Corporate Giants Form Exchanges

SAN MATEO (05/08/2000) - A rash of online exchanges last week made allies of fierce competitors and changed the competitive landscapes of a growing number of vertical industries.

The PC industry led things off by bringing together 12 different equipment manufacturers -- including Hewlett-Packard, Compaq, Gateway, and NEC -- to create an as-yet-unnamed company to address supply-chain inefficiencies. Each company is contributing $5 million to the venture, which is expected to be launched in 90 days.

Next up was the hotel business, which saw two giants come together in Marriott and Hyatt, also creating a yet-to-be-named enterprise. The hospitality behemoths will work with Orlando, Fla.-based GoCo-op as their e-commerce service provider and are looking to be operating later this year.

In addition, Oracle, Encore Ventures, and five house-building companies this week announced HomebuildersXchange, a b-to-b supply-chain exchange slated for the third quarter.

Rounding things out was the sprawling real estate industry, which managed to bring together 11 of the biggest players in various market segments to create a hybrid exchange/incubator company, code-named Project Constellation.

In addition to the extraordinary speed with which the competing companies patched together their exchange strategies (the PC companies did it in three weeks), the trend of powerful, established companies creating new entities to serve the overall market is catching on fast.

"The real trend here is these oligarchic exchanges where a small group of unquestionably important companies get together to start up a company for exchange," said Richard Villars, an analyst at IDC, in Framingham, Mass.

"Though in theory they are for the good of the industry, you have to wonder whose interests are they focused on."

Villars is skeptical about the future of the exchanges, citing the current glut and the difficulty of competing in a market in which all players achieve the same efficiencies. But more importantly, the effect of mega-exchanges on the market can have negative repercussions from the consumer's perspective.

"The healthiest industries are the ones that are not dominated by a few major players," Villars said.

This is why Project Constellation goes beyond a simple exchange and dabbles in the incubation market. Brought together in just two months, the companies involved want to have more control over the evolution of their respective markets, and the Internet investment arm permits that, according to officials of the companies.

"We want real estate entrepreneurs with good ideas to come to us first in looking for financing," said Hamid Moghadam, CEO and chairman of San Francisco-based AMB Property, an industrial real estate firm and founding member of Project Constellation. "We want to play a leadership role in establishing industry standards."

Because market control is one reason why HP and Compaq raced to create their exchange, it is also no coincidence that Dell is not a member of the new company. HP, Compaq, and others have struggled for years to compete with the efficiencies of Dell's supply chain.

Meanwhile, IBM decided to eschew its competitors' venture, opting instead start its own exchange with Ariba and i2 Technologies.

"We have not been turned down by anyone, but there are a number [of potential members] that are making a decision," said Carly Fiorina, CEO of Hewlett-Packard. "We do have space available for founding members."

Analysts are expecting some major shakeout throughout the exchange marketplace, and it remains to be seen whether brick-and-mortar companies will be able to form an effective online marketplace. Nevertheless, companies are scrambling to put their exchange strategies in place, even if it means cozying up with a competitor.

"If you really want to [know]why we are here, the answer is that this is the Internet at work," said Michael Capellas, CEO of Compaq. "Just look at the ways it changes relationships. It's open and it came together in the space of three weeks.That's Internet speed.

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