Who Will Profit From The Internet Agora?
Years from now, when the Internet has changed everything about how we do business, we may marvel that we ever doubted it. But it's hard to blame folks for being just a tad skeptical. First they had to watch sock puppets pitch dot-com dog food and top e-tailers lose buckets of money. Now, they see even more online upstarts piling in--this time daring to steal a march on mainstream industries from steel to trucking, and take a lucrative cut of trillions of dollars in business-to-business transactions.
Faster than you can say dot-com, they're throwing up hundreds of electronic marketplaces on the World Wide Web--conference rooms, auction houses, and trading floors where buyers and sellers can trade everything from ball bearings to backhoes. At the same time, the world's biggest corporations, from General Motors and Ford to Sears and DuPont, have caught e-marketplace mania, too. They look a bit like rubes lined up at a Vegas slot machine that just gushed a jackpot.
Is it any wonder that investors are freaking out? Since early April, B2B stocks are down as much as 80%. And it's not just investors who have doubts. "There's a lot of goofballs out there," snorts William Glenn, director of strategic planning at lumber giant Louisiana Pacific Corp, which has rebuffed requests to join several e-marketplaces. "I think most of 'em are going to get fried."
Primal. He may be right. But the truth is, under the piles of hype and stock market wreckage lie the seeds of new corporate titans. Like no other Internet businesses to date, e-marketplaces tap into something primal: When lots of people get together in one place, commerce happens. Some 4,000 years ago, the tiny country of Phoenicia--a place with few resources of its own--thrived simply by running Mediterranean shipping channels. In ancient Greece, the public agora became the center of commercial activity. Today, the bulk of commerce happens on bustling Wall Street, in Chicago's noisy commodities pits, at flea markets, in the mall.
And it's happening now on an electronic agora called the Internet. Think eBay Inc., the online marketplace that has become the single dominant site to auction collectibles. But instead of Beanie Babies and baseball cards, it's steel rebar and polymer resins: the building blocks of the economy. By next year, 71% of business buyers and sellers will at least try online marketplaces, says market watcher Forrester Research Inc. From $54 billion this year, the value of transactions over e-marketplaces will zoom to $1.4 trillion by 2004, eclipsing trade between individual companies. Says Arthur C. Martinez, chief executive of Sears, Roebuck & Co.: "This will transform our industry, almost overnight."
The appeal goes way beyond just saving lots of money--though that's huge in itself. By being able to negotiate with thousands of suppliers all huddled together on one trading hub, companies can get the best prices--fast. Quaker Oats Co., for instance, has since 1997 bid on $59 million in food ingredients, packaging materials, and services at the online-auction house FreeMarkets Inc. Savings: $8.5 million, or 14%. FreeMarkets reckons it has saved buyers $1 billion on $5.4 billion in auction purchases since 1995.
Even more fundamental, e-marketplaces will likely alter the whole process by which raw materials are converted into products and delivered to customers. Think of today's typical supply chain as a narrow, meandering trail at night, from which you dare not stray for fear of stumbling into a ditch. But once day breaks, you can see the whole landscape--so you cut across a field, avoid potholes and dead ends, give a helping shout to friends, maybe even meet new people. As the era of e-marketplaces dawns, the supply chain is morphing into a supply web, spurring faster time to market, access to new suppliers and customers, and quicker entry into new markets. Says Carl Bass, CEO of construction-services marketplace Buzzsaw.com: "It's a change on the scale of the Industrial Revolution."
By nature, though, revolutions aren't pretty. And this one could mean even more wrenching changes than the Industrial Revolution--maybe a whole lot faster. As e-marketplaces reduce the cost of finding and communicating with new suppliers or customers, relationships all along the supply chain, and even between archrivals, are up for grabs. Negotiation via Net links will replace schmoozing on the golf links.
Companies such as Wal-Mart Stores Inc., which dominate because they mastered how to apply technology to their supply chains, may find that e-marketplaces suddenly give smaller rivals the same potent tools at far less cost. By gathering knowledge of supply and demand superior to any one company's, e-marketplaces may even usurp industry leaders and become the new nexus of power in many industries--which explains the reluctance of leaders like Dell Computer and Wal-Mart to join them.
No matter how the winds of power shift, the environment will be more Darwinian than ever--and nowhere more than in e-marketplaces themselves. All too many are blatant attempts to grab a few billion dollars' worth of equity while the grabbing's good. "Many B2B business models simply won't work," says Morgan Stanley Dean Witter analyst Mary Meeker.
