B2B bricks-and-mortar: all bark, no bite

On that day, if you remember, the brick-and-mortar consortia (BAMCOs) were born, with a simple, two-page release from Ford, General Motors and DaimlerChrysler announcing their intention to band together and jointly develop an independent Internet-based supply exchange for the auto industry (subsequently named Covisint).

Since then, no fewer than 60 BAMCOs have been unveiled: Sears and Carrefour joined forces in retailing; Kmart, Safeway, CVS and Albertson's joined with seven others to announce a venture in the food, general merchandise and drugstore sectors; Johnson & Johnson, GE Medical Systems, Baxter, Abbott and Medtronic announced the creation of a global health care exchange; IBM, Hitachi, Matsushita, LG Electronics, Nortel Networks, Seagate Technology, Solectron and Toshiba unveiled plans for an online marketplace for computer, electronics and telecommunications products; Chevron, McLane (a subsidiary of Wal-Mart) and Oracle announced plans for a marketplace for convenience stores and small-business retailers; BP Amoco, Dow Chemical, Bayer and Mitsubishi Chemicals joined eight other prominent chemical companies to announce plans for a global chemicals marketplace. And the list goes on...

Though few, if any, substantive details have emerged about these BAMCOs, the flurry of press surrounding them--in conjunction with the efforts of Federal Reserve chairman Alan Greenspan & Co.--has had a devastating effect on companies and investors involved in the e-markets industry.

One need look no further than the implosion of valuations across the sector over the past three-and-a-half months to gauge the dramatic shift in sentiment that has enveloped the industry. For example, WR Hambrecht's eMarkets index, which includes such companies as Ariba, Ventro, Commerce One, VerticalNet and FreeMarkets, has declined approximately 50 percent since the BAMCO announcement by the Big Three auto manufacturers, compared with an approximate 18 percent decline in the Nasdaq composite index.

We emphatically believe that pure-play independent e-markets will, in fact, survive and thrive. More pointedly, we expect the overwhelming majority of BAMCO initiatives to fail--sacked by enough operational, legal, logistical and technological hurdles to stretch from the auto plants of Detroit, Mich., to the airplane hangars of Seattle, Wash.

The following represents only a partial list of the most daunting challenges we see, any one of which has the potential to serve as a metal rod in the spoke of a BAMCO wheel:

Co-opetition
To understand the dynamics and underlying currents of a BAMCO-led marketplace, it is essential to remember who the players are and from whence they came. Specifically, most BAMCO participants have been (for years, if not decades) and should continue to be fiercely bitter rivals, embroiled in perpetual duels over market share, customers, price points, feature sets, and so on. We therefore place very little faith in their ability to suddenly subjugate the very competitiveness and ego that define their relationships in the name of an online marketplace.

Governance, ownership and structure
It is easy to issue a press release. It is, however, exceedingly difficult to transform that press release into a living, breathing organization teeming with people, product, strategy, revenue and profit. This transformation is likely to be exponentially more difficult for BAMCOs, given the competitive and historically antagonistic relationships among many of their participants (see "co-opetition," above).

With stories already surfacing that BAMCO meetings have been difficult to organize because members can't even agree on the city in which to have them, we think that slightly more pressing questions, such as, Who will run them? Who will own them? and How will they be organized? could take months, if not years, to resolve, let alone implement.

Technology
The technological complexity of any one BAMCO participant is mind numbing: dozens of hardware platforms around the globe, hundreds of software programs, thousands of hours of systems integration, implementation, and optimization, and likely billions of dollars in costs. Multiply these figures by the number of participants in any one consortium and ask yourself, How will these companies ever agree on one common technology platform?

The answer, in our opinion, is likely to be, They won't...at least not anytime soon. Assuming for a moment that they do come to some resolution, the installation and integration of the technology across all buy-and-sell-side participants are almost certain to take years or decades and cost exorbitant amounts of money--two considerable issues not lost on CEOs, CFOs and shareholders of publicly held companies.

Neutrality
By definition, a BAMCO involves the banding together of a handful of industry participants. Though this grouping may, in fact, be innocuous, it raises the concern among potential members (i.e., non-BAMCO industry participants thinking about buying and selling through the marketplace) that the marketplace is, in some way, biased toward the founding members or controlling parties.

The specter of an uneven playing field may, in turn, cause other prominent players in an industry to sit on the sidelines or, perhaps more damaging, to launch or join a competing marketplace.

Antitrust concerns
When dominant players in oligopolistic-like industries attempt to link arms and unilaterally change their relationships with suppliers or customers, it usually catches the eye of the Federal Trade Commission. This has already occurred on more than one occasion (e.g., the Big Three automaker marketplace and the BAMCO involving Sears and Carrefour) and should continue to occur in the future. Such investigations are, at a minimum, likely to stall some BAMCO efforts and may completely derail others.

Risks to vendor relationships and information flows
After spending years, if not decades, forging strong personal relationships with their direct product vendors, BAMCO participants may be hesitant to risk those relationships in an "open" online marketplace.

Relatedly, concerns about the sharing of sensitive business information (e.g., contracts for pricing, volumes, and so on) among members, many of whom, as we stated previously (see "co-opetition," above), have been vicious competitors for years, could cause further hesitancy among participants.

Though BAMCO domination is possible in a handful of more buyer-driven, oligopolistic industries, we expect few success stories to emerge from the projects announced to date.

Perhaps more importantly, as the buzz from their press releases wears off and the brutal realities of their efforts come to the fore, we expect the dark clouds hanging over the minds, actions and wallets of e-markets entrepreneurs and investors to lift, ushering in a period of renewed interest in, and demand for, independent Internet pure-play solutions.

The information contained herein is based on sources believed to be reliable but is neither all-inclusive nor guaranteed by WR Hambrecht + Co (WRH+Co). Opinions, if any, reflect our judgment at this time and are subject to change. WRH+Co does not undertake to advise you of changes in its opinion or information. In the course of our firm's regular business, we may be long or short in the securities mentioned and may make purchases and/or sales of them or options to purchase or sell them from time to time in the open market, as a market maker or otherwise, including purchases from or sales to customers on a principal basis. In addition, WRH+Co may perform or seek to perform investment banking services for the issuers of these securities. Most of the companies WRH+Co follows are emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in the reports included in WRH+Co Research may be unsuitable for investors depending on their specific investment objectives and financial situation and needs. No report included in WRH+Co research is a recommendation that any particular investor should purchase or sell any particular security in any amount or at all, and is not a solicitation of any offer to purchase or sell from or to any particular investor. For additional information that may be available on the securities mentioned, please contact WRH+Co.