BUSINESS MODELS OF THE NEW INTERMEDIARIES

For the first time, entire industries can join centralized electronic exchanges that offer commerce among many buyers and sellers.  With a click of a mouse, companies can execute secure, real time purchases and sales on a global scale.  Online exchanges represent a nearly frictionless form of commerce.  Layers of inefficient and expensive intermediaries are eliminated from the transaction chain.  Other forms of business to business e-commerce like online catalogs and electronic integration of supply chains lack the ability to match a single qualified buyer with a single qualified seller.  None of these are true marketplaces where all participants have a say in the dynamic determination of price.  Even auctions fail on this count, because sellers can set reserve prices.  Many startups in B2B e-commerce are trying to garner enough buyers and sellers to make their exchanges standards within their industries.

For example, CommerceOne and Ariba Technologies have a common business model:  revenues from subscriptions and transaction fees.  And these companies recognize that by convincing suppliers and purchase managers to use online exchanges instead of picking up a phone and placing an order, they are daring to disturb the traditional business universe.  Ariba and CommerceOne specialize in buy-side servers, which connect one buyer to many sellers.  Buy side software is likely to generate the most revenues.  The sales of buy side software will grow form $220 million in 1998 to $5 billion in 2003 (InfoWorld , "Going Global", April 19, 1999).

To increase their revenues, companies that sell marketplace severs can take a cut of the sales of products and services that run on their software.  The value of transactions on marketplaces will grow from $290 million in 1998 to $20 billion by 2002 (InfoWorld , "Going Global", April 19, 1999).  Both Ariba and CommerceOne are banking on these figures to propel them into the 21st century.

VerticalNet, Unibex, and TradeCompass rely on a slightly different business model.  These companies gather about 95 percent of their revenues from advertising and sponsorship.  However, by year's end they are expecting advertising to account for 70 percent of revenues, with the other 30 percent coming from such areas as auctions, virtual trade shows, charging admission to online video presentations by industry pros, and lead generation fees, which could migrate from flat fees to transaction based charges.

A primary ad revenue generator for VerticalNet and something its trade print competitors can not match are "storefronts", which provide extensive space for product information.  Selling for about $6,000 each, these storefronts function as small Web sites within the vertical featuring information from a particular company.  Advertisers have set up approximately 1,274 of these storefronts across the verticals.  Potential customers at one of the storefronts can research a product, download information on it, and then email the company with a detailed lead, explaining what's needed, where, and by when.  VerticalNet collects a fee on the lead.  In addition, Requests for Proposals can be posted on the site, and suppliers can search through them and submit bids through VerticalNet.  In November 1998, VerticalNet generated about 19,000 leads (Inside 1 to 1, "Virtual, Vertical Trade Communities" February 2, 1999).  Each of these leads generated revenue for VerticalNet and with the growing B2B marketplace VerticalNet is planning on cashing in.

HOW THE NEW INTERMEDIARIES MAKE MARKETS

VerticalNet essentially works as a cross between a trade magazine publisher and a matchmaker, taking advertising and linking buyers and sellers who, quite often, did not know of each other's existence or of each other's products.  VerticalNet also has "transactional" storefronts that let vendors close sales online, and it runs auctions too.  Beginning in early 2000, VerticalNet plans to use technology that came with its acquisition of Isadra to create a search engine that will allow buyers to run "parametric" searches on the vendor catalogs in the various communities in order to find and compare products quickly.  Companies are part of an industry, not part of a group of other companies that are the same size.  So we look at businesses that have a natural vertical orientation with their buyers, suppliers, distributors and value-added middlemen.  If you're in the chemical processing business you have no concern for pollution control or food processing.  As a chemical processing engineer, you look at your world vertically.  You care only about the products you need to buy for the process and the factory you're trying to build or operate.  Engineers are looking for vendors that supply products needed for their business, but they're also looking for information surrounding their particular industry.  In addition they need a valid editorial source of information and comment.  And they would look for a marketplace of used and excess equipment, in perhaps an auction format.  They are also looking for a career center where they can browse resume databases.  VerticalNet provides all this for both buyers and sellers.
 

HOW DOES IT CREATE A SENSE OF COMMUNITY?

To lure traffic, VerticalNet provides the four C's:  content, community, context, and commerce.  Each site offers editorial content updated daily, including white papers written by industry leaders, interactive software, industry news, product information, directories, classifieds, and job listings.  VerticalNet's original content, supplemented by wire service, is updated daily and can be linked to other related stories or products, satisfying the "context" requirement.  As for community, the verticals allow professionals to interact via chat and live events, or visit a career center for job postings.  The thought behind this is that all this leads to commerce.
 

SALES CYCLE

"VerticalNet is a creator and operator of vertical trade communities. They leverage the interactive features and global reach of the Internet to create multinational, targeted business to business communities. These narrowly focused web sites attract buyers and sellers from around the world by catering to individuals with similar professional interests."(www.VerticalNet.com) VerticalNet is not a direct marketplace for the often expensive products its clients manufacture.  Instead, it is a lead generator, and "leads are e-commerce to the business to business world now."

