That's It in an Eggshell

Ovum outlines what marketplaces need to survive

Boston  April 26, 2001  This year has seen plenty of depressing news for B2B marketplaces: high cash burn rates and low usage has led to closure, restructuring and lost funding at high-profile marketplaces such as Ventro, Dell Marketplace and Just2Clicks. Now in the wake of the market downturn, you'd be forgiven for thinking that the concept is dead and buried.

But this is no more truthful than last year's belief that running a B2B marketplace was the key to immeasurable riches, according to analyst and consulting company Ovum. There are plenty of opportunities to be had  but providers will need tenacity and a healthy dose of realism if they are to make the most of them.

The mistaken belief that marketplaces are entering their dying phase stems from a confused view of the consolidation that is currently taking place. "This is happening because there are simply far too many marketplaces chasing the relatively few users who are market-place ready," said Mary Hope, senior analyst at Ovum. "Given the huge funding pressures marketplace operators are under, they cannot sustain such huge cash burn rates for long."

But this should not be confused with mature-market mass consolidation, which has been widely predicted to happen within the next five years. On the contrary, Ovum believes there is room for thousands of specialist marketplaces in the long term. "We are quite simply nowhere near a mature market," added Hope. "User take-up and revenues to date are tiny, and profits are years away for most marketplace operators. But revenues are growing steadily. Once supply and demand has been balanced, there will be plenty of scope for the survivors to make money."

According to Ovum, specialization is the key. Most marketplaces services so far have simply automated offline equivalents without offering significant extra value, leaving users unwilling to pay the transaction fees that operators expected to contribute most of their revenues. Many were focused on indirect goods rather than direct goods; that is, supplies incidental to the running of a business rather than crucial for the production process. They have also tended to concentrate on the needs of buyers, leaving suppliers wary of joining. "Hearing a marketplace operator promising to help your customers push your prices down doesn't inspire confidence," commented Hope.

To be successful, operators will have to play to the individual needs and trading patterns of small groups of users (both buyers and suppliers) who have a lot in common. Users will be more willing to pay for complex value-added services that support trading and collaboration between close partners in the most strategic areas of their business. This will result in a large number of niche marketplace players, rather than the few giant B2B exchanges that had been predicted.

In the long term, many profitable marketplace operators will use an application service provider model. This is where the operator provides a ready to go integrated marketplace platform with a set of value-added services to many "subsidiary" marketplaces. Ventro, hard-bitten by enormous start-up costs and low revenues, announced a shift to this model late last year, followed by VerticalNet.

"This model benefits from significant economies of scale, which are much-needed when the cost of building a marketplace is so enormous," says Hope. "It is also suitable for marketplace operators who find that they don't have the vertical expertise or customer-facing skills to operate a trading environment directly." These include organizations such as telcos, many of whom rushed to set up cross-industry horizontal marketplaces last year but are meeting with limited success because of a lack of the relevant skills.