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Top vertical markets for B2B transactions
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But now there's a better way, and it's being provided by Internet-based, third-party marketplaces, such as e-Chemicals, e-Steel, MetalSite, the PlasticsNet and ChemConnect. Forrester Research estimates that business-to-business e-commerce totaled $43 billion in 1998 and could reach more than $1.5 trillion by 2003. Most of this activity occurs on seller sites, such as W.W. Grainger, Intel and Federal Express. The far more interesting trend is that 15% to 20% of business-to-business e-commerce is transacted through third-party marketplaces. Forrester predicts total e-marketplace transactions could hit $500 billion by 2003. What an e-marketplace offers is the ability to process large volumes of highly specialized information at Internet speed. A buyer can disseminate complex product specifications to hundreds of suppliers with one keystroke, and can view bids that are updated continuously on a personalized home page. A buying/bidding process that often took weeks can be reduced to 24 hours, and in some cases, 24 minutes. E-Trons Systems of White Plains, N.Y., and Mountain View, Calif., set up its e-Marketplace over the summer, partnering with IBM Global Services to connect bidders with suppliers of electronic components.
According to e-Trons Chairman and CEO Joseph Jeng, 85% of a typical buyer's time is spent chasing information, dealing with paperwork and analyzing spreadsheets. The real buying, negotiating a good price, takes up only 15%. From the sellers' perspective, the problem is getting your product noticed by buyers who have to review specifications on 300 or so parts for one widget that fits into a larger gadget.
At e-Trons, a buyer personalizes a page on the Web site to reflect the subset of sellers he wants to deal with, personalizes how the RFQs within a given product category will be promulgated to sellers, whether broadcast or narrowcast. The buyer can customize an account page to the point where the quotes received on pricing can be simultaneously received by competing sellers, thereby building in an automatic, self-regulated "best-price" quotation component to the process.
"For one item, they type in what they want, click a button and send it out to the universe of bidders that they have customized to their purpose from the site," Jeng says. "Every time they get a quote back, they will have a notice on the screen. The system will tabulate all the quotations received, with clickable drilldowns for the buyer to see who it is, additional conditions, and they're laid out next to each other so buyers can quickly see and compare the conditions and parameters of each quotation."
Without electronic marketplaces, buyers have to do those cost comparisons by hand. "But with us, they don't have to. This speeds up transactions incredibly," Jeng says.
FreeMarkets, possibly the oldest of the e-marketplaces (in operation since 1995), focuses on bringing buyers and sellers together in more than 100 vertical markets, from coal to tax preparation services. FreeMarkets runs reverse auctions, which, unlike traditional auctions, are designed to drive prices down. Sellers continue to lower their prices until the auction is closed. "This is where suppliers bid for their business in real time," says Jane Kirkland, FreeMarkets senior vice president and chief marketing officer.
According to Kirkland, FreeMarkets boasts a market operation center to answer technical and commercial questions, enforce marketplace rules and attack unique situational problems, such as a bid submitted after the market closes or a disconnection occurring when a bid is made.
"We have a dynamic market-closing feature built into our software. In most cases the buyer and the market maker will set a parameter which specifies that if there's still active bidding at the time of market closure, then the time of market closing is automatically extended -just like in a hockey game. If a minute goes by after that without a new low bid, then the game is over," Kirkland says. This way, FreeMarkets ensures that suppliers continue to enter bids and to compete for business and that the buyer gets the most competitive pricing.
Fraud: A hacker could go onto an e-marketplace, represent himself as the purchasing agent for an airline and put in a bid for five million barrels of jet fuel.
The company selling the jet fuel believes it has a legitimate buyer and so does the e-marketplace, which expects a commission on the transaction.
Eventually, someone will discover that the bid was bogus, but, "there's no good information on how often that gets attempted what measures are being taken to prevent it," says Tim Evans, senior energy analyst at Pegasus, a division of Thompson Financial Networks.
Rogue sites run as fly-by-night companies are also a worry. A massive online fraud case has yet to happen, but that doesn't mean it won't.
