Donny, you should have been here when I was selling B2B, and the new economy boys were buying at any price they could their hands on.
I was considered to be a sinner then while history will record I just got out too early.
ED B2B is hot today.
>NEW YORK, April 10 (Reuters) - Of all the over-hyped e-buzzwords, online business-to-business exchanges have to take first prize for generating the most excitement on the one hand while delivering the smallest returns on the other.
Promising to help companies save billions in costs by doing business with their suppliers and partners over the Web, so-called B2B exchanges burst onto the scene with so much fanfare that no one, it seems, could hear the alarm bells.
But they were ringing loud and clear last week when executives from Ariba Inc. (NASDAQ:ARBA), a pioneer of the B2B software market, shocked Wall Street by announcing that sales of its online exchange software amounted to a breathtaking "near zero" in the first quarter.
The decline in sales led the once high-flying Ariba to cut a third of its workforce and declare it would make a loss in the quarter, instead of the profit analysts were expecting.
A day later its biggest rival, Commerce One Inc. (NASDAQ:CMRC), warned it also would miss Wall Street's profit estimates.
So what went wrong?
"There was this perception that because all of these applications were Web-based, that somehow the laws for software development didn't apply, that miraculously software could be designed, debugged and implemented in these 90 day time frames and work ... when it had never been proven and never been tested," said Bruce Richardson, an analyst at industry research firm AMR Research in Boston.
International Data Corp's Leo Lipis agreed. "They're certainly not meeting the expectations that were set for them a year ago, that's for sure," Lipis said. "Most of them look like the walking dead at this point."
Of the thousands of online exchanges set up within the last year and a half, hundreds never made it off the pages of the news release, and of those that did, a huge number have either gone bust or are teetering on the brink of bankruptcy.
Last month, Ventro Corp. (NASDAQ:VNTR), which owns and operates B2B exchanges, closed two of its key marketplaces, chemical exchange Chemdex and medical industry exchange Promedix, resulting in a loss of $382.5 million. Year-end losses totaled $618.1 million, 11 times greater than the $48.6 million loss for 1999.
Dell Computer Corp. (NASDAQ:DELL) quietly closed its exchange, Dellmarketplace.com, which connected its customers with third-party suppliers of office goods and services, in February.
Earlier this month, Washington, DC, and Delaware electric utility Potomac Electric Power Co. (PEPCO) (NYSE:POM) said it was closing its office supplies and services exchange due a lack of uptake from buyers and suppliers.
Only the large, public marketplaces -- Covisint in the automotive industry, Transora in consumer packaged goods and Exostar in aerospace and defense, for example -- are still visible. But try to eke out hard data about transaction volume, or actual savings, and it's like trying to penetrate a heavily guarded fortress.
"We're not in bragging mode yet," said Mark Holman, chief executive of e2open, one of the two main exchanges in the hi-tech and electronics industry.
To date, none of the $200 billion in combined purchasing from the 10 hi-tech firms which started e2open last June has been automated over the exchange. It has been used to conduct a number of online auctions, as a way of getting rid of excess goods, but Holman said the founding firms have made no "precise commitments" as to how they plan to spend via the Web.
Other consortia-based exchanges tell a similar, sad story.
"The public marketplaces have gone into what I call 'suspended animation,'" AMR's Richardson said. "The founders have now sobered up and they're saying, 'Hey, what exactly are we getting from this and when is it going to be delivered?"
LACK OF PARTICIPANTS
The biggest factor holding back exchanges is the lack of suppliers, analysts said.
"Nobody, not one of the big vendors nor any of the public exchanges has really made a concerted effort to bring in the small and medium suppliers," said Joshua Greenbaum of Daly City, Calif.-based Enterprise Applications Consulting. "But if they don't get every supplier involved they won't get critical mass and the exchanges will just remain a bunch of press releases."
Less than 1 percent of the world's suppliers are connected to online exchanges, Richardson said. "The classic example is General Motors. When they signed a deal with Commerce One in November of 1999, they said within 18 months all 30,000 of GM's suppliers will become part of the exchanges."
"That 18 months expires next month and right now I think there's about 40 suppliers that are tied in," Richardson said. "What happened to the other 29,960?"
B2B DOWN BUT NOT OUT
Nevertheless, analysts still believe there is a place for online exchanges in business-to-business commerce.
"There is no question that expectations outpaced reality," said Peter Pashigian, vice president of Morgan Stanley's Digital Transformation Group, which invested in e2open, among others. "If you think of it as a pendulum, it swung too much to one side last year, but now it's swung too much to the other."
"The answer is it should be somewhere in the middle, because the same business problems still exist," Pashigian said.
According to AMR's Joan Harbin, author of a new report on exchanges due out this week, electronic marketplaces are here to stay. "We're just not there yet," she said.
Harbin's team reviewed data from the top exchanges in 10 industries from a list of more than 1,400 survey recipients.
"Money's changing hands, but no-one's profitable yet," Harbin said, adding that AMR saw revenues crossing exchanges in retail, chemical, utilities and some in aerospace.
For example, CheMatch.com, an online exchange in the chemical industry, completed more than $450 million in transactions in 2000. And since going live in October 2000, $9 billion worth of electricity has been traded via Tradespark, an exchange in the utilities sector.
All of which supports an important point. Exchanges that automate buying and selling of commodity goods, such as plastic or electricity, are taking off fastest because the transaction is simpler than the more complex collaborative planning and design processes required for other products, such as cars.
"But broader-scoped exchanges are floundering in their attempts to deliver capability," Harbin said, pointing to companies like Covisint and Transora.
B2B NOT B2C
To succeed, AMR's Harbin said B2B exchanges need to stop thinking they can just be a wholesale version of retail, or business-to-consumer, sites like Amazon.com, eBay and Priceline.com.
"The transaction between a business and a consumer is not that complex," Harbin said. "But when we're talking about collaborative planning and design between buyers and suppliers, those are complex processes and they take time to build out."
But even Harbin, who was more pro-exchanges than most analysts, was somewhat skeptical that the exchanges could implement such collaborative procedures. "It just remains to be seen where those processes will be supported," Harbin said. "We'll have to look at it again in another 12 to 18 months to find out." |
