How Will B2B Marketplaces Be Regulated?

Our friends in the B2B space got what they called an “all clear” the other day.

The Federal Trade Commission (FTC) announced it would allow, a B2B procurement market for the car-parts business put together by GM, Ford, Daimler-Chrysler, Renault, and Nissan, to go ahead. In response, shares of Commerce One, the B2B software outfit supplying the venture, started acting like an Internet stock again – up $12 in three days.

It may be premature to sound the “all clear,” however. For evidence you need to look no further than the FTC press release. “The Commission cannot say that implementation of the Covisint venture will not cause competitive concerns,” it said. “The Commission reserved the right to take such further action as the public interest may require.”

In other words, watch your step.

What the FTC is looking for from this market, and from all B2B marketplaces, can be summed up in one word – transparency.

Merriam-Webster has lots of definitions for transparency, but the one of concern here is “the quality or state of being transparent.” Transparent, in turn, is defined by the same source as “free from pretense or deceit,” obvious or readily understood.

For a market to be transparent, it must be liquid, with lots of buyers and sellers, and it can’t be open to manipulation. To use a poker analogy, it must be stud poker, with cards on the table. Such a market is a healthy market for both buyers and sellers. But it has taken 200 years (and a ton of mistakes) to create financial markets with enough transparency to satisfy investors around the world. We’ve never had such markets for industrial materials.

One reason for that is that, in most industrial markets (as in car parts) there are just a few buyers. The main protection for sellers is that the buyers aren’t sharing information – they can offer one price to the biggest one and another price to a smaller competitor. It’s in the nature of Covisint, however, that buyers will share information. That’s part of its power.

B2B marketplaces are now being organized in every industry. A year ago it seemed most were being organized by start-ups. Major buyers and their software vendors have pretty much taken over. There’s danger in that. But the danger isn’t being recognized anywhere.

It’s easy to see what will happen next. As soon as a major industrial company gets into financial trouble it will try to manipulate its marketplace. There will be a scandal, politicians will weigh in, and we’ll get a cure worse than the disease.

So it’s important that B2B marketplaces decide right now how and by whom they expect to be regulated. Financial markets have a multitiered system of private regulation with government oversight that serves them well. It’s a model the B2B marketplaces would do well to emulate. The alternative is that government will step into the breach, in the name of transparency.

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