Credit verification: "Much of the world's business is done on the basis of credit. As far as business-to-business transactions go, we're talking about credit lines that go into the billions of dollars," Evans says.
Evans says a customer may become overextended on credit and the e-marketplace might not find out until it's too late.
Spin city: Then there's the problem of 'fading', in which the e-marketplace shades the information on its site to its own advantage.
"How do I know, sitting in my office, that this site is giving me a representative picture of the market, as opposed to a site that is cleverly reflecting back my own pattern of transactions in a way that anticipates today I'm going to be a buyer rather than a seller and therefore doesn't give me a true reflection of the market, but 'fades' the market," Evans says.
For example, a major airline comes on a given site and asks for a quote for jet fuel. The airline seems a good prospect for buying jet fuel. The temptation would be to quote a price that's a fraction of a cent higher than the real price that the seller is willing to accept. This boosts the e-marketplace's commission, which is based on a percentage of total sales.
Evans says many sites routinely put their own spin on the information they supply, so a savvy buyer who doesn't want to be 'faded' may be forced "right back in the old world having to do my due diligence to compare prices by calling around or using my own search engine comparing prices on 10 different sites."
Related links
E-marketplaces have created too much buzz. Here's how to tell if their technology will live up to their hype.
Network World, 09/11/00.
B2B E-markets
Web-based trading floors bring buyers and sellers together at Internet speed
 
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Top vertical markets for B2B transactions
Subscribe to the E-commerce e-mail newsletter
But now there's a better way, and it's being provided by Internet-based, third-party marketplaces, such as e-Chemicals, e-Steel, MetalSite, the PlasticsNet and ChemConnect. Forrester Research estimates that business-to-business e-commerce totaled $43 billion in 1998 and could reach more than $1.5 trillion by 2003. Most of this activity occurs on seller sites, such as W.W. Grainger, Intel and Federal Express. The far more interesting trend is that 15% to 20% of business-to-business e-commerce is transacted through third-party marketplaces. Forrester predicts total e-marketplace transactions could hit $500 billion by 2003. What an e-marketplace offers is the ability to process large volumes of highly specialized information at Internet speed. A buyer can disseminate complex product specifications to hundreds of suppliers with one keystroke, and can view bids that are updated continuously on a personalized home page. A buying/bidding process that often took weeks can be reduced to 24 hours, and in some cases, 24 minutes. E-Trons Systems of White Plains, N.Y., and Mountain View, Calif., set up its e-Marketplace over the summer, partnering with IBM Global Services to connect bidders with suppliers of electronic components.
According to e-Trons Chairman and CEO Joseph Jeng, 85% of a typical buyer's time is spent chasing information, dealing with paperwork and analyzing spreadsheets. The real buying, negotiating a good price, takes up only 15%. From the sellers' perspective, the problem is getting your product noticed by buyers who have to review specifications on 300 or so parts for one widget that fits into a larger gadget.
At e-Trons, a buyer personalizes a page on the Web site to reflect the subset of sellers he wants to deal with, personalizes how the RFQs within a given product category will be promulgated to sellers, whether broadcast or narrowcast. The buyer can customize an account page to the point where the quotes received on pricing can be simultaneously received by competing sellers, thereby building in an automatic, self-regulated "best-price" quotation component to the process.
"For one item, they type in what they want, click a button and send it out to the universe of bidders that they have customized to their purpose from the site," Jeng says. "Every time they get a quote back, they will have a notice on the screen. The system will tabulate all the quotations received, with clickable drilldowns for the buyer to see who it is, additional conditions, and they're laid out next to each other so buyers can quickly see and compare the conditions and parameters of each quotation."
Without electronic marketplaces, buyers have to do those cost comparisons by hand. "But with us, they don't have to. This speeds up transactions incredibly," Jeng says.
