Gloomy Forecast for Online Exchanges

FRAMINGHAM (04/25/2000) - A new study of online trading exchanges predicts some rough weather ahead. By the end of next year, 85 to 90 percent of the independent business-to-business exchanges will be blown away, a report by AMR Research Inc. says.

The Boston-based firm found that 600 independent trading exchanges, backed with venture-capital funding, began operations in the past 18 months. The crop of startups will be reduced to between 50 and 100 by the end of 2001, AMR predicted.

"The reality is that in the next 18 months, through bankruptcy, mergers and acquisitions, that number will drop to two or three within each industry," AMR analyst Scott Latham said in the report.

Among the challenges facing the independent exchanges is that they are having difficulty driving sales at a time when they are also coming under more pressure to be profitable, the report said. Many suppliers are also balking at participating in buyer-initiated exchanges, the report said.

Other analysts agree that online exchanges face a shake-out, but they differ on when that will begin.

"The tables are beginning to turn," said John Campanale, a consultant at ARC Advisory Group Inc. in Needham, Massachusetts. "It's all hype at this point. .

. . It still remains to be seen how well any one of these can execute."

Execution will be key for the trading exchanges that do survive, Campanale said.

Successful exchanges will integrate supply-chain management, customer relationship management and enterprise resource integration functions into their services, the AMR report said.

"The question is how the IT infrastructures tie together as much as how solid the business models are," said Lara Abrams, an analyst at Aberdeen Group Inc. in Palo Alto, California.

Abrams says the competitive shake-out for independent exchanges has already begun. But a report released yesterday by Keenan Vision Inc. predicts that the rapid growth of exchanges will peak in 2003.

"Anyone who thinks we're going into a consolidation phase is way ahead of the market," said Vernon Keenan, founder of the San Francisco-based firm.

Keenan predicts that the total number of exchanges - independent as well as those set up by brick-and-mortar businesses - will grow to more than 4,000 by 2003.

"That's not a number I necessarily disagree with," said Latham, predicting that many businesses will set up their own exchanges. "The reason it's not too early for this shake-out is that if the (independent) exchanges are not going to make it now, they are never going to make it."

AMR's report also ranks the top 20 independent trading exchanges. The top five, according to the report, are Altra Energy Technologies Inc. in Houston; Ventro Corp. in Mountain View, California; CheMatch.com Inc.in Houston; SciQuest.com Inc. in Research Triangle Park, North Carolina; and PlasticsNet.com in Chicago.

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