Article 2 of 200
Features/The Tech Boom
The Exchange Economy
Erick Schonfeld
02/15/99
Fortune Magazine
Time Inc.
Page 67+
(Copyright Time Inc. 1999)
Online companies such as bookseller Amazon .com and auctioneer eBay
may be showing the Internet's potential to transform consumer retailing, but
the real action is in a less-hyped area: business-to- business e-commerce.
Forrester Research in Cambridge, Mass., estimates that businesses bought
and sold $43 billion in goods over the Internet last year, vs. only $8 billion
bought by consumers. By 2003 more than 90% of the predicted $1.4 trillion
in Internet commerce will be conducted between businesses.
The linchpin of this trade will be what Volpe Brown Whelan analyst Charles
Finnie calls "infomediaries": online exchanges that link buyers and sellers by
efficiently distributing market information. "Infomediaries are like
mini-Nasdaqs that will crop up all over the economy," says Finnie. He thinks
that within a few years, at least half of all business-to-business online trade
will flow through such exchanges.
This year online exchanges will take off, reaching old-line Rustbelt
industries. Infomediaries whose Websites don't yet have transaction
capabilities are adding them. To succeed, though, they must avoid the
mistakes of ill-fated past attempts, such as Nets Inc, which collapsed in 1997
after spreading itself across too many industries and trying to push them all
to accept e-commerce at the same pace.
Since different industries have different needs, focus seems to be key.
Industry exchanges are appearing for steel, paper, research chemicals,
hospital supplies, marine equipment, home equity loans, trucking--even bull
semen. Analysts say infomediaries are a cross between electronic catalogs,
efficient marketplaces that greatly reduce transaction costs, and content
libraries, which help companies make purchasing decisions. "I get confused
with all the jargon," says Pat Stewart, CEO of MetalSite, an online exchange
for flat-rolled steel, "but basically this business is about bringing together all
the necessary things for buyers and sellers to interact."
The appeal of an exchange is its ability to lower transaction costs, especially
in fragmented markets where prices are difficult to compare. For instance,
information on laboratory chemicals is so hard to find that a chemist can
spend five hours a week thumbing through thick paper catalogs. The price of
a single chemical can vary by more than 200%. Now
pharmaceuticals-industry and university scientists can search electronically
through multiple suppliers' products on chemdex.com and cut their research
time to an hour a week. The cost of processing a transaction has dropped too,
since scientists can place orders directly from their desktops. Similarly,
CareerBuilder, an infomediary that makes more than a million job matches
each month between 1,000 corporations and 22 online job-posting sites,
claims it can reduce the cost per hire from $8,000 (the national average) to
$900.
Wringing efficiencies out of each transaction isn't enough to guarantee
success. To win decisively, an infomediary must make itself the No. 1 online
source of industry-specific information. To that end, MetalSite, for instance,
acquired online rights to the content of trade publications such as American
Metal Market, Metal Center News, and New Steel. Software linked to
information-rich databases can also attract users to the sites. The National
Transportation Exchange (nte.net), for example, helps shippers find available
capacity on trucks and ranks shipment requests in order of potential
profitability.
Almost all infomediary companies are still private, but many, like Chemdex
and VerticalNet (which runs content sites for 33 industries), may go public
in 1999. This year will be a land grab in which rival infomediaries will try
to lock in buyers and sellers before anyone else can. Analyst Finnie believes
the operating margins of successful infomediaries should be better than those
of most software companies- -perhaps as high as 50%--because once an
infomediary is up and running, it will have little capital equipment, no
inventory, and declining marketing costs per customer. The IPOs should
provide an interesting show, but the real spectacle will be watching these
high- tech go-betweens drag the industrial economy onto the Net.
--Erick Schonfeld
{BOX}
COMPANIES TO WATCH
VERTICALNET PRIVATE This infomediary, which offers content sites for
33 industries, is set to go public this month.
CHEMDEX PRIVATE This site matches buyers and sellers of lab chemicals.
Watch for an IPO in 1999.
COLOR ILLUSTRATION: PHOTO ILLUSTRATIONS BY GEOFF SPEAR
{Montage of rows personal computers and people} |