Slim profits. The key problem: Only one or two big marketplaces likely can survive in each industry, because buyers and sellers want to be where all the action is. Moreover, the profits to be shared from transaction fees, the chief source of revenue for many e-marketplaces, may prove too thin for multiple players. The New York Stock Exchange, the mother of all exchanges, did $8.9 trillion in transactions but earned only $75.2 million in profits in 1999--less than one one-thousandth of 1%.
The hardest part, however, is getting started in the first place: Without buyers, you can't attract sellers, and without sellers' products, no buyers will come. Four years ago, Altra Energy Technologies Inc. Chairman Rusty Braziel built his natural-gas online marketplace with all the latest technologies--and nobody showed up. Only when he hired dozens of brokers to call buyers and sellers on the phone to alert them to auctions did he get the marketplace rolling. Last year, privately held Altra traded $9 billion worth of energy.
Traditional industry players have a big advantage over Net-born upstarts when it comes to starting marketplaces: instant commercial activity. Still, it's too soon to tell whether the big winners will be the upstarts' or the traditional companies' e-marketplaces. For one thing, some large companies aren't sure they would get a fair shake in e-marketplaces started by rivals. Furthermore, a lot of suppliers suspect that e-marketplaces started by big buyers, such as Covisint, the auto exchange, will simply hammer them for lower prices. Growls retired Honeywell CEO and Internet evangelist Larry Bossidy: "When you're a supplier, you gotta have more than an option to reduce your price." All that may blunt the advantage of e-marketplaces begun by traditional companies.
Cash drain. The outlook for Web upstarts is equally mixed. In the roughly half of all industries that have no dominant buyers or sellers, upstarts may have the best chance to win because they're neutral--equally appealing to buyers and sellers. But they're also running through money fast, and it's unlikely that more will come anytime soon.
Either way, pressures are forcing all e-marketplaces to swiftly rethink their business models. Now, e-marketplaces are mixing and matching revenue streams and adding new services beyond transaction hosting--from product-design software to insurance to transportation.
In 1998, life-sciences e-marketplace SciQuest.com Inc. got most of its revenues from advertising, but now it's 90% from e-commerce, including an 8%-to-10% cut of orders placed on its site. Two recent software acquisitions are starting to bring in license fees, says CEO Scott Andrews. And he plans to start selling information, such as data comparing suppliers' delivery times and product quality. Although the company is unprofitable as a result of expansion efforts, its first-quarter sales rose 93%, to $5.1 million.
Providing a place for all parties to collaborate, not just buy stuff, may be the most attractive service of all. Swinerton & Walberg Builders used Bidcom, an online workplace where contractors do everything from store blueprints to order building materials, to coordinate dozens of subcontractors and suppliers for discount broker Charles Schwab & Co.'s new building. The time savings from avoiding phone calls, voice-mail tag, and back-and-forth faxes got the six-month project done two weeks early--saving Schwab $880,000 in rent on its old building, says Swinerton Senior Vice-President Charlie Kuffner.
Ultimately, e-marketplaces could function as corporate departments-for-rent: When a company needs products and services, it plugs into an e-marketplace to assemble a team--then just as quickly dissolves it when the project is over. In that case, who needs mergers? "It's a substitute for consolidation," says J. Smoke Wallin, CEO of eSkye.com Inc., which has gathered alcoholic-beverage distributors into an e-marketplace. "You can get 80% of the benefits with none of the hassle."
Another likely outcome: Corporate spin-offs, which could become the next hot trend. Eastman Chemical Co., for instance, has just spun off its logistics operation into ShipChem.com, which will help chemical suppliers arrange shipments. Indeed, it could prove fatal for companies to keep doing things at which they're merely adequate. Morgan Stanley analyst Charles I. Phillips puts it this way: "A tight federation of highly skilled SWAT teams flying in formation might approach the economies of scale of vertically integrated companies."
E-marketplaces may even alter the relationships between companies, prompting rivals to join forces on more activities. This hasn't escaped the attention of the federal government, which is looking into potential antitrust problems. "The boundaries between companies will become more permeable," says Thomas W. Malone, professor of information systems at Massachusetts Institute of Technology.
None of the e-marketplaces whose stories follow is that far along yet. But they hint at the sweeping changes to come in nearly every industry. More than that, they illustrate the trials and triumphs along the long, winding road that all e-marketplaces face before they can prove the skeptics wrong.
For a look at a computer industry exchange go to ebiz.businessweek.com