The Great Internet Shakeout, Part 2

Thursday 9th November 2000

Or, just when you thought it was safe to go back into e-commerce

By Nikki Mandow

When executives of US e-marketplace company Freshplex.com turned up in Auckland earlier this year and started signing up customers for a perishable goods trading portal, Toby Warren was worried. Warren, chief executive of New Zealand seafood wholesaler-turned-perishable goods e-marketplace company Southfresh, reckoned Freshplex was going to be a rival - a big one, too. Freshplex was backed by World Commerce Online, a US company which, since 1996, had pulled in $US50 million to $US60 million in funding to build flower and fresh produce e-marketplaces. Warren got his technical people to have a look at the site. They came back baffled - as far as they could see there was no trading software there. "They had a Web site, a brochure, but no engine," Warren says. Months later, a small note in the sign-up document is still saying the site will be available for trading "soon".

Financials from WCO's Nasdaq filings also make interesting reading. Accumulated losses as of March 31, 2000 are $US54.2 million (up from $US45.6 million in December). By contrast, total revenue for the three months ended March 31 was $US51,000.

As Warren learnt, business-to-business (B2B) e-commerce marketplaces aren't always what they seem.

The perils of business-to-consumer (B2C) e-commerce are well documented. Over the past 12 months, a mixture of too few custo-mers, too much competition, no loyalty and hugely expensive marketing costs has seen a big consolidation in the industry and many sites flounder. Suddenly business-to-business (B2B) became the buzzword for a surefire way to make (or save) money using the Internet. In particular, B2B e-marketplaces have become the pinnacle of e-commerce excitement. Bringing buyers and sellers together on the same site, enthuse the press releases, these trading hubs have the potential to slash purchasing costs, open up new markets for suppliers and burn administrative expenses for all.

True, and false. Certainly, the numbers look exciting. Jupiter Communications estimates US Internet trade will grow more than 20 times in the next five years, from $US336 billion in 2000 to $US6.3 trillion in 2005. Of that, Jupiter reckons Net marketplaces will account for $US2.2 trillion, or 35% of all B2B Internet trade (up from 2% this year). Put another way, 15% of total (that is online and offline) B2B spending will be done through an e-marketplace by 2005.

So what's the problem? The same as for B2C e-commerce. Too many expensive-to-set-up exchanges chasing the B2B dollars. The number of e-marketplaces worldwide has grown from around 250 in 1998 to around 1450 in July this year, according to a recent Deloitte Research report, and could climb as high as 10,000. There are an estimated 70 e-markets in the food/hospitality sector alone, and more than 15 in chemicals. Trouble is, many analysts believe there is room for only 300 to 500 in total and are predicting a huge shake-out. "Whatever the final number [of marketplaces]," says the Deloitte report, "it's clear that the e-wars between competing marketplaces have begun ... and will reach epic proportions over the next 18 to 24 months. And while this Darwinian struggle will leave some e-marketplaces and their member companies with a powerful competitive edge, it will leave others scratching their heads and wondering how they managed to miss the boat."

Baby steps

In New Zealand, where e-marketplaces are largely still in their infancy (or more accurately, their embryonic phase), the excitement - and the hype - are growing. In the past month alone NZ Post announced it was joining the race for the $3 billion government procurement contract, and Biolab and Ariba announced the formation of a major Australasian marketplace for laboratory and scientific supplies industry exchange. Trade NZ is set to make the decision on the consortium to build and run at least one e-marketplace at the end of this month. The government has earmarked $10 million for Trade NZ's e-commerce strategy, including marketplaces.

The Ministry of Economic Development will bring out US e-marketplace guru Arthur Sculley in early November as part of its e-commerce summit, and there is another conference in late No-vem-----ber dedicated to government procurement, where e-commerce market---places will be high on the agenda.

