"Brick-and-mortar companies tend to have partners they've dealt with in their supply chain for 10 to 20 years. Most don't want to tweak that by jumping on board an open marketplace," said Mike Qualley, a vice president at Commerx, which hit hard times with its online plastics marketplace, PlasticsNet, before selling it to VerticalNet in February.
"People by nature don't like change," Qualley said. "There was also the reality that manufacturers...tend to be slow to adopt new technologies."
It has been this cultural shift and the up-front costs and complexities of setting up the software and hardware to participate in a marketplace that has scared off many participants--and, in the end, doomed most marketplaces.
"To get started on eBay, you need a browser. To get started on Chemdex (a now-defunct exchange) you need a lot more," said Tom Eisenmann, assistant professor of entrepreneurship at Harvard Business School.
In 1999, at the height of the B2B craze, Gartner predicted that more than 100,000 online marketplaces would be operational by 2001, up from roughly 300 at the time. While solid estimates are hard to find, experts believe far fewer than 100,000 exchanges are in existence today. Tellingly, Gartner said last week that it has ceased tracking the growth of online marketplaces.
The strength of these massive exchanges is in reaching a critical mass of small merchants buying and selling online. And if these buyers and sellers are hesitant to join, it puts the entire enterprise at risk.
That's what happened at Pepmarket.com, an online exchange launched in December by Potomac Electric Power in the Washington, D.C., area. Executives at the power company decided to grow the public exchange out of their successful private exchange to cash in on the B2B craze.
But instead of becoming a cash cow, Pepmarket.com wound up costing Potomac Electric $1.4 million before it shut it down in March because demand for the service never materialized.
"Both buyers and suppliers are uncomfortable with the collaborative process that is the Internet," said Jay Demarest, former general manager at the power company and then-president and chief operating officer of the exchange.
"We found that suppliers weren't ready with their catalogs...and buyers were...slow to adopt the Internet as a vehicle for doing business," he said. "They're just not ready to adopt that technology in daily business processes yet."
Several other marketplaces, launched with high hopes just months ago, have also recently shut down.
In February, Dell Computer shuttered its Dell Marketplace, an online exchange for buying products from Dell or select third parties, after only four months of operation after it failed to attract suppliers. That same month, Chevron closed an online marketplace aimed at buyers and sellers of petroleum products.
Others are visibly struggling, notably Covisint, an auto industry exchange founded by General Motors, Ford Motor and DaimlerChrysler. Despite early promises, Covisint has been slow to get rolling due to technological complexity, administrative bickering and a souring market for B2B exchanges, analysts said. An early--and high-profile--Federal Trade Commission investigation also slowed progress. The FTC gave the green light to Covisint last fall.
Ready, set, jump?
Observers on the sidelines, such as Bill Westhead, say the online marketplaces haven't shown enough benefit to justify getting involved--part of the self-fulfilling prophecy of a marketplace that relies on huge numbers of buyers and sellers to keep it profitable.
"There aren't enough people using the marketplaces to make it worth joining," said Westhead, purchasing manager for Northwestern Memorial Hospital in Chicago. "No one has shown us anything that indicates this will work and save us money. And even though the manufacturers may see some cost-cutting, there is no guarantee that those price savings will come back to us," he said.
"A few are spending a lot of money and time on a leap of faith to join," he said.
Another piece of the puzzle is that even those who sign up have to spend time and money up front setting up their systems. Sandy Kemper, CEO of eScout, a marketplace targeting local businesses, said that effort took some clients up to nine months--a lifetime in a sector where numerous exchanges have failed within months of launching.
"The vast amount of companies out there are not early adopters of the latest technology," Kemper said. "It is not just putting up a Web site and hoping everyone will come on board.
"It was a challenge for us to implement and then customize what is essentially an 800-pound gorilla," he said. "This is clearly a challenge for many others out there too. B2B has a lot of complexity."
At PlasticsNet, it was necessary to force participating companies to implement a new technology and business process that hadn't existed before.
"That was asking a lot," Qualley said.
Meta Group says B2B marketplaces must switch from sales-based models to setups that focus on collaboration if they are to survive.
If a company plowed ahead and put the proper technology in place, a larger though less tangible problem remained: how to overcome cultural barriers to adoption.
More to it than money
In a world where deals are still done over the phone and by fax, and sealed with a signature or a handshake, these large, sometimes anonymous public exchanges are a kind of culture shock.
This alone may be the Achilles' heel of many public exchanges, which assumed that buyers were only searching for the best price on goods and services.
"Customers are not interested in auction or open exchanges because many have multiyear contracts (with suppliers). They're concerned with quality and service as much as price," said Andy Cohen, vice president of marketing at Instill, which provides e-commerce services to the food service industry. "They want to buy the right product from the right supplier and not necessarily get the lowest price today."
But while many public exchanges are stalling, private exchanges are poised to become even more popular.
Keeping it private
The private exchanges, with restricted membership, closely parallel the 30-year-old electronic data interchange technology--wrapped in Web clothing. The exchanges, used to link a company to its key partners and suppliers over the Web, will survive and possibly thrive as more companies revamp their back-office systems.
Private exchanges may prove more successful because they "set up individual customers with their suppliers, not trying to change processes, but make them more efficient," Cohen said.
Several executives, even at failed marketplaces, agree that the public online exchange will eventually succeed given time to acclimate business owners to the new technology and business culture and being sensitive to customers' needs.
"The Internet is a vehicle that companies looking to control their costs" will move toward slowly, Demarest said.
"The bottom line is that you need a real business model" where a marketplace meets the needs of buyers and sellers, said Richard Alt, president of ICS FoodOne.com, a food industry marketplace used by 121 suppliers and 14,000 stores.
"There were a lot of great ideas out there that lacked a solid business model," Alt said. "They built something online, but it didn't necessarily meet the needs of an industry, and it didn't survive."