e-Marketplaces 2.0

What went wrong, what went right, and what's the value that your company can get out of an e-marketplace right now


e-Marketplace. Now there's a word that you might not have heard for, oh, say, the last five years.

In the wake of the dot-com bust, when so many "New Economy" companies went belly up, it's easy to forget that as late as the year 2000 many tech industry analysts were still predicting that e-marketplaces would revolutionize, and come to dominate, B2B commerce. Trillions of dollars in transactions would run through the public e-marketplaces, which promised to connect buyers and suppliers in fragmented markets, streamline procurement processes and lower purchasing costs.

By the end of 2000, some 1,500 "independent" and industry-sponsored e-marketplaces had been announced. Today, just a handful of the public e-marketplaces survive, and even fewer actually still call themselves e-marketplaces. What went wrong? More importantly, what went right for those e-marketplaces that are still around? And most important, where can your company find value by turning to an e-marketplace right now? Let's take those questions in order. First...

What Went Wrong?

For starters, how about avarice? "Many of the e-marketplaces were not set up for the purpose of improving procurement or supply chain processes, they were just looking for an opportunity to make a quick buck," says Deborah Wilson, research director for procurement strategies and systems at technology consultancy Gartner. Wilson's colleague at Gartner, Benoit Lheureux, research director with the consultancy's Infrastructure and Architecture Group, agrees with that assessment: "In a lot of cases, these e-marketplaces were driven by sheer greed and a desire to have just outrageous capitalizations."

Indeed, back in the late 1990s heyday of e-marketplaces, a "build it and they will come" mentality seemed to prevail. Venture capitalists (VCs) couldn't pour money into the new e-marketplaces fast enough. And who could blame them? The math seemed so easy: If B2B commerce in a given segment totaled X billions of dollars, and an e-marketplace could capture Y percent of the total transactions in that segment and charge Z percent as a transaction fee, the payoff for investors would be huge.

But with the sudden appearance of a host of different e-marketplaces, frequently competing in the same industry verticals, buyers were left scratching their heads, trying to figure out which, if any, of the e-marketplaces made sense for their companies. Oftentimes buyers simply were reluctant to give up control over their strategic relationships with their suppliers, and suppliers were unwilling to pay a fee for the privilege of being "disintermediated" from their customers.

Ultimately, says Mitch Free, founder and CEO of MFG.com, an enduring e-marketplace targeted at buyers and suppliers of discrete manufacturing services and industrial components, many of the Net markets essentially mistook what their role needed to be in the market. "They thought they were technology companies," Free says. "But it's not about the technology, it's about community. A marketplace is really a community-aggregation business." Which brings us to...

What Went Right?

Responding to this question in separate interviews, a number of executives at several different e-marketplaces echoed Free's sentiment with regard to community. For example, Brandon Spear, senior vice president of operations at Quadrem International, a global e-marketplace founded in 2000 as an industry-sponsored consortium of the mining and metals industry, says that Quadrem spent it first four years very focused on trying to build scale in its supplier community. "Only after we had achieved a relative critical mass did we start to focus on delivering more solutions and services to that existing base of customers," Spear says.

Critical mass is important to the success of an e-marketplace because it helps to create a barrier to entry for potential competitors in a particular market segment, says Free, who points to online auction site eBay as an example. "Who's going to compete with eBay? Nobody. And it's not about the technology. Because with some amount of money, I could duplicate eBay's auction technology, but then I'd have MitchBay, and how am I going to move the herd of people to my site? It's too hard."

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