The potential benefits of the molten-hot, new B2B market are enormous, but so are the potential pitfalls as industry giants muscle their way into the arena, Web builders take advantage of the high demand for their services, and an industry shakeout looms large.

The Big-Business Squeeze

Manufacturing titans in almost every major industrial sector are forming alliances to create their own buyer-driven exchanges. For example, Boeing, Lockheed Martin, Raytheon, and BAE Systems plan to build an online marketplace for the aerospace industry. Ford, General Motors, and DaimlerChrysler are creating an auto industry exchange. Forest products giants International Paper, Weyerhaeuser, and Georgia-Pacific have joined forces to launch a pulp-and-paper marketplace. The list goes on and on.

If you’re looking to start your own exchange, you could be up against some heavy competition. The industrial behemoths have an edge over start-ups due to the enormous amount of capital they have to put into the development and promotion of their exchanges. The idea is that vendors will flock to the well-funded, buyer-driven marketplaces because these will be the only venues in which the major buyers will participate. In this way the megaindustrial exchanges hope to gain critical mass, and it could work, given analysts’ prediction that the B2B market will be winner-take-most: This means that because gains for participants increase as more members join, few businesses will want to deal with the #2 market — the independent exchanges.

Similarly, if you’re a vendor in one of the industrial sectors where a buyer-driven megaexchange is king of the hill, you may be forced into doing business in a marketplace where prices are forced as low as possible and the rules are set by the buyers.

But do not despair just yet; there is reason for hope. First of all, does the term “price fixing” come to mind? If so, you’re not the only one whose antitrust sensors are going off. Government officials are beginning to scrutinize exchanges made up of competing industry giants. Look for antitrust cases to start popping up as the big-business marketplaces kick into high gear later this year.

A second potential weakness of the big-biz exchanges is their lack of neutrality. Mark Walsh, president and CEO of the successful Verticalnet, predicts a “revenge of the vendors.com” as suppliers rebel under the pressure of lowering their prices as far as they can go. Walsh also contends that independent ownership of exchanges is crucial to their success. He believes that all participants must feel that the marketplace is trustworthy: that everyone involved has open access to vendors and prices. It’s questionable as to whether the corporate giants, which are so invested in their own interests, will be able to provide such a neutral environment.

High Cost of Development

Another potential pitfall to be aware of when considering the creation of your own B2B is the high costs associated with developing your site’s back-end capabilities.

Whether you’re looking to create your own exchange or support transactions with the exchanges you desire to do business with, you will most likely face development prices forced high by the tight Web development market. Companies that specialize in building B2B sites and integrating information systems on various platforms are in extreme demand.

“Clients chase integrators the way teenagers chase rock stars,” says Christine Ferrusi Ross, a Forrester Research analyst. This results in high prices and, more often than not, poor service. An October 1999 Forrester report titled “Taming eCommerce Integrators” stated that many corporate customers are facing huge fees, long delays, demands for equity, and even abandonment from the Web developers that are supposed to be helping them. These developers then move on to the next lucrative project.

Of course, not all development companies are run in this way. But to protect your fledgling B2B company from such a devastating scenario, it would be wise to clearly outline the scope of every project for the development company you work with and obtain a contract that covers all the bases, allowing for proper recourse if the relationship with your developer should fall apart.

The Inevitable Shakeout

Another major hazard to B2Bs is the winnowing of the hot from the not. Not all these new businesses will succeed. Factors contributing to the coming shakeout include:

• An overcrowded market. Two dozen B2B firms plan to go public this year alone, and many industrial sectors have four or five exchanges elbowing each other for the hallowed top spot. As Patrick Walravens, an analyst at Lehman Bros., puts it, “For a year, B2B was a land grab. We’re now reaching the end of the land grab, and all the flags are in the ground.”
• Untested revenue models. B2B sites are so new, no one’s quite sure how to turn a profit. Even the most successful of B2B firms have yet to find themselves in the black.
• Wary investors. The volatile motions of the stock market with respect to B2B companies have put fear into venture capitalists, the major money source B2Bs depend on. Those businesses that jumped into the game early now have nervous investors breathing down their necks, and may have trouble securing further rounds of funding. Those new to the market may have a hard time finding investors at all. Investors are a fickle bunch, and if they don’t like the way things are going, they’ll pull out in a heartbeat. Take, for example, Neoforma, a medical supply exchange. The company’s shares opened at $13, rose to $73 in February, and now loll about in the $7 to $8 range.

If your B2B site is an exchange, you face the possibility of losing to your competitors for the above reasons. If you are a vendor dealing with a potentially unsuccessful exchange, you risk the time and money lost should that exchange go under.

The safest approach for an exchange in such an environment is to choose a niche marketplace where it will be less likely to face such heated competition. The best maneuver for vendors would be to avoid committing to doing business exclusively with a particular exchange. Now is the time to diversify.

Overall Strategies for Sidestepping B2B Pitfalls

Despite the tricky landscape, some experts believe there are definite strategies to staying alive in the current B2B marketplace. Below are a few tips floating around the e-commerce world.

If your B2B site is an exchange:

• Have a well-respected, established partner in your camp that will see you through the rough times and give you the clout needed to rise above the rest.
• Create a diversified revenue stream, thereby becoming a moving target for your competitors.
• Focus on earlier links in the supply chain not covered by the large exchanges.
• As with any business venture, develop a solid business plan and procure a niche for yourself.

If you are a vendor dealing with exchanges:

• Keep a close eye on which marketplaces are doing the best in your industry. These are usually the ones with the most value-added services to offer and the greatest number of players involved.
• If at all possible, do business with and support independent exchanges that offer impartial access to all vendors.
• Focus your attention and efforts on marketplaces that have the most buyers looking for the product you offer.

The B2B market is in the early phase of formation, and with that phase come the peaks and valleys necessary to hammering out an entirely new industry. Keep your eyes and ears open, there’s still much more to come.

To find out more about the emerging B2B market, read the following articles:

• Is There Gold under That There Hype? ^[1]
• B2B Exchanges: Industry Heavyweights Push Aside Little Guys ^[2]
• Middlemen Business-to-Business Exchanges Trim Costs and Time, Open Up Larger Markets for Goods — But Success Isn’t Assured ^[3]

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