thrive.

Theres no doubt about it. Once the darlings of investors and New Economy gurus, business-to-business e-marketplaces have fallen on hard times. Analysts expect their numbers, estimated at about 1,000 or more last year, to plunge to a few hundred this year.

Among the hardest hit have been the early independent players—those e-marketplace companies launched as venture-backed startups with a mission to remodel the way major industries buy and sell. But, unable to attract critical masses of buyers and sellers and facing competition from consortia-based e-marketplaces and the rising tide of private exchanges, once-high-profile independent, public e-marketplaces—such as Inc. and Ventro Corp.s Chemdex and Promedix—have closed.

Others, such as VerticalNet Inc. and SciQuest Inc., have all but ditched their initial business models—which were based on charging fees for online B2B transactions—and instead have begun to position themselves as B2B software vendors.

So independent e-marketplaces are dead, right? IT managers planning their B2B strategies should look elsewhere, to private exchanges or consortia? Not so fast. While the bulk of independent e-marketplaces seem to have lost their way, a few are bucking the trend and indicating that, contrary to popular wisdom, there may be a place for independent e-marketplaces after all. In the following pages, eWeek profiles three of the strongest: Altra Energy Technologies Inc., ChemConnect Inc. and Arbinet-thexchange Inc.

To be sure, none of the three is guaranteed to survive. Indeed, only one, Altra, claims to be profitable, a feat the commodity energy exchange reached back in 1999. That means that IT and e-business managers must still carefully study track records and prospects before choosing an independent e-marketplace through which to do business.

Still, even through the current economic downturn, all three of the e-marketplaces discussed in this package—and a few more we looked at—have made major strides in reaching the number and mix of customers necessary to create effective trading exchanges.

So how are they doing it, and what should you look for in a potential independent e-marketplace partner? Besides the obvious factors—financial condition and sound technology foundation—the successful independent marketplaces seem to share three traits. First, theyve been willing and able to move beyond a revenue model based solely on claiming a portion of each transaction, a model that hasnt found wide acceptance in many industries. Instead, most successful independent e-marketplaces have found alternative revenue sources. The three exchanges profiled here have all moved into offering value-added services on a subscription basis. Some are also offering technology and hosting services to enterprises choosing to launch their own private exchanges.

One example is NTE Inc., an independent commodity transportation e-marketplace that saw revenues grow by 270 percent in the first quarter of this year. Recently, NTE began offering hosted, private-label versions of its exchange service to customers wishing to launch private exchanges. (Public and private e-marketplaces differ in that while both may restrict who can be members, a private e-marketplace is led by a given buyer or seller to trade and collaborate in its specific supply chain, while a public one is run for an entire industry.)

The expectation, according to CEO James Davidson, in Downers Grove, Ill., is that customers will link from their private exchanges into the public e-marketplaces to take advantage of services such as open trading and financial settlement.

e-Steel Corp., one of the best known of the early independent, public e-marketplaces, also switched its focus to offering software last year. It offers its SupplyNetwork software for managing the steel supply chain in a hosted model and as a packaged application, said Ken Thompson, president and chief operating officer, in New York. It has signed on such large customers as automaker Ford Motor Co., of Dearborn, Mich., and the BHP Steel division of BHP Billiton Ltd., of Melbourne, Australia, to use the software for their private exchanges.

About 80 percent of e-Steels revenues are generated from selling software licenses, with the remainder coming from the public exchange for steel and its consulting work, Thompson said.

Besides being able to find new sources of revenue, independent e-marketplaces that may survive the shakeout share at least one other trait: Theyve staked out industries dominated by commodity products and large numbers of highly fragmented buyers and sellers. In fact, all three profiled e-marketplaces—ChemConnect in chemicals, Altra in energy and Arbinet in telecommunications capacity—have succeeded in industries with significant portions of commodity trading.

Consider the chemicals industry. Two independents, ChemConnect and Inc., have made headway in the trading of commodity chemicals. In fact, since ChemConnect last month merged with Envera LLC, just one major industry consortium, Elemica Ltd., remains.

Leif Eriksen, a chemical industry analyst at AMR Research Inc., said he expects that Elemicas role will remain in the back end, and the two independents will battle for dominance in commodity trading. Eriksen estimates that nearly one-quarter of trade in the $1.7 trillion chemicals industry involves commodities.

"Theyre in a strong position because they hit a sweet spot," said Eriksen, in Boston. "Commodity chemical trading will increase, and it just makes logical sense."

The third common characteristic of successful independent e-marketplaces is that theyve been astute about conforming to the prevailing business practices in their industry rather than attempting to force more-radical changes than necessary on enterprises that may already be uncomfortable with e-commerce. Altra and Arbinet, for example, allow buyers and sellers to remain anonymous through much of a transaction, a common practice in energy and bandwidth commodity trading.

Independent e-marketplaces must contend with the concern felt by many enterprises that, by using a public exchange, they could risk disrupting relationships with valued business partners and threaten the business advantages that they believe are inherent in their existing business processes, experts say. Thats one reason many have begun to embrace private exchanges. With a private exchange, they can model online trading to match their own business processes and avoid the price pressure that using public e-marketplaces could bring, according to Jessica Figueras, an e-business analyst at Ovum Ltd., in London.

"[Public e-marketplaces] cant offer that deep support for business processes if theyre dealing with thousands of companies, and what they offer is a quite basic platform," Figueras said.

Still, say other experts, the resiliency and relative success of a few independent e-marketplaces suggest one thing: It may be premature to dismiss them out of hand.

"Its too early to write them off, but I dont think theyll look the same two years from now as they look today," said Joan Harbin, an AMR analyst in Atlanta.

Ultimately, say experts, many e-businesses may end up using independent e-marketplaces in combination with private exchanges and consortium-based exchanges.

According to Harbin, enterprises should move beyond using private e-marketplaces exclusively for trading with a set of established business partners. They could use them, for example, to integrate into independent, public e-marketplaces to trade commodity products or find new suppliers and integrate into consortia e-marketplaces to tap into collaboration applications.

"I dont think public and private e-marketplaces are mutually exclusive," Harbin said. "What youre seeing the beginning of is private trading exchanges being ... an on-ramp between outside resources and supply chains."

And with so many e-marketplaces losing their way, on-ramps that link them to customers may be the real key to helping the best of them navigate toward survival.