By Adrian Mello

True to the infamous proverb, e-markets have clearly lived in interesting times.

Between 1999 and 2000, thousands of e-markets burst onto the scene in pursuit of the huge B2B e-commerce revenues that market analyst firms were forecasting at the time. At the peak of the B2B frenzy, e-market investment group ICG had a market capitalization bigger than that of General Motors, the world’s largest automobile manufacturer.

But then things went awry. In 2001, ICG’s market cap lost 95 percent of its value—not uncommon for e-markets and other B2B stocks at that time.

After the loss of investor confidence, many e-markets didn’t have sufficient backing to survive. It takes time to attract buyers and sellers to achieve the necessary trading volumes to cover operating expenses. Since last year’s crash, e-markets have attracted so little media attention you may think the entire concept is dead.

Not so. E-markets—also known as e-marketplaces, exchanges, trading hubs, and a host of other terms—have been quietly evolving and slowly finding their financial footing. In fact, at least six e-markets within the Global Trading Web Association (GTWA) will become cash-flow positive this year, according to the association’s chairman, Sandy Kemper, who is also CEO of eScout, a financial services e-market.

Many analysts believe e-markets are now poised for steady—if not stellar—growth. Giga Information Group forecasts that by 2005, e-markets will handle more than $1.3 trillion in transactions in the United States, up from $48 billion in 2000. What’s more, a joint survey from Cap Gemini Ernst & Young and Line56 Research found that more than three-quarters of survey respondents think e-markets are either strategically important or a source of competitive advantage to their companies.

As enterprises reexamine e-markets, they should carefully consider the lessons of the past few years. Although e-markets’ prospects look much brighter now than they did a year ago, they continue to face a number of challenges—which should give enterprises reason to pause before setting up their own e-markets or entering into exclusive relationships with existing e-markets.

What follows can help you understand how e-markets work, the key lessons learned, and where e-markets are heading.

E-markets 101
At its most fundamental, an e-market is a Web site where companies buy and sell products and services using different trading and purchasing mechanisms, such as catalogs, bid-ask systems, auctions, reverse auctions, requests for quote (RFQ), and requests for proposal (RFP). Some e-markets use more than one mechanism to satisfy buyers and sellers with different requirements. For example, buyers might turn to a catalog to buy a regularly stocked item, a bid-ask system for spot purchases of commodity products, or an auction for opportunistic purchases, such as those that arise from the sale of excess inventory.

Reducing transaction costs is perhaps the most compelling benefit of using an e-market. E-markets can shave more than three-quarters off the cost of processing a transaction, which averages $79, according to the National Association of Purchasing Management. E-markets can also help buyers find competitive prices and permit sellers to reach more customers without significantly increasing sales and marketing budgets. In addition, transactions can be completed much faster than through normal channels, and they can take place around the clock—a real boon to companies with an international presence.

Horizontal or vertical
E-markets tend to go either wide or deep. Horizontal markets provide a wide range of general-purpose products—often called “indirect” or “maintenance, repair, and operations” goods—to a diverse set of businesses. These products—paper clips, office furniture, light bulbs, cleaning supplies, and the like—are necessary, but not strategic to a company’s operations. In contrast, vertical markets, such as Quadrem in mining, Exostar in aerospace, and E2open in electronics, serve specific industries with focused content, products, and services, including so-called “direct” goods, which are components and materials that become part of a manufacturing company’s finished products.

Ownership and access
E-markets fall into two or three major categories based on who can access the market or who owns and controls it. Access to e-markets is either public or private. In public markets, any business that meets the criteria established by the market’s operators can participate. Private e-markets, on the other hand, limit access to a specific set of business partners and are almost always owned and controlled by a single company.

Public markets are divided into two groups of owners. Consortia markets are owned and controlled by a collection of companies in an established industry. Independent markets are owned and operated by investors who don’t have a significant preexisting presence in the industry served by their e-market.

E-market challenges
E-markets were far more difficult to build and manage than most pioneering market operators ever imagined. The challenges are so daunting, in fact, that few new e-markets are being formed today. Here are several key challenges that operators must overcome to establish a successful e-market.

This is the single biggest factor that determines the financial health of an e-market. If buyers and sellers don’t transact enough business on the e-market, the market is significantly less valuable to all participants. The market is useless to buyers if it doesn’t have enough sellers to provide a diverse selection of products to meet demand. Similarly, suppliers will hardly find it worthwhile to sell their wares on an e-market if it doesn’t attract enough buyers.

If your company is considering setting up an e-market, don’t underestimate the difficulty of achieving liquidity, particularly if it’s a public market. If you’re thinking about using a particular e-market, evaluate how many other buyers and sellers are genuinely active on the market, the level of trading volume, and whether the market is sufficiently covering its costs to remain viable for the long haul.

