Public Net exchanges may be losing their luster

The days of building huge public marketplaces for companies to connect their partners with online procurement and collaboration may be numbered, analysts say.

As companies start to look beyond the much-hyped gargantuan consortium marketplaces, many have started trying to establish private marketplaces and exchanges within their company networks to link their own business partners and suppliers.

The private exchange market is expected to surpass the public exchange consortiums and become the cornerstone of the $5.7 trillion in commerce transacted over the Internet, according to a report released by AMR Research this week.

AMR also said it expects Fortune 500 companies to spend anywhere from $50 million to $100 million to build private exchanges or marketplaces, while smaller companies will likely lease private exchange participation from the larger players.

The push by companies to build their own private exchanges is being driven in part by the need to have a single Web hub for e-business, autonomous from public marketplaces, according to the report.

Other analysts agree that more companies are looking to automate the procurement and collaboration processes between themselves and their supplier partners by utilizing private exchanges.

"We believe the number of consortiums is going to shrink to just 200 globally," in the coming years, said Laurie Orlov, an analyst at Forrester Research.

"Private marketplaces are a nice word for what used to be called extranets, which means almost any brick-and-mortar company could establish one," Orlov said. "We see this as a trend and a potential for software makers who are witnessing the public marketplace sector lose steam, like Ariba and Commerce One who will redirect their strategies," to fit this demand.

AMR describes a private exchange as the application system on which a company builds its trading interface to both suppliers and customers via the Internet.

One of the earliest makers of software used to build private marketplaces is Malvern, Pa.-based Atlas Commerce, which sells technology that enables companies to automate their sourcing processes, the management of supply and demand for their products and integrate commerce transactions with their suppliers' online systems.

"Private and public marketplaces are not mutually exclusive," said John Hanger, a marketing executive at Atlas Commerce. "Some of our clients play in both areas, but private exchanges are where our clients see the most high value."

Public exchanges have had problems with providing a real value proposition, industry watchers say. Some have made some headway in aggregating industry information and some supplier and manufacturer collaboration and transactions, but many public exchanges have struggled recently in gathering momentum.

For example, Covisint, a giant public exchange for the auto industry launched by Ford, General Motors and Daimler Chrysler, officially began conducting online auctions in October, but only between automakers and their hand-picked, highest-volume parts makers--familiar companies known as "tier one" suppliers. Among that select group, only about 50 suppliers have learned the fundamentals and have agreed to participate.

Covisint is working to pull in more participants and is continuing its search for a chief executive.

Analysts said many suppliers have had problems integrating their systems with the new auto exchange, showing that even the most well planned marketplace venture is having difficulty getting fully off the ground.

Private marketplace advocates say their sites have the luxury of existing on a company's extranet, the network built inside a company that enables communication and collaboration between it and its customers, suppliers and business partners, thus removing some of the boundaries suppliers are facing with larger public sites.

"For the past 15 years companies have been spending most of their time and money automating their internal processes," Hanger said. Private marketplaces are the next step of development, providing an external view to these automated internal processes, he said.

Start-ups like Atlas, as well as old-line intranet and extranet software players like IBM subsidiary Lotus, which touted its existing Domino and Notes product line at its user conference in January as natural, private marketplace enablers, are looking forward to a bright future in private marketplaces.

Indeed, AMR Research expects the private marketplace and exchange market to reach $35 billion by 2005. If even only one-third of every company with revenue exceeding $1 billion builds private exchanges, the market will become one of the largest application software markets to date, AMR says.