Ariba and Commerce One are falling all over each other these days announcing glistening new marketplaces for all sorts of big and dirty industries. The firms, which are two poster children of the business-to-business e-commerce craze, are building these virtual markets by courting corporate titans in the hope that these partners will be able to attract the deal flow necessary to bring the exchanges to life.
Ariba and Chevron on Wednesday said they will jointly build a new Internet exchange called Petrocosm for companies in the energy industry. On Monday, Commerce One trumpeted a similar deal with Shell targeting the oil and gas sectors. They both hope to attract some of the $200 billion spent each year on supplies and services to keep oil and gas companies running.
Internet exchanges, which bring buyers and sellers together on the Web, are at the center of most b-to-b activity these days. The prevailing thinking holds that firms that establish them fastest will reap the spoils of victory. So far, however, most of these exchanges have barely gone beyond sending out a press release and welcoming the world.
The few operating in sectors like plastics and chemicals have found that you can build it, so to speak, but they won't necessarily come. The key to any marketplace is liquidity, or the volume of deals flowing through it, and convincing heavy industry to conduct business in a new way online has proven exceptionally difficult for these fledgling Internet exchanges.
By linking with Chevron and Shell, Ariba and Commerce One are betting these giants will be able to lure or even strong-arm suppliers and business partners into using their energy exchanges. That may work, but they will have to convince the market that the exchanges are independent and do not serve corporate masters' interests.
Chevron and Ariba aim to achieve that by taking minority stakes in Petrocosm and offering equity positions to other key industry players. "We're doing this like an independent startup," says Chevron CTO Donald Paul, adding that ownership structure is a critical success factor for an Internet exchange, as well as the reason for the choice of a venture capital model. "Everybody is a minority owner."
Paul says there is probably room for both the Shell and Chevron exchanges, but eventually they may settle in various market niches focusing on certain parts of the country, or types of products. The game now is to grab the biggest chunks of the market and to learn as much as possible about the Internet economy from these exchanges. That learning, he hopes, will be transferred back into Chevron despite its minority ownership status in the exchange.
"The winning companies at the intersection of the traditional economy and the new economy will combine the knowledge of the traditional business with the culture of the new economy," says Paul. The Chevron and Shell exchanges certainly have both. Now they just need to convince energy firms that using the exchanges is good for them, too.