Divining the future of b-to-b marketplaces
November 07, 2000 12:00 AM PT

This is a confusing time for b-to-b e-commerce. There is a preponderance of good news from companies and analysts that should spread smiles across our faces. Yet at the same time, there is a steady stream of gloom that threatens to wipe away those smiles.

Is the b-to-b glass half full? Half empty? I guess it depends on your disposition. But whichever way you bend, there is no arguing with the fact that the b-to-b sector has entered a crucial inflection point. The next six months (maybe fewer) are going to be tell us a lot -- most notably, whether b-to-b companies can avoid the dismal fate that has befallen their distant cousins in the b-to-c market.

To be honest, I'm feeling pretty low right now -- too much negativity out there (and before you blame me for that, remember, I just deliver the news, I don't make it).

Ventro's woes

Where do I start? How about with the apparent downfall of the b-to-b marketplace pioneers? Ventro (VNTR) was supposed to show the rest of us how to run a successful online marketplace. Today, the company is struggling to survive, mainly because its biggest marketplace, Chemdex, has hit a wall and is struggling to maintain any semblance of growth.

Rival SciQuest (SQST) finds itself in similar straits. Last week, after missing reduced Wall Street estimates, the company announced a restructuring plan. Both SciQuest and Ventro are taking divergent paths, but their problems share the same roots -- an inability to scale their core b-to-b offerings. In others words, these companies can't attract enough buyers and sellers, they can't generate enough revenue and they're handicapped with too much debt or escalating costs.

It's easy to pick on Ventro and SciQuest because they're publicly traded and therefore must open themselves up for quarterly scrutiny. But privately held marketplaces don't seem to be burning anyone's fingers these days either.

Two weeks ago, PaperExchange laid off 14 percent of its staff as part of a major change to its business model. Commerx, an operator of several industry marketplaces, including PlasticsNet, announced last month that co-founders Tim and Nick Stojka (Chairman/CEO and EVP, respectively) had resigned. And yes, Commerx is also restructuring.

(Side note: These companies are backed by Internet Capital Group (ICGE) and Divine Interventures (DVIN), both hailed in months past as leading incubators of promising b-to-b companies. It may be time to re-evaluate that claim.)

Throw in a recent rash of mergers between dotcom marketplace operators, countless other b-to-b marketplaces also undergoing revisions to their business plans and the rise of consortium marketplaces, and the dish you're left with doesn't taste so good.

On the bright side

Now, if I were a real curmudgeon, I'd say the whole b-to-b marketplace model was doomed. But hey, as Monty Python says, "Always look on the bright side of life." B-to-b land is beset with problems, but some are "good" problems.

Problem No. 1: Too many marketplaces are running a half-mile ahead of their customers. Many of these buyers and sellers only now are putting the technology infrastructure in place that will allow them to conduct e-commerce.

"Much like building a house, the foundation must be set before the walls can be lifted or the roof installed," say Tim Klein and Jon Ekoniak, b-to-b analysts with U.S. Bancorp Piper Jaffray, in their weekly newsletter. "While some believe that the marketplace model is a flawed business model, we believe that it may be ahead of its times, as the infrastructure must first be in place before marketplaces have any chance of succeeding."

This would also explain why there appears to be cleavage in the b-to-b sector right now. Marketplace operators are struggling, but e-commerce software and infrastructure firms like Ariba (ARBA) and Commerce One (CMRC) are flying high.

So, this is good news, right? All these marketplaces that are struggling just have to wait it out until their buyers and sellers get hooked up. Then it's gravy time, right?

Graveyard of pioneers

Well, not so fast. Unfortunately, the ultimate success of b-to-b marketplaces may be built on a virtual graveyard of pioneers. For existing marketplaces that are "waiting for liquidity" (like "Waiting for Godot"), the game already may be over, fears Bob Kraus, vice president of quantitative research at AMR Research.

"It takes a tremendous infusion of capital to build a marketplace, which then must be offset by the ability to generate revenue very quickly," he says. "Unfortunately, existing marketplaces that have stalled have not been able to ramp up fast enough."

Kraus doesn't want to be known as the grim reaper of b-to-b, so he's not going to make any specific predictions as to which companies will fail and which will live to see another day. But it's clear that the weak will die so that the strong may live.

And ultimately, there will be plenty of strong b-to-b players, even among the ranks of marketplace operators. This week, AMR Research will release a survey of 152 pre-qualified companies, which were quizzed on their e-business plans. The results showed that b-to-b e-commerce is not yet mainstream, but it is catching on and considered strategically important to a majority of businesses.

More participating in marketplaces

Thirty-one percent of companies interviewed by AMR said they didn't believe b-to-b e-commerce would provide any value. That will seem like a big number to the glass-half-empty types out there, but the percentage is down from earlier AMR surveys, not to mention that 69 percent of respondents were either already participating in online marketplaces or planned to in the near future.

The benefits of joining a trading exchange start with the ability to share information among a trading community, followed by streamlining buying and selling operations, reduced procurement cost, identification of new suppliers and products and support of current business processes, according to the survey.

But here's a warning for all those would-be trading exchange operators out there who believe bells and whistles will attract participants. AMR says b-to-b now means "back-to-basics." In other words, keep it simple, stupid.

Keep bells and whistles

The most desired marketplace functions, according to the survey, revolve around strategic sourcing and integration -- stuff like product catalog and product search, order status and tracking, request for quote/proposal and integration of e-commerce into back-end software systems.

And guess what made the "so-what" list? A lot of the current buzz-worthy technology: auctions, collaborative product design and online negotiation.

So maybe there's a lesson in all this for those trying to figure out which way the b-to-b winds are blowing. This stuff is going to happen. We just need patience. But alas, some of today's players, including some high-profile names, may not last long enough to enjoy the fruits of their labor.