Exploring the Enablers and Inhibitors of European B2B Marketsites
Introduction
Businesses have recently seized new Internet-based opportunities in terms of faster information flows as well as easier and cheaper access to markets, organizations, and individuals. Business-to-Business (B2B) trade has enjoyed a relatively quiet existence in the last 2-3 years with the establishment of new intermediaries that trade products/services between businesses. Less well-known newcomers such as Chemdex, Verticalnet, and e-Steel have become dominant companies within their own industries, with many businesses now realizing the potential benefits of the Internet as a new source of B2B trade. These new virtual intermediaries are represented on the Internet by a complex website, where buyers and sellers meet to exchange products and services.
At present, a week does not go by without an announcement of a new B2B marketplace being established. It is estimated that there are already close to 4,000 known marketsites worldwide, however, this number varies significantly according to the source. In addition, many marketsites are, at this point in time, still only a public announcement, without any transactions, CEOs, or actual suppliers or buyers.
It could be argued that this industry is still in an early growth phase, however at a similar pace to its rise the industry could easily be said to be already consolidating. Many are already questioning the growth projections, believing that at some stage the influx of new marketsites will slow down and winners will emerge, forcing the rest into acquisition or closure. The exact time of this decline in marketsites is suggested by some research organizations to be happening already with some predicting that there will only be between two and three marketsites operating within each industry by the end of 2001.
The objective of this white paper is to look at the barriers to marketsites - and the key success criteria that these marketsites will need to develop1. It should be noted that only marketsites operating in Europe are included, and the paper disregards U.S., Latin American, and Asian operators.
Value-Added Services
Value-Added Services (VAS) are defined as services that supplement the actual transaction, cataloging, and search capabilities. Recent research has highlighted the main services that marketsites currently offer and intend to offer in the future (see Figure 1).
Figure 1 - Current and future services
The five main services include financial services, logistics services, ERP integration, and settlement of disputes. It is clear that most of the companies surveyed intend to add additional services to their marketsite, and that the two most important services are "credit & payment" and "logistics services." If marketsites are to offer a "frictionless" environment, close links or partnerships with both a logistics provider as well as a financial institution are absolute necessities, because the parties do not necessarily have previous relationships and have therefore not built up any trust between them.
A key addition to these mentioned services is that of connectivity to other marketsites. The vision is that buyers are given a one-stop experience, where they can buy all relevant products and services through one marketsite. If it can not offer additional services and complimentary products itself, the marketsite is capable of connecting to other ones to ensure customer satisfaction.
Revenue Sources
Even though there seems to be a large influx of new marketsite companies, none of them are yet economically viable businesses and most of them operate at huge loses. Recent research2 predicts that only one in 20 marketplace initiatives will survive the early competition, which will result in many bankruptcies, acquisitions, and mergers. It is suggested that less than half of all current European marketsites have the revenue sources to reach critical mass. Marketsites appear to have a number of potential revenue streams (see Figure 2).
Figure 2 - Current and future revenue sources
The seller transaction fee seems to be the most predominant source of revenue, whereas the buyer transaction fee is less popular. In addition, very few companies seem to cover their costs through subscription, and it is debatable whether any marketsites generate revenue through buyer subscription. Advertising and selling market information is also seen as a major source of income in the future, which suggests that the suppliers are largely paying for marketsite participation, and may indicate that the buyers will not pay to join. In addition, many business models for the marketsites rely on being able to sell "market information" to suppliers in the future.
Market Conditions
For the different marketsites, it is important to understand the kind of market characteristics that companies look for before entering a specific market, for example:
- Market size: How big is big enough? Is there a minimum limit for how large the market must be to make the marketsite viable? If a market is large, when the product range increases, does the focus diminish?
- Volume: How much of all purchasing is generated outside existing relationships and can therefore be handled by the marketsites? If a majority of the buying is done through existing collaborative partners, then that share of the market must be discounted as potential transactional volume.
- Prices: What kind of trading is undertaken within the industry - commodities with spot pricing or are the products unique with high profits and with little or no competition? Also does the industry have a need for dynamic or static prices?
- Pain: When procuring, does the industry/market require much paperwork or hardly any? Are there any additional documentation or customs requirements?
- Volatility: Is the price fluctuating or is it stable? Large manufacturing companies dislike volatile prices and would like to see such instability disappear.
- Settlement: How are transactions normally settled. If the parties are anonymous, the settlement needs to be handled by a third party such as the marketplace, whereas if the parties are not anonymous, the two parties could easily handle the settlement themselves.
- Fragmentation: Is the market fragmented with many buyers and sellers or does it have certain dominant companies? Does the market serve buyers or sellers? Who are the essential companies to include in the marketsite, which will increase the transactional volume significant and lead to many followers?
- Adoption: Is the industry technically capable or will it take significant changes for the industry participants to adopt the marketsite technology? To what degree is the industry ready for a marketplace, both technologically and mentally?
- Product Specifications: How detailed are the product descriptions, and consequently, do the marketsites need to add these specifications to their catalogs? How often are products upgraded and new products launched?
