Web Marketplaces Face Industry Goliaths

SAN FRANCISCO (05/23/2000) - Most of the attendees at last week's Net Market Makers conference put on a brave face. But inside the neoclassical Imperial Ballroom at the stately Boston Park Plaza Hotel, one could almost smell the fear.

The semiannual gathering, a lovefest for b-to-b Web entrepreneurs, attracts many of the pioneers of electronic marketplaces. This one included Rusty Braziel, founder of Altra Energy Technologies; Mike Levin, CEO of e-STEEL; Dave Perry, CEO of Ventro; and Tim Stojka, cofounder of PlasticsNet.com. Hordes of other entrepreneurs with marketplace ideas showed up to hear from the giants in this tiny industry. Six months ago, when many of the same people met in Boston, the dominant attitude was blue-sky optimism - a sense that there was nowhere to go but up.

Armed with an idea, a couple of million dollars in venture capital and rudimentary electronic-marketplace software, these entrepreneurs were going to reshape American industry - and make millions in the process. Now, many wondered if they would survive. The reason: In the past few months, some 60 coalitions of billion-dollar companies have announced plans to build their own electronic marketplaces. The proposed marketplaces involve 278 companies, which control a staggering $3 trillion in annual purchasing, according to Credit Suisse First Boston. These coalitions, or consortia, have essentially frozen the growth of electronic marketplaces.

Smaller buyers and suppliers won't spend money to integrate with an independent marketplace until they see what the big boys do. Most independent exchanges are still flush with venture capital, but if the coalitions stall adoption for six months or more, many startups will find themselves on the ropes. "In November, everyone was thinking, 'We'll transform the world,' " said Kevin Jones, CEO of Net Market Makers, which put on the conference.

"There was no accounting for what could go wrong. Reality has set in." Perhaps, but speakers and attendees spent most of the conference trying to convince themselves that the consortium marketplaces weren't a threat. Jones set the tone in his opening speech, which was titled "The Phantom Menace"- a not-too-subtle dig at the coalition marketplaces, which are little more than press releases at this stage. "Right now, when [the coalitions] need to work at Internet speed, they're working at committee quagmire speed," he said.

"I think lot of them will break down and turn out to be nothing more than announcementware." Jones, a burly, bespectacled former journalist and early evangelist of Internet marketplaces, told the audience about a startup that had been approached days earlier by a coalition of six major players in an unnamed industry. He said the coalition members were begging "on their knees" for the startup's help. They were bitter enemies; they couldn't agree on anything. But their boards were forcing them to do this, and they needed someone to show them how. Although it's undoubtedly true that the coalitions have little experience with marketplaces and have enormous political issues to overcome, some of Jones' speech and much of the talk at the conference sounded like bravado.

"These consortia are saying they don't need the VCs and the market makers," said Charlie Finnie, a general partner at CMGI, during a session called "Net Market Defense Strategy - When Clicks-and-Mortars Strike Back!" He continued: "I think it's going to be that way for a while until they start to feel pain. Then they'll come calling." "The Goliaths need us" was a mantra recited over and over at the conference. Finnie told the audience about a "senior executive at a Fortune 50 company" who was working on an industry marketplace initiative. "He says it will never get past the press-release stage," Finnie said. "He's thinking of leaving the company and starting his own marketplace to take advantage of the opportunity. We may be looking back in three years and saying, 'Hey, there was a lot of fear created by these consortia, but they had to come to startups for help.' " Many of the conference attendees have been building or operating Web marketplaces for a year or more and were dismissive of the coalitions because of their lack of experience and reputation for being slow to adopt new technology. "They're coming together for defensive purposes," said Carl Bass, CEO of Buzzsaw.com, an electronic marketplace for the construction industry.

"They're afraid their competitors will do it first. Most of it's mumbo jumbo and will fall away." Another theme was that members of the consortia are bitter enemies and will never be able to work together. Eric Upin, managing director of Robertson Stephens, said he'd been working with some of the consortia and that "it takes them three months just to get a date to meet."

Upin was particularly skeptical of marketplaces being set up by groups of powerful suppliers, such as MetalSpectrum, a metals marketplace proposed by Alcoa, Kaiser Aluminum, Reynolds Aluminum and other metal producers. "On the sell side, it will never work because essentially with these marketplaces, suppliers are getting on stage naked," he said, "and buyers are given magnifying glasses." A few members of industry consortia were on hand for the bashing; they took it in stride. Dana Hermansen, strategy and business development manager for Hewlett-Packard's Trading Communities business unit, has been closely involved with an online marketplace that the computer maker is setting up with Compaq, Gateway, Advanced Micro Devices and eight other high-tech companies. "We're familiar with the pitfalls," said the soft-spoken Hermansen. "So far, I've been impressed with the amount of cooperation.

We've all agreed that we have to do it quickly, it has to be independent and it has to be liquid. Right now, that's what's driving the cooperation." The 12 tech companies have committed to having their marketplace on the Web within 90 days. Like most consortia marketplaces, it's little more than a concept right now. Hermansen said the founders are looking for a CEO to run the independent company that would be created to run the exchange. He said he wouldn't have a problem with a Compaq executive being chosen because the rules of the marketplace and the independence of the company that runs it would ensure impartiality.

"We all wanted to do this on our own," Hermansen said. "But we knew we couldn't control the medium and still have the liquidity needed to make it work. So we're leaving it to fate that market forces will drive it in a direction that is beneficial to us." Does he think that he'll be running to the dot-coms for help in two months? "We'll learn from their experiences," he said. "We're interested in partnering across the board, and we'll make acquisitions if it makes sense." Despite all the bluster from the startups, some were realistic about the threat posed by the consortia. Ventro's Dave Perry said his company would expand into highly fragmented industries where there are no dominant players.

Tim Stojka, CEO of Commerx, said he would look to connect to consortia marketplaces so that his customers would have access to products available on those sites. Christopher Vroom, an analyst with Credit Suisse, spelled out several scenarios for the future of independent marketplaces. The best case was that the consortia all fall apart and the dot-coms win. The worst case was the consortia hold liquidity hostage and demand 50 percent of a startup's business for nothing. The most likely outcome was somewhere in between. "The consortia will win in highly concentrated industries where commodity and spot-buying is prevalent," Vroom said. "They'll partner with independents in some industries.

And the independent marketplaces will grow and prosper in highly fragmented industries."

More than 2,000 people attended the conference, according to Net Market Makers' Jones. He said he was scared, before the conference, that the emergence of coalition marketplaces would kill the Web marketplace industry he's been nurturing. But he said he was reassured by the attendance this time around, up from 950 in November. He said he was also pleased with the determination he saw from many of the entrepreneurs. "I had this nightmare that I was the king of push technology," Jones said, referring to the once-hot technology that never caught on. "Now I know that isn't true."

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