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Business exchanges look to regroup for 2001

Despite the setbacks of 2000, business-to-business marketplaces are still forecast to dwarf their e-tail cousins when it comes to size and value.

At this time last year, companies in the business-to-business market were the rage on Wall Street and among venture capitalists.

see special report: Head-on collision Software companies that build the marketplaces saw their stock prices skyrocket. Traditional offline businesses, like the chemical, auto manufacturing and construction sectors, lined up to buy the software and build marketplaces to streamline their business transactions with suppliers and business and logistics partners.

The two leaders in the business-to-business software market, Commerce One and Ariba, saw their stock soar from single-digit share prices at their public offerings in summer 1999 to triple-digit share prices a year later.

But by the end of 2000, several marketplaces had come under international antitrust scrutiny, while a market shakeout and skepticism about investing in Internet-related companies bogged down the new business-to-business boom.

There have already been some early failures.

"A number of companies didn't really have a business plan for staying afloat," said Tim Clark, an analyst with Jupiter Media Metrix. "They had one for establishing a marketplace, but they didn't have one for getting liquidity, to bring customers on board."

In September,, a construction marketplace, shut down because of financial difficulties. Soon afterward, used equipment and metalwork machinery exchange eSprocket announced that it was cutting its staff in half to reduce costs and build business. In December, online marketplace services provider Ventro said it planned to shut down its Chemdex and Promedix ventures and lay off about 235 employees.

But the size and value of business-to-business marketplaces may soon dwarf those of their e-tail cousins--even of such household names as and eBay.

For example, take Covisint--a massive business-to-business auto marketplace for as many as 40,000 companies doing business with the automobile industry. The exchange, which is due to go live in 2001, is expected to handle up to $750 billion in annual purchasing and, according to advisers at Morgan Stanley Dean Witter, could amass a market capitalization exceeding $10 billion by 2005.

Year in
review special report Overall, analysts estimate that the business-to-business market will grow from about $131 billion in 1999 to between $2.7 trillion and $7.3 trillion by 2004. In comparison, Forrester Research projects that e-tailer spending will reach $184.5 billion in 2004, up from $20.3 billion last year.

The sky-high business-to-business predictions still hold despite the early challenges online marketplaces have faced, analysts said.

In addition to shutdowns and job cuts, the sector has stared down antitrust investigations and vicious talent poaching among business-to-business e-commerce companies and their clients. The sheer size of the large marketplaces caused some concern for companies that had longstanding relationships with suppliers that might be jeopardized. And many smaller players feel squeezed by the larger marketplaces springing up for whole sectors, like chemicals or aluminum.

See 2000 timeline "Investors and independent exchanges got scared when the big brick-and-mortar companies came in with their consortiums," Clark said. "Venture capital firms thought there was too much risk in financing independent companies against the big consortium exchanges like Covisint."

In 2001, analysts expect two major trends: The larger marketplaces, such as Covisint, will become operational, and there will be an upswing for support software and technology companies that got hurt in the dot-com downturn.

"I expect to see a resurgence in customer resource management within the business," said Andrew Bartells, an analyst at Giga Information Group.

"I also see a renewed concentration on internal processes," Bartells said. "As online business between companies becomes standardized, companies will realize that in order to be competitive they'll have to focus on internal systems as well. We expect this to occur in the enterprise resource planning area especially."