Exchanges Face a Market Shakeout

SAN MATEO (05/08/2000) - Following on the heels of dire predictions about the business-to-consumer environment, some see the proliferation of business-to-business exchanges forcing an intense shakeout among e-marketplaces as well.

In short, exchanges face evolution or extinction, say many industry observers.

Some exchanges fall flat because they simply don't add value to trading, according to Dror Liwer, CTO of Context Integration, a Web systems integration company in New York.

"Some companies out there are failing miserably in attracting liquidity and interest, and therefore dollar volume in their exchange. The reason they're failing is that they don't provide added value and they did not focus on business development up front, meaning they didn't treat it as a [complete] trading system up front," Liwer said.

Scientific product exchange Sciquest has struggled despite its sound business model, according to one industry observer.

In response, Scott Andrews, CEO and co-founder of SciQuest, said share price problems have more to do with glib market perceptions than with the exchange's performance. "We are in the beginning stages of a very aggressive ramp-up," he said.

According to Venkat Srinivasan, CEO and founder of financing service eCredit.com Inc., once suppliers and buyers establish a relationship with one another, the exchange loses its value.

"Most exchanges have a big issue that once buyers and suppliers are introduced to one another and have a relationship, they no longer need the exchange," Srinivasan said.

The estimated 600 or so exchanges will dwindle to about 50 over the next two years, said Randy Covill, an analyst at AMR Research, in Boston.

"There is no reason to have six, seven, or eight exchanges per industry," he said.

In such a shakeout, a recent Gartner report predicts the winners will be exchanges that boost their value to customers, adding services such as credit validation, financing, logistics, and collaborative demand planning.

Erica Rugullies, an analyst at Cambridge, Massachusetts-based Giga Information Group, identified several more possible services for exchanges, including the capability to learn prior behavior via data mining, supplier ratings, tax calculations, news feeds, and chat rooms.

Exchanges such as Ariba Inc., ChemConnect, Gofresh, VerticalNet Inc., Chematch, and Commerce One Inc. are heeding the omens by offering services such as logistics, multilingual auctions, and payment capabilities.

Ariba recently partnered with i2 Technologies Inc. for logistics and freight, and with American Express Co. for an interoperable payment engine with pay-upon-shipment functionality, said Jon Corshen, vice president of product marketing at Ariba. Ariba also offers liquidation and sourcing services.

"We cannot afford to have each company do it themselves," Corshen said. "Not every company can figure out how to deport payments. Not every company can figure [out] how to do logistics. Not every company can figure out how to do order routing and put in the messaging code on their own. And they're going to turn to a set of network commerce services, and that's really a part of our major imperative."

Commerce One recently deployed auctions allowing English-speaking suppliers and buyers to buy and sell in Mandarin Chinese, Spanish, and Indonesian, according to Liron Petrushka, vice president of auction services at Commerce One.

ChemConnect recently announced logistics services, while PlasticsNet.com, Gofresh.com, and Chematch.com established partnerships with e-Credit.com to provide financing services.

Another saving grace for these exchanges may come in the form of their adaptability and interoperability, noted Jeff Fieler, an analyst at Dresdner Klienwort Benson Securities, in New York.

"Interoperability of exchanges is very important. You take the b-to-b Ariba solution and the Commerce One solution, [it is] something they advocate. [But] Oracle for example, most of their exchanges are stand-alone -- that's a strategic shortcoming," he said.

Once a company has integrated its back-end systems into an exchange, it is loathe to switch to another exchange, said Steve Banker, an analyst at ARC Advisory Group, in Dedham, Massachusetts.

Vernon Keenan, an analyst at Keenan Vision in San Francisco, said that solutions such as Ironside Technologies Inc. and Mercator appeal to businesses wary of being locked in to one exchange.

"Buyers and sellers wish to have flexibility in which exchanges they work with.

Especially at this early stage, we're not sure which of the new industrial exchanges are going to be dominating each particular vertical [market]. Members are wary of being locked in," he said.

Both Mercator and Ironside let sellers integrate once and plug in to multiple trading exchanges. Ironside also plans to offer services such as analysis of exchanges -- including transaction volume -- customized for the e-business later this year, according to Derek Smyth, COO of Ironside.

Aichin Voermanck, manager of e-commerce partnerships at Ariba, noted that b-to-b imperatives are shifting such that the way a customer is acquired is closer to the business-to-consumer model, in which attracting customers requires promotions and services.eCredit.com Inc., in Dedham, Massachusetts, is at www.ecredit.com. Ariba Inc., in Mountain View, California, is at www.ariba.com. Commerce One, in Walnut Creek, California, is at www.commerceone.com. Ironside Technologies, in Pleasanton, California, is at www.ironside.com. Mercator Software Inc., in Wilton, Connecticut, is at www.mercator.com.

Keeping current

Business-to-business exchanges are adding services to remain viable.

* Exchange analysis

* Customer behavior analysis

* Logistics/freight

* Payment

* Financing

* Liquidation

* Auctions

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