- Inefficiency: Apart from these important market characteristics, marketsites must also focus on how they can drive out inefficiencies in their industry. Does the industry have a complex supply chain with multiple distribution layers? The general consensus is that when there is a complex supply chain infrastructure, there are probably also plenty of inefficiencies to be untangled by the marketsite.
Marketsite Inhibitors
For the different marketsites, certain aspects stand out as the main inhibitors to progress. The first real obstacle is capital, where several marketsites are quickly forced into re-thinking their strategy. To either let buyers or sellers take an equity share or to let the marketsite merge with a competing company. Beside the lack of capital, some companies also experience supplier reluctance, which stems from the suppliers' unease about the trend toward "commoditization," and the squeeze on the suppliers profit margin. As mentioned earlier, the suppliers also seem to be charged more by the marketsites than buyers.
A significant challenge for Pan-European marketsites is to overcome the differences within the European market and to cater to the different needs within the separate markets. A situation not helped by virtue of certain European nations having different legislation, such as the French law which prohibits the auctioning of new goods and Italian legislation against online auctions. Finally, the current European tax laws regarding stock options could also limit the proliferation of these new companies, and act as serious inhibitors for companies.
Finally, there is a significant challenge in the integration between the marketsites and the buyers' network. This integration is often difficult, time-consuming and expensive, and could be a real inhibitor for the marketsites, especially bearing in mind the lack of standardized technology platforms. A development already being observed is the partnering between Independent Trading Exchanges (ITEs) with Enterprise Application Integration (EAI) vendors and system integrators.
Growth Prospects and Marketsite Evaluation
It is widely acknowledged among industry experts that this new B2B industry will continue to grow in the near future. As shown in Figure 3 below, there are different views about what are the most crucial aspects for these marketsites in the near future.
Figure 3 - Reaching critical mass in B2B marketsites
Figure 3 shows that the main objective of the B2B marketsites is to reach critical mass and to offer additional services to their clients. There is also an indication as to how important market leadership is (24%) to the marketsites, which confirms the common belief that "winner takes all" or at least "winner takes most."
Marketsite Evaluation
There are five distinct indicators that investment firms look for as the basis of their financial evaluation of a marketsite:
- Traction: Two key indicators are the number of customers (both buyers and sellers) and the transactional volume of the marketsite. Even more important is the rate by which these two indicators increase on a regular basis.
- Strategic Partnerships: To expand industry intelligence and reduce costs, it is important to partner with the right companies to enable the increase in transactional volume.
- A large war chest: Having enough cash to attract both buyers and sellers to join the marketplace is vital. Going public is necessary for some companies; it not only increases the war chest but also increases the public's awareness.
- Technology platform: The platform must be robust, scalable, secure, and easy to use. It must also enable connectivity to other marketsites.
- Must be a leader: Due to there being room for only a limited number of marketsites, the marketsite must be among the one of the first in the specific industry.
Equity Relationship
There are often several companies involved in the formation of a marketsite, no longer just privately funded, but instead relying on investment from large buyers, large sellers, banks, consulting firms and venture capital companies. This creates a whole range of different equity agreements, as well as different types of "centricity" among the marketsites:
(1) The "buyer-centric" marketsites (owned by the buyers) have a clear advantage in that they only have to add their existing suppliers and eventually invite new ones; (2) For the "seller-centric" marketsites (owned by the sellers), the main obstacle is to attract the buyers to their sites; (3) For the neutral, independently-owned marketsites, these companies have to attract both buyers and suppliers.
When looking at the consortium marketsites, it is evident that they mainly appear in industries where the partners (buyers) control a significant percentage of the purchasing power within that industry. However, most markets, especially in the overall European picture, are moderately or highly fragmented - where few companies rarely control a significant share of the purchase power. These large marketsites are clearly disadvantaged because they are less agile than the smaller neutral marketsites. Recent research3 also describes additional problems for consortium sites as follows:
- Organizing: In fragmented industries with many buyers, it can be difficult to organize and agree on a company structure and equity share among the many partners.
- Sharing Value: The value proposition of the marketsite often favors some equity partners more than others, and it will be difficult to agree on.
- Managing: Finding the right management team that can cope with these highly politically charged companies is difficult. The employees may end up spending too much time on politics, and not enough time managing the company. Many consortium sites have had problems like these, and some are not even able to find and select a CEO.
Besides these problems, the buyer-centric marketsites can easily find themselves involved in legal trouble due to anti-trust legislation. However, this buyer equity problem can be solved by setting up a dynamic ownership agreement, where equity shares are matched to the partners' share of activity on the marketsite. Not only does it solve the equity problem, but it also encourages early activity.
Despite these equity problems, not everyone sees the ownership issue as a problem in the long run, and due to the fierce competition and focus on reaching critical mass and becoming an industry leader, mergers and acquisitions will rapidly sweep the industry. Buyers and sellers may give up their initial dominant intentions to enable the marketsite to survive. This would significantly change the ownership structure and will ultimately force the marketsites to become neutral, simply due to there being too many equity partners.