Most business to business sales involve contracts and large decisions that you don't just give your credit card number and spend half a million dollars for a product.  "Identifying people you can get into that process is extremely valuable.  There aren't a lot of people on the Web doing that.  If you look at traditional trade magazine publishers, they're putting their magazines on the Web, but business to business marketers aren't all that interested in having another place to put an ad.  They want places to identify leads."(Smart Money, "How Fast Can a Leader Run?", August 20, 1999)

While many observers say the Internet is killing intermediaries in such areas as real estate and finance, Mark Walsh, President and CEO VerticalNet, insists that VerticalNet has a critical role to play.  "The disintermediation play really works when there's a fungible good, and airline seat, a car or business travel.  In many, many industrial sectors and purchasing environments you can't disintermediate.  The channel adds value."  That value comes from consultants, engineers, contractors and others who all play a role in installing what typically is a highly technical system.(Tech Capital, "VerticalNet Gets the Paper Out of Publishing", volume 12)
 

OVERCOMING E-INTERMEDIARY OBSTACLES

PRODUCT DESCRIPTIONS

As web users become more sophisticated, they are increasingly drawn to new centers created with content and buying opportunities designed specifically to meet their needs.  VerticalNet communities contain content, including product information in buyers' guides, supplier and products directories, daily industry news and articles, job listings and classifieds.  In addition, VerticalNet's sites enable business to business exchanges of information, supplementing existing trade shows and trade association activities.  By providing a forum, VerticalNet web communities attract thousands of visitors.  Many of these visitors are looking to buy or sell some product or service.  VerticalNet is more concerned with helping companies develop leads to sell their products online rather than VerticalNet marketing the products themselves.  In this regard, VerticalNet does not get involved with payment issues between vendors.

CREATING TRUST BETWEEN BUYERS/SELLERS

VerticalNet is capturing a significant amount of valuable information on the interests and purchasing behaviors of its community members - using "cookies" and other technologies to track their movements on the vertical sites.  As VerticalNet learns more and more about the individual members of each of its vertical trade communities and enables sponsors to deliver individualized messages to them, it enhances sponsor loyalty and trust between buyers and sellers.  The business marketplace inherently has more margin built into sales.  The consumer marketplace believes everything should be sold below cost, and it has no loyalty to a supplier.  The business marketplace believes in margins, and it has loyalty to the supply chain.

Because the buying and selling of industrial chemicals is an area of commerce that has traditionally relied on trust and old fashioned personal relationships, it has been resistant not only to online exchanges, but to electronic commerce in general.  That is changing, one of the things that is driving the chemicals industry's acceptance of e-commerce is the efficiency of online exchanges, which provide worldwide access to bulk quantities of industrial chemicals.  Companies can log on and anonymously post the chemical and quantity they want to buy or sell; then interested parties start bidding.  Once the bidding ends, the buyer and seller enter a chat room, work out an agreement, and close the deal.

However, without trust, this cyber process can easily break down.  The new exchanges recognize that they must soothe the fears of people who have worked in this industry for dozens of years.  Trust has become a commodity almost more valuable than the chemicals themselves.  Online chemical exchanges are therefore working quickly to establish, maintain, and enforce a sense of trust in this industry, where reputation and pre-existing relationships can easily take precedence over price.

In the virtual world, the aspects of traditional businesses that instill trust remain constant - high quality products and services, low process, good reputation, and personal relationships.  But trust can be harder to come by and harder to hold onto when dealing with huge sums of money and foreign governments.  The first companies to enter the electronic commerce arena are betting that industry experience and personal relationships are the best way to create trust.  These companies are trying to gather an impressive list of industry executives to help guarantee that its trades are on the up and up.  The company's list online profiles of its exchange members that include their professional associations (like the Chemical Manufacturers Association) in order to help firms decide whether on not they want to trade with a certain supplier.

For now, online exchanges have no choice but to do their best to become self-policing, trustworthy institutions.  They know that their potential for profit in the trillion dollar global industry is enormous.  So too is the potential for major problems.  So far, online exchanges are betting on trustworthiness to avoid those hazards.
 

Six Components of E-commerce Trust
Researchers identified 28 ways in which trust is established. They can be aggregated into six categories (see full report at www.studioarchetype.com/cheskin).

1. Seals of Approval:  Symbols like VeriSign and Visa, designed to reassure visitors that sites have established effective security measures. Known as “security brands,” these seals of approval testify to the safety of a merchant’s site, its technology and the network behind it.

2. Brand:  A company’s implicit promise to deliver specific attributes, based on a company’s reputation and visitors’ previous experience with its products. This concept of branding includes online and offline brand recognition, portal or other marketing affiliations, community building and the sense of a site’s breadth of product offerings.

3. Navigation:  The ease of finding what a visitor is looking for. Navigation is aided by understandable terms, the consistent placement of a navigational system, clear instructions to help shoppers make their way through

4. Fulfillment:  How clearly a site indicates the way orders are to be processed, its return policy and how well it explains the way customers can seek recourse to problems. The assurance that a customer’s personal information will be kept secure and private is a key attribute of fulfillment.

5. Presentation:  Ways in which the look of a site communicates meaningful information. On the home page, a site’s purpose must be clear to the first-time visitor.

6. Technology:  Visitors evaluate technology largely in terms of speed and function. How well does a site’s technology operate, and how quickly does each page load?