"There are a lot of people wanting to jump on the bandwagon," says Steve Hornblow, market development manager at Esolutions. He estimates that as well as the 15 or so marketplaces or e-procurement portals up and running, proposed, or in a pilot phase at the moment, there are up to 50 companies "considering drafting a business proposal". Direct Capital's Gavin Lonergan says his venture capital company is actively interested in two B2B market-place proposals, though he has heard of at least 10 to 15 smaller organisations investigating setting up Internet exchanges, plus five to 10 bigger players, with more chance of success. Other venture capitalists report meetings with a number of aspiring players they don't consider likely to ever get to start-up stage, let alone profitability. "Consolidation will be inevitable," Lonergan says.

One of the key problems for New Zealand companies is cost. Setting up an exchange isn't cheap. Research house IDC estimates at least $US1 billion has been earmarked to establish exchanges worldwide. Two high-tech marketplaces - Ehitex.com (Hewlett-Packard, Compaq and 10 others) and E2open.com (IBM, Toshiba, Nortel and seven others) will alone chew up $US300 million of their owners' dough in the set-up phase.

In New Zealand, exchanges won't be that expensive, but Hornblow says he has already seen a couple of potential marketplaces in New Zealand collapse through lack of funding. Having spent $200,000 to $300,000 on the early phases, the projects' leaders simply couldn't find any more money.

Turn up the volume

The weak New Zealand dollar exacerbates the problem here, making overseas technology very expensive. And our lack of scale doesn't help either - one thing almost everyone agrees on with e-marketplaces is that volume of users and transactions is one of the main keys to success. "It's much harder to get the economics working here than in the US," says Deloitte Consulting principal Matthew Hitch. "So the business case needs to be very strong." Deloittes is leading the implementation of the SupplyNet marketplace being set up by the Government Supplies Board, Qixel and Advantage and competing for the government's $3 billion procurement budget. SupplyNet went online with pilot customers in August.

Nigel Varcoe, Australasian general manager of New Zealand's main marketplace software provider, Genie Systems, estimates a market---place here would need to be turning over around $2 billion a year before it would be a viable proposition. "If you look at the financial markets, the trend is towards 0.5% in terms of the net margin for operating. In a New Zealand environment if you want to get $10 million, you need net revenue of $2 billion."

So the ones that survive either need to be in an industry big enough to support a marketplace, or to be providing a marketplace that adds value for customers beyond being a simple buy-sell portal. The latter should not only entice customers, experts say, but allow those running the marketplace to take a higher margin. Varcoe points to some of the overseas construction industry exchanges (buildnet.com, for example) where the marketplace software can help cost a job, suggest what sort of contractors will be needed and for how long, and organise the tender process.

The New Zealand e-marketplace scrap is likely to get into full swing next year as marketplaces get set up and the competition becomes fierce to bring buyers and suppliers on board. "I believe there will be a number of exchanges set up over the next 12 months or so," says Varcoe. "Then there will be some rationalisation onto offshore exchanges or consolidation within New Zealand."

Winners and losers.

Nikki Mandow
nikki@unlimited.net.nz

Sounds gloomy?

Don't get us wrong. Internet exchanges do offer potentially astounding benefits for participants, and also for owners. Even in these early days, overseas some marketplaces are making money. US-based VerticalNet, which has created 57 different

marketplaces for industries from energy to food, boasts a market capitalisation of $US4.5 billion and made a solid $US53.6 million in revenue for the March to June 2000 quarter.

But as we head into the "hype" phase of New Zealand's B2B cycle, it's worth remembering many are not being so successful. An index of leading B2B exchanges published in BusinessWeek magazine in September shows that stocks in the sector are down an average 75% since December 1999. Venture capital funding is drying up, too. In March this year, US venture capital firms poured $US800 million into 77 exchanges. In August, 35 exchanges got $US500 million.

Perhaps the scariest thing of all: two of the canniest IT companies, Cisco and Dell, have steered well clear of e-marketplaces so far. Both have well-established e-procurement systems for their own organisations, but so far there's no talk of forming or joining a marketplace. "There's a fair bit of commitment based on vague information," a Dell spokesman told Forbes magazine. "We would need compelling evidence of a net gain before we would share data and business process."

Bumpkins beware.

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