Conclusions
The objective of this white paper was to identify the enablers and inhibitors of the B2B marketsites in Europe. There are specific enabling and inhibiting factors that determine the type of marketsite (i.e., centricity). Marketsite structure, in terms of ownership, centricity, and focus, often reflects the current state of the industry within which the marketsite operates. Market fragmentation is the main determining (enabling) factor for the centricity of the marketsite.
Several different types of companies have ownership of these marketsites, forming various types of equity agreements. The companies with ownership include venture capital firms, buyers, sellers, software providers, consulting firms, and private funds. Agreeing on the equity share often involves new partnerships between competing companies, and can be both time-consuming and a real inhibitor for the marketsite. Many marketsites are trying new and innovative approaches to this equity share problem such as granting shares according to the partner's activity on the marketsite. Certain marketsites are also trying to involve suppliers and give them ownership to overcome supplier reluctance and to turn the marketsite into a real industry-wide exchange.
Involving either buyers or sellers as equity partners does have an advantage (an enabler) in that the marketsite achieves a real head start in terms of the transactional volume. Neutral marketsites with no buyer or seller partnership must be able to attract both buyers and suppliers to secure transactional volume. In certain industries, bringing together the main players may even deter other marketsites from even entering the industry/market.
The markets that the marketsites appear to be aiming for are large (with revenues of at least $7 billion), ranging from domestic, to European, to global markets. There would appear to be very little competition, which may suggest that markets are not yet saturated, leaving room for more marketsites. The number of marketsites within different industries would appear to depend on the type of product and the degree of market fragmentation. The structure of marketsites also depends on the trade practice, where some markets are still very fragmented and local. For these markets, marketsite service offerings must be customized to the local requirements, which can be an inhibitor.
The size and requirement of the initial investment to establish a marketsite is large, and as a result, capital is perceived both as an inhibitor and enabler for these companies. For some suppliers and buyers, ERP integration is a fundamental requirement, which further increases the need for capital investment, and which can be a genuine obstacle that slows down the progress of the marketsite. Most of the marketsites do not expect to break even before two years and have high enough cash burn-rates (a polite term for how much cash is consumed) to operate with losses for a few years. Other marketsites are dependent on either IPO or plan to become profitable businesses faster.
There are many different ways of generating revenue, and currently there seems to be a tendency that suppliers pay more than the buyers do. The main reason is that the buyers are used as a way to attract the suppliers through their spend and rarely the other way. This again shows that having buyers as members of the marketsite is a true enabler for the success of the marketsite. Only a few marketsites intend to get additional revenue from subscription fees, but see this fee as a major obstacle for attracting new buyers and suppliers. Neutral marketsites seem to be more dependent on seller transaction fees than the buyer-centric marketsites, as they have to attract buyers who do not want to pay for the privilege of buying. In the future, the marketsites expect to increase their revenue through advertising and the selling of market information.
Value-added services are also perceived as enablers and inhibitors. Most marketsites perceive value-added services as the main area where they can differentiate the value proposition. Other marketsites only see their role as facilitators of information, and as a result do not offer any of these services. The three main services include "logistics," "ERP integration," and "credit & payment." The findings also suggest that there is a need for the marketsites to be connected, which will enable customers to have a single entry point for a wider range of products and services. However, even though the customers want the services, there is a real concern that adding these services may slow down the marketsite's ability to get to market fast.
The main goal for the marketsites is to reach critical mass and to become market leader. Becoming market leader seems to be one of the most important enablers for the success in this industry, where it is believed that "winner takes most." Speed is therefore of the essence and the marketsites must be among one of the first in that industry. The marketsites also see increasing the product range as crucial, since some buyers want all their procurement done online, or else it is not worth it.
One of the main obstacles/inhibitors for progress seems to be the software - the technology that actually enables the companies to trade. Software solutions are both inadequate and flawed, and they do not have the functionality and capability to deliver the service that is required. These software solutions are therefore seen as one of the main inhibitors to the success of marketsites. Another inhibitor is reluctance from buyers, where they are unable to set up the equity agreement together with their partners, who may also be their competitors. Finally, there is also a significant reluctance among the suppliers who tend to pay more than the buyers, and who are worried about lower profit margins and the "commoditization" of their products.
Acknowledgements
The authors would like to acknowledge the assistance of Jon Bumstead at the E-Procurement Center of Excellence, Accenture, London, for generously providing access to research material and reports. Without his help, the research upon which this paper is based would not have been possible.
References
1 The research upon which this paper is based consists of 12 case studies of European marketsites from the following industries: airline; construction; consumer electronics; consumer foods; gifts and housewares; global energy; horizontal MRO; hospitality; life science; pre-owned industrial equipment; SME energy; and tobacco.
2 Favier, J. et al. (2000), "Euro E-Marketplaces Top Hype", Forrester Research, Inc. May 2000.
3 Johnson, B. (2000), "B2B Exchanges: Making Customer Ownership Work". Stanford University. http://www.netmarketmakers.com. (Accessed July 15, 2000).
