Private, Public Exchanges Specialize

SAN MATEO (08/04/2000) - With business-to-business exchanges either dropping out of the race for liquidity or combining, they are entering a period of consolidation and heading for a split along public and private lines.

Among the recent casualties are AviationX Inc. The commercial aviation exchange decided it will focus on providing software for aerospace companies rather than running its own exchange. After a 5-month stint, IndustrialVortex.com Inc. ceased operations last month, citing an inability to secure funding for the industrial automation products exchange. In contrast, WorldCatch.com and Fishmonger.com agreed to merge this week.

Industry analysts cited business reasons for the consolidation: unworkable fee-per-transaction business models, too many exchanges in each industry, evaporating venture capital funding, and no clear value to participants. The increasingly complex technology required to conduct business over b-to-b exchanges is also a weeding-out factor.

Randy Covill, an analyst at AMR Research Inc., in Boston, said that four distinct layers of technology -- the foundation, transactions, value-added services, and collaboration levels -- are becoming important in the competition for liquidity, or participation. "I also believe there will be shakeout based on the technical availability or lack of availability [among the exchanges]," Covill said.

If consolidation were not enough, two major camps are emerging for b-to-b exchanges: one for indirect procurement, usually independent, public exchanges; and the other for direct procurement, which are closed, private marketplaces. A typical case is Kingsport, Tenn.-based Eastman Chemical, which recently agreed to use LiveExchange from Moai. It is opting for private, online negotiations for direct procurement.

Echoing others, Jane Kirkland, senior vice president and chief marketing officer of Pittsburgh-based online auctions start-up Freemarkets, said the split is highly likely. The infrastructure that many exchanges are building first is aimed at transaction processing and catalogs, "which is well-suited for indirect procurement," Kirkland said. "Direct sourcing is a more strategic activity," she said.

Complicating matters more, most buyers involved in exchanges would prefer not to reveal their supply chains while doing direct procurement, said David Yockelson, an analyst at Meta Group Inc., in Stamford, Conn. In addition, many public exchanges that never had the capability for direct procurement also decided against providing it, Yockelson said. "Indirect is also easier because there are not the same time-and business-critical requirements," he said.

But for the future, independent exchanges are going to have a tough time of it, said Chuck Steinberger, founder and chairman of the defunct IndustrialVortex effort. "[They] don't have the liquidity," Steinberger said of the independents. "The venture community is looking for quick liquidity." Private exchanges also have a built-in advantage over their public counterparts because they are outgrowths of the brick-and-mortar realm, Steinberger said. "They can gain liquidity quicker."

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