FreeMarkets, possibly the oldest of the e-marketplaces (in operation since 1995), focuses on bringing buyers and sellers together in more than 100 vertical markets, from coal to tax preparation services. FreeMarkets runs reverse auctions, which, unlike traditional auctions, are designed to drive prices down. Sellers continue to lower their prices until the auction is closed. "This is where suppliers bid for their business in real time," says Jane Kirkland, FreeMarkets senior vice president and chief marketing officer.
According to Kirkland, FreeMarkets boasts a market operation center to answer technical and commercial questions, enforce marketplace rules and attack unique situational problems, such as a bid submitted after the market closes or a disconnection occurring when a bid is made.
"We have a dynamic market-closing feature built into our software. In most cases the buyer and the market maker will set a parameter which specifies that if there's still active bidding at the time of market closure, then the time of market closing is automatically extended -just like in a hockey game. If a minute goes by after that without a new low bid, then the game is over," Kirkland says. This way, FreeMarkets ensures that suppliers continue to enter bids and to compete for business and that the buyer gets the most competitive pricing.
Downside risks
Yet, behind every boom lurks the possibility of a bust, and the generally rosy picture painted of the e-marketplace gold rush does concern a few analysts, who worry about credit verification, market saturation, potential for fraud, price collusion and the absence of any specialized regulatory body to oversee this new electronic commodities boom.Market consolidation
Conventional wisdom says there's only enough room for two e-marketplace sites per vertical industry, implying the potential for a shake-out down the road. "In vertical markets it's going to be a winner take all, if not a winner take most situation," says Ed McCabe, vice president of Merrill Lynch's Internet Research and its business-to-business specialist. In a particular industry, either you're going to be the New York Stock Exchange or the Philadelphia Stock Exchange. Given the economics of these business models, which are small margins on very big volumes, you need to get the lion's share of the volume and liquidity to generate a profitable business. I think the two site per industry estimate is roughly accurate and there are over 700 of these sites now."Collusion
Covisint is an auto parts e-marketplace created by GM, Ford, DaimlerChrysler and Renault/Nissan. Trade Ranger is an e-marketplace formed last April by 14 oil refiners. Both sites were evaluated by the Federal Trade Commission and have been approved, but their existence and the probability that there will be other e-marketplaces in which competitors team up to buy parts and supplies raises concerns about price collusion. One scenario has car makers getting together and setting an artificially high price for catalytic converters, putting catalytic converter suppliers at their mercy. "You have competitors funding, sharing, governing and operating a network that allows for the very efficient dissemination and sharing of information, which could be inappropriate information. There lies the potential to use these platforms for anticompetitive practices," McCabe says.Junk bidding
Kirkland of FreeMarkets also warns about "junk bidding," in which an unqualified bidder comes in with the best bid. "People will think they've achieved a match between buyer and seller, but after the market closes, they'll discover important conditions missing from the RFQs, that there were misunderstandings as to what was being bid on. There is a definite danger of junk bidding. These marketplaces have to be run in a disciplined, careful way, especially when dealing with large pieces of business." Kirkland believes junk bidding is an issue for each site to try and protect against, as there currently is no governmental oversight. "There's no regulatory entity to deal with this, no Better Business Bureau. This is a huge pitfall for the e-marketplaces. So for now, it's a matter for individual housekeeping rather than neighborhood watch," she says. Neighborhood watch could mean a consortium of business-to-business sites overseeing the swell of activity or a regulatory body that might work like the FTC. But if you're looking into doing business on an e-marketplace, here are some things to check:- Make sure the site has the capacity to handle negotiations for large commercial contracts. The site has to be robust, with a range of bidding formats.
- Make sure the site verifies the credit of its customers.
- Make sure the site will protect the confidentiality of your information.
- Try to find a site that transparently presents bids and prices without fading.
Related links
Kadet is a freelance writer in Cambridge, Mass. He can be reached at kadetg@aol.com.
Subscribe to the E-commerce e-mail newsletter Buzz Issue: Checking the B2B foundationE-marketplaces have created too much buzz. Here's how to tell if their technology will live up to their hype.
Network World, 09/11/00.