Attracting enough suppliers
Market operators assumed that suppliers would flock to e-markets as a way to reach new buyers. Wrong. Fewer than 20 percent of U.S. suppliers have the means to transact business online, according to the Hurwitz Group. Why have suppliers stayed away from the e-market scene? Some suppliers view e-markets as a threat because they could give buyers the means to pressure them to lower prices through auctions and bid-ask systems. Suppliers are also reluctant to expose the buyers with whom they have pre-existing relationships to competitors.

Catalog costs
E-markets rely on electronic catalogs to list and describe the products they sell online. Given that some markets sell thousands of products in hundreds of categories, preparing and maintaining a catalog can be an immense undertaking. It’s also expensive—simply maintaining catalog data over the course of a year typically costs several dollars per part.

Markets can reduce these costs by aggregating existing catalog content or by outsourcing their catalog operations to a company such as Requisite Technology or Cardonet. If your company is thinking of setting up an e-market or becoming a supplier on an e-market, carefully assess how much time and money it will take to create or convert a catalog and maintain it.

Interoperability and integration
E-markets are built on different technology platforms, creating integration and interoperability problems for buyers, sellers, and market operators alike. Some e-markets use technology platforms from such vendors as Ariba, Commerce One, and Oracle that have done little to make it easier for companies to integrate their packages with those of other vendors. Worse yet, AMR Research found that 76 percent of all public e-markets are built on custom technology—making for a highly fragmented technology base.

If your company is considering building an e-market or even working with an existing one, make sure the e-market has sound technology underpinnings from an established vendor. “Markets that don’t have adequate technology are at risk,” says Kerry Lamson, chairman of the GTWA’s business interoperability committee. “Idapta was a small company that helped develop markets and supported some small companies—those that started out with it either changed technology, merged with other markets, or went away.”

According to Giga, Commerce One is the clear market-share leader for e-market platforms; Ariba, i2, SAP, Oracle, and VerticalNet also have sizeable e-market customer bases. However, with the exception of Commerce One, which continues to describe itself as “the e-marketplace company,” these vendors no longer actively promote their e-market platforms now that fewer new e-markets are being built.

Learning to cooperate
No single e-market is likely to provide all the goods and services buyers need. For example, a construction company might turn to different e-markets to buy lumber, steel, concrete, appliances, tools, and office supplies. (You can also arrange acquisition of leased equipment, such as a backhoe or excavator via equipment leasing e-markets.) Buyers are unlikely to go to the trouble and expense of integrating their procurement systems with each e-market sporting a different technology platform. Suppliers face similar set-up and integration challenges to selling their goods in multiple markets.

One answer may be banding e-markets together with interoperability agreements. Within the GTWA, a group of seven e-markets—called the Global Interoperating Group (GIG)—has agreed to let buyers move easily among the participating markets. In addition to using the same technology platform, the GIG markets have contractually agreed to provide common security, pricing, and service levels. Supplier content is also syndicated among the broader membership of the GTWA to reduce the cost of building and maintaining catalogs for the market operators and suppliers.

One interesting benefit of interoperability is that it makes it easier for e-markets to specialize in horizontal services. For example, GIG member eScout provides financial services, such as reconciliation and settlement, to 23,000 customers. Other markets within GIG can function as resellers of those services, allowing them to add value to their markets while increasing eScout’s potential customer base. It’s easy to see how different markets might specialize in various horizontal services, enriching the value of the entire network.

In any case, e-market operators rarely see themselves as entirely separate islands of activity. The likely outcome is that consortia, independent, and private e-markets will begin to link up with one another to take advantage of their various competencies as well as the economies and efficiencies that come from an extended network. For example, a manufacturing company might use its private e-market for design collaboration and product forecasting among its large suppliers, while turning to one or more public markets to work with smaller suppliers, make spot purchases, or sell off excess inventory.

Together, e-markets are slowly restitching the fabric of B2B e-commerce. Savvy enterprises are experimenting with a range of e-markets to discover which approaches work best and how to incorporate different e-markets into their buying and selling activities.

“The worst thing you can do is to commit to one model—it’s actually valuable to participate in different models,” advises Andy Bartels, research leader for e-business applications at the Giga Information Group. “You don’t have to use e-markets for everything. It may not work for your purchasing, but it might be good for your supply chain planning.”

Adrian Mello, Tech Update’s e-business columnist, has covered the technology business for nearly two decades and is a former editor-in-chief of Line56, Macworld, and Upside. Tech Update originally published this article on June 17, 2002.