What's the Marketplace Forecast?

Will independent marketplaces survive? Will the industry consortia replace them? Or will companies choose to build their own private marketplaces? Yes, on all counts. Here's why, and here's how purchasing professionals might take advantage of all three models.

[From iSource Business, August 2001] The basic value proposition of B2B e-marketplaces is simple and compelling: Companies can buy goods and services through the Internet at more favorable terms and with more efficiency. But while everyone seems to agree that B2B marketplaces can deliver significant benefits, no one seems to agree on how these marketplaces will evolve over the next few years.

The first wave of B2B hype hit in 1999 with the rise of the independent exchange model. Pioneers like Chemdex proposed a model whereby companies would pool purchasing power and drive down prices while simplifying the supplier-selection process. The model seemed obvious, and every venture capital company scrambled to fund exchanges in every industry segment from oil to poultry. The future seemed boundless.

But 2000 dawned with a new model: the industry consortium. Seeing small, independent exchanges starting up, the dominant players in each industry realized they could collaborate and gain even more purchasing power than that of the independents. Competitors came together in all the major industries, and overnight the independent e-marketplaces appeared to be an endangered species. Industry analysts, who had been forecasting the appearance of thousands of exchanges, cut their numbers to hundreds.

As we now pass the midway point of 2001, a new model is becoming increasingly popular. Large companies are realizing that while the consortia have value for many buy-sell operations, they are not without their problems. Is it really safe to buy sensitive materials for your next-generation product in a forum you share with your competitors? Don't you have some advantages in direct supplier relationships, rather than allowing the exchange to intermediate? Do you want to pay fees to a consortium or exchange? Now that the technology is available to run private marketplaces, many large companies are taking this route for these very reasons.

So what happens next? Since I have the unique opportunity of meeting all day long with people running all three types of marketplaces, let me offer you one possible scenario that may unfold over the next three to five years.

Simply put, each model has value to a certain type of buyer. For smaller companies, there will be no invitation to join a major consortium and no internal information technology resources capable of building a private marketplace. These companies will very likely use multiple independent marketplaces for purchasing direct and indirect materials.

Large companies, on the other hand, may well join a consortium, but they are unlikely to obtain all their goods there. Thus, they may choose to use independent exchanges as well for indirect materials. The largest companies have been the first movers in creating private exchanges, since they already have a competitive advantage through their relationships with trading partners and their purchasing volume. But I have already seen a number of consortium participants begin building private marketplaces.

So, while there is clearly a period of shakeout underway for independent exchanges, the market will find its equilibrium. In fact, a boom in funding these e-marketplaces is still underway outside the United States. Consortia are likely to grow, but they will not be the panacea some had envisioned, since partnering with your competitor is a dicey proposition. And, finally, private marketplaces will become popular among larger companies as purchasing professionals realize they can harness the Internet as a powerful tool for online negotiation.