From: Linda (firstname.lastname@example.org)
Date: Tue Jun 06 2000 - 20:07:06 PDT
'Meta networks' will put apart B2B exchanges
By Bill Burnham, ZDII
June 1, 2000 3:37 PM ET
These days everyone seems fascinated with business-to-business
exchanges. These exchanges promise to automate buying and selling within
a particular industry and give big industrial markets the same kind of
efficiency and transparency found in most stock,markets.
To that end, it seems as though not a day goes by without someone
claiming to be creating the Nasdaq of one industry or another. For
example, GM (NYSE: GM), Daimler-Chrysler (NYSE: DCX) and Ford (NYSE: F)
recently got together to form a giant auto industry exchange. Groups of
companies in other industries, such airlines and hotels, have also
recently announced their own exchanges.
Unfortunately for many of these new ventures, just as the fervor for B2B
exchanges is reaching its peak, new trends and technologies are making
centralized exchanges much less valuable and relevant than they were
just a few short months ago.
Blame it on eBay
The current obsession with these B2B exchanges is driven in large part
by the success of one company: EBay. EBay (Nasdaq: EBAY) pioneered
consumer Internet auctions and is seen as the poster child for all
What B2B exchanges like the most about eBay is scale -- the bigger eBay
gets, the harder it is for its competitors to keep pace. This is known
as the network effect. Network effects are a fancy way of saying that
the bigger a site becomes the more attractive it is for people to use
it. Thus, with network effects, successful Internet sites become like a
giant black hole where their increasing mass sucks up more and more
customers. Growth is allegedly infinite.
The network effect has B2B exchanges racing to market. The idea is that
the first exchange to generate network effects in each major market will
become the insurmountable leader, forever reigning over their particular
patch of the B2B landscape.
In an effort to cater to this enthusiasm for exchanges, an entire
industry has sprung up to help build B2B exchanges. You know the cast
already. CommerceOne (Nasdaq: CMRC), Ariba (Nasdaq: ARBA), Oracle
(Nasdaq: ORCL), i2 (Nasdaq: ITWO), VerticalNet (Nasdaq: VERT) and others
racing to provide B2B software platforms. Some of the earliest B2B
exchanges, such as Ventro (Nasdaq: VTRO) and Neoforma (Nasdaq: NEOF)
have even managed to go public. Meanwhile, exchanges such as Aribinet
and Paper Exchange.com have filed for IPOs.
Investor enthusiasm for exchanges is largely based on the belief that
successful exchanges will enjoy a near monopoly. These dominant players
will then throw off tons of cash as they collect a small fee on every
Unfortunately, just as exchange mania is reaching its peak, new
companies are threatening to undermine the long-term value of exchanges
by decreasing the network effect.
How are they doing this? By creating, for lack of better word,"meta
networks." Meta networks are networks of networks and they enable
Internet users to access numerous exchanges at the same time.
When users have such a consolidated view of all the possible exchanges
within a particular market, the value of any single market decreases
Just look at eBay. Lots of companies including Yahoo (Nasdaq: YHOO) and
Amazon (Nasdaq: AMZN) have tried to take on eBay with little to show for
their efforts. Buyers and sellers won't try new auction sites when eBay
gives them the greatest chance of completing a transaction.
Recently however, a large number of meta networks have sprung up. These
networks allow both buyers and sellers to go to one place and have
access to all of the different auction sites. On the buyer side, sites
like AuctionWatch and Bidders Edge enable buyers to search and monitor
listings across all the major auction sites. At the same time, on the
seller side, sites such as Andale are enabling sellers to post and
monitor their listings across multiple sites.
EBay is so concerned about these meta networks that it's suing some of
them, demanding that they pay fees to access eBay's database of
listings. EBay may control database access in the short term, meta
networks are gradually removing the auction giant from direct contact
with its customers. EBay is turning into one of many databases,
decreasing customer loyalty and putting pressure on fees.
Meta networks are pulling apart existing exchanges by using the
inherently distributed nature of the Internet. Indeed programs such as
Napster, which is essentially a meta network for MP3 file sharing,
demonstrate how powerful meta networks can become. (See last month's
column for more on Napster).
As far as B2B exchanges are concerned, meta networks provide a sobering
view of the future. Meta networks connect the individual B2B exchanges
together thus undermining the ability of any one exchange to generate
substantial network effects. Exchanges will compete on efficiency,
service, and price, but never generate incredible returns.
Why is this vision of the future important? Because it highlights the
fact that owning a successful exchange is unlikely to produce incredible
investment return, even if a given exchange dominates a market.
Just look at what are arguably the two largest and most established
exchanges in existence, the New York Stock Exchange and Nasdaq. While
together these exchanges dominate the trading of U.S. stocks, as a group
they generate less than $1.5 billion a year in revenue. The two
exchanges have margins that make them look more like commodity producers
In contrast to the exchanges, brokerages and processing firms make the
real money -- $100s of billions in revenue and $10s of billions in
Look for the three C's
These firms make money by providing investors with the three C's:
credit, clearing, and custody. All exchanges need the three C's in
order to operate efficiently. And all customers need the three C's to
complete a transaction.
The lesson for B2B companies is that the real money will be made by
providing the ancillary services and technologies used by all exchanges.
Exchanges won't matter. At Softbank Venture Capital, this realization
has led us to invest in private B2B companies focused on technology and
services, such as Perfect.com, Syntra, and Hubstorm, rather than the
high-flying industry exchanges.
Investors should approach the various exchange models with skepticism
and a focus on those companies providing core software technologies or
Sticking to these principles should enable investors to live through the
"Great Exchange Mania" and be all the richer for it.
Bill Burnham is a General Partner at Softbank Venture Capital and was a
former Wall Street E-Commerce analyst. Softbank is an investor in ZDNet.
For more information on Softbank Venture Capital and a list of current
job openings, go to www.sbvc.com
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