E Marketplaces Face A Bloodbath

There are 600 sites to link buyers and sellers. But two per industry is plenty

Is it just me, or does it seem as if somebody announces a new online marketplace about every three seconds? In the past few weeks, countless companies--from General Motors and DuPont to Sears Roebuck and Sabre--have announced Web sites to connect buyers and sellers. They clearly hope to recreate the incredible growth and fast profits of eBay Inc., the consumer auctioneer that proved the power of e-marketplaces.

But eBay fooled everyone by making it look easy. It's one thing to get consumers to auction off Beanie Babies and Joe DiMaggio jerseys to one other. It's quite another to persuade purchasing managers at General Motors to buy 600 tons of steel online, sight unseen. Getting those business-to-business (B2B) deals rolling takes a lot more time, as well as wrenching changes in corporate cultures. That's why I think many, if not most, of the e-marketplaces will fail or sell out.

Problem is, the investors funding these companies have no idea they're headed for a cliff. There are a dozen publicly held B2B e-marketplaces valued at an astonishing total of $110 billion, and dozens more are IPO-bound. Yet most experts think there will be only one or two big winners in each industry, as buyers and sellers gravitate to where all the action is. As a result, says Mohanbir Sawhney, a professor at Northwestern's J.L. Kellogg Graduate School of Management, "there's going to be a lot of dead bodies."

Why? The old chicken-and-egg dilemma. You need buyers to attract sellers, and sellers to attract buyers, so it's tough to get started. That's why most of the 600 or so e-marketplaces have yet to conduct their first transaction. E. Russell Braziel, chairman of gas marketplace Altra Energy Technologies Inc. in Houston, for instance, got nowhere until he phoned suppliers and buyers, imploring them to check out his Web site. Says Braziel: "It was hard work to jump-start the process."

And now, these e-marketplace upstarts face the arrival of big guns such as GM and DuPont suddenly rushing in to take back their turf. As a result, they have less of the head start that e-tailers such as Amazon.com Inc. had against traditional book chains. Says Morgan Stanley Dean Witter analyst Mary G. Meeker: "It will be harder to Amazon the entrenched players."

The big companies face their own challenges. It's tough enough for suppliers to swallow the need to share space on an e-marketplace with archrivals. Even when buyers join together, as carmakers GM, Ford, and DaimlerChrysler did, meshing the corporate cultures and conflicting goals will be a monumental job. Says Accel Partners venture capitalist James W. Breyer: "Many of these B2B exchanges will simply crater because there's no independent management." David Perry, CEO of e-marketplace holding company Ventro Corp., predicts only 20 exchanges will be left standing in five years.

The winners will have to go beyond just announcing space for rent in a virtual swap meet. They must offer valuable new services that help corporations smooth and compress their supply chain--from raw-materials purchases to customer shipments. And that's not something that will happen in Internet Time.

See what Mark Walsh, CEO of VerticalNet, has to say in a Q&A at ebiz.businessweek.com.

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