Consolidation Awaits E-Marketplace Industry

More than 500,000 companies will be participating in e-marketplaces as buyers and/or sellers by 2005, according to research by Gartner Group, Inc., but the number of marketplaces may dwindle in the coming years.

The developers and managers of these B2B marketplaces, which Gartner calls e-market makers, have begun to attract large numbers of buyers and have begun to use the buyers’ market power to attract sellers. The long-term effects of these new entrants in markets are yet unproven, but it is expected that benefits from their presence will far outweigh the costs.

“Independent e-market makers will help sellers increase the size of their markets by investing heavily in branding, as well as helping buyers meet their needs by attracting large numbers of sellers,” said Barbara Reilly, vice president and research director for Gartner. “Most importantly, independent e-market makers will manage massive quantities of supply and demand data and help foster the distribution of near-perfect information to buyers and sellers.”

Currently, Gartner found that e-marketplaces are generally limited to spot buys, excess product sales, and indirect procurement. As marketplaces mature, they will begin to mediate larger sets of buyer supplier relationships. Marketplaces will be forced to constrain their focus, producing an environment populated by three unique varieties of marketplaces:

  • The commodity marketplace — This marketplace will support high-volume trade of products and services of commodity or near-commodity status, as well as financial instruments such as futures contracts.
  • Business service marketplaces — These marketplaces will be focused on supporting specific inter-enterprise processes, such as those related to logistics, financial services, and maintenance, repair and operations (MRO) procurement.
  • Integration service marketplaces — This market will emerge with a focus on linkages and process definitions between trading partners to facilitate process-to-process integration.

“Individual marketplaces will find it increasingly difficult to support broad sets of commerce capabilities required to sustain relationships of differing intensity and duration,” Reilly said. “Marketplaces will have to align themselves strategically with business services partners as well as technology partners.”

Marketplaces will find themselves taking on the role of the traditional distributor as well as an application service provider (ASP), according to Gartner. With business process efficiency comes added value and traditional customer responsibility. Marketplaces must also take on the customer relationship management (CRM) initiatives through other channels outside of their Internet initiatives.

According to research by the Boston Consulting Group (BCG), total e-marketplace revenue in the US will approach $9 billion in the next four to five years. In five years, BCG predicts the e-marketplaces serving America’s largest industries should be expected to generate $350 million to $450 million in annual revenues, while e-marketplaces in most industries will generate revenues of much less than $100 million.

“While our projections show that e-marketplaces will grow rapidly, they won’t generate the kind of blockbuster revenues that many may have expected,” said BCG vice president Andy Blackburn. “Most of the value created by business-to-business e-commerce will be captured by the buyers and sellers that participate in these e-marketplaces. The benefits these players generate from participating in e-marketplaces will be greater than any return on an equity investment in an e-marketplace business.”

In its report “The B2B Opportunity: Creating Advantage Through E-Marketplaces,” BCG forecasts that by 2004 business-to-business e-commerce will generate productivity gains equivalent to 1 to 2 percent of sales; by 2010, this figure could grow to 6 percent, or roughly $1 trillion. Despite this, BCG believes the market will only support one to three major e-marketplaces within any given industry segment.

“Today, there are more than 700 e-marketplaces currently in operation. Most of them face an uphill battle to survive,” said BCG vice president Jim Andrew. “Ultimately, the US B2B market will be characterized by a handful of e-marketplaces giants that serve the overall needs of an industry; and scores of niche players serving a special segment within an industry or providing a specialized function across many industries.”

BCG predicts that over the next few years, e-marketplaces will need to bridge a gap between falling transaction fees and a rising demand for investment in collaborative services. For most e-marketplaces, transaction fees will drop below 50 basis points over the next two years, and other revenue streams such as financial services and logistics will not offset falling transaction revenues. Collaborative services, such as supply-chain forecasting and planning tools, are difficult and expensive to fully implement and will not be widely adopted for at least four to five years. These services are, however, critical to long-term sustainability as they could account for up to half of total revenues for e-marketplaces.

The challenge for buyers and sellers, BCG found, will be to place their bets on the e-marketplaces that will survive the shakeout. These market participants have an opportunity to influence the development of e-marketplaces to their advantage, but must be extremely careful when choosing how they allocate limited time, liquidity, and resources. Sellers, in particular, will be looking for ways to ensure that e-marketplaces don’t become venues for product commoditization, but provide opportunities to differentiate their offerings and deepen customer relationships.

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