FRAMINGHAM (02/18/2000) - If you believe the hype, every company but your own is on the Internet buying and selling at one of those business-to-business trading exchanges for industries such as health care, paper and steel. But the reality is that most of these Net market-maker sites have almost no transaction volume.
They do, however, have millions of dollars in venture capital at their disposal, so expect to hear more from established exchanges as well as the likes of I-many, bolero.net and Tradeum, all of which have launched in the past two weeks. Another start-up, NeuVis, has begun selling a $5 million software package to companies that want to start business-to-business exchanges.
Many trading exchanges have been created based on the old belief that if they are built, customers will follow. The reality is that they often lack commitment from buyers and sellers to use them. Even with some of the older trading exchanges - "old" meaning they've been around for more than two years - online sales transactions are few.
Founded four years ago and now worth about $9 billion, VerticalNet's goal is to support online trading in more than 50 vertical markets, including electronics, food, auto and computers. But so far, this Horsham, Pa., exchange, built on Microsoft's SiteServer, is only generating revenue from advertising its members' wares and is still in the red. The company wants to create revenue from processing transactions at a minimum of $45 per month for 25 transactions.
"We're just getting going," says Dean Sivley, a senior vice president at VerticalNet, which is working with The EC Company, a maker of software for enabling sites to support e-commerce transactions.
A report issued this week by the Boston consultancy AMR Research claims VerticalNet could well be a goner before long.
"VerticalNet will falter and provide several lessons to other independent trading exchanges," the report says, predicting the fall of VerticalNet will prove that a trading exchange can't survive on advertising and can't be all things to all people by trying to lure so may industries to one spot.
Other much-ballyhooed on-line marketplaces, such as those under development by Commerce One and highprofile partners like MCI WorldCom and British Tele-communications, are not yet operational. Commerce One admits none of its marketplace ventures are processing transactions yet, except for one started by General Motors, which is forcing its suppliers onto its Trade-Xchange site.
The few truly active business-to-business exchanges seem to focus on niches and at present rely on some rather simple technologies to bring together buyers and sellers.
San Francisco's Chem-Connect, for instance, started out in 1995 as a bulletin-board service for members such as Dow Chemical, BP Amoco and BASF to discuss the chemical business with suppliers. By 1999, ChemConnect started what it calls the World Chemical Exchange, which is based on a Java server that lets the exchange's 5,000 members anonymously bid for purchases that typically run more than $200,000.
Once a bid situation ends with a click to accept, ChemConnect generates a transaction confirmation to the buyer and the seller. The negotiation is then taken off-line, where the parties finalize purchase orders and shipment terms.
ChemConnect, which will probably go public this year, plans to integrate more complex XML-based order-processing technologies into its system.
There are other specialized business-to-business exchange sites that show signs of life. Among them are Altra Energy, for the electrical power industry; the National Transportation Exchange, which books truck capacity for long-haul carriers; and Chemdex, which hosts catalogs to sell pharmaceuticals to hospitals and research organizations.
In its report this week, AMR Research mentioned CheMatch.com and PlasticsNet.com as sites with steady revenue streams based on transactions. For the steel industry, metalsite.com and e-Steel, after lengthy technical ramp-ups, last year began processing orders auction-style for the steel industry.
According to the latest PricewaterhouseCoopers/Network World Venture Capital Survey, business-to-business exchanges were among the most popular targets for venture capital investment in the fourth quarter of 1999. Such companies received an average of $9 million apiece during the quarter, with a dozen exchanges funded for the health care industry alone. NeoForma, a Web site for health care facility planners in Santa Clara, received $70.5 million in funding from a group of investors.
I-many, a health care exchange announced this week, is funded with $22.5 million in venture capital from Insight Capital Partners and MSD Capital, Dell Computer CEO Michael Dell's investment firm. I-many, in Portland, Ore., plans to go live in a few weeks with a Web marketplace where hospitals nd manufacturers can buy pharmaceuticals and surgical supplies.
According to Tim Curran, director of I-many's consumer goods strategy, the exchange will have a product catalog that contains items for sale from big suppliers such as Glaxo, Wellcome and Nuvartis. I-many will take 1% to 2% of each sale as its transaction fee. I-many's plan is to complete each sale based on contract terms personalized for each buyer. The idea has caught the eye of some potential buyers, although I-many has yet to officially sign any.
"To be able to pick and choose what I want at prices I have negotiated could be time-saving for me," says Jim Korczynski, director and general manager of Cleveland's Northcoast Infusion Tech-nologies, which supplies intravenous products for home-care use.
I-many's Curran acknowledges that business-to-business exchanges are at the experimentation stage as they sort through technology issues and business procedures. "Business-to-consumer transactions are simple compared to business-to-business," he points out.
The challenge of receiving updated catalog information from multiple suppliers and providing personalized pricing to multiple buyers all at one site is hardly a trivial matter.
"The business-to-business exchange is a very immature industry with huge hype, but there's not a lot of people actually doing business," says Menachem Chen, CEO of Mercado, which makes software for aggregating multiple catalogs that can be viewed through one search engine.
About 400 companies, including Caterpillar and BellSouth, are using Mercado software for business-tobusiness e-commerce. But Mercado only has one customer using the software to anchor its trading exchange. That firm, outpurchase.com, plans to launch in a few weeks as a source for office goods.
Although the exchanges aren't nearly as busy as they'd like to be, industry observers are optimistic that all the venture capital isn't going to waste. In fact, AMR Research estimates business-to-business marketplaces will account for about $5 billion in transactions before the year is out.