'Meta networks' will pull apart B2B exchanges

By Bill Burnham These days everyone seems fascinated with business-to-business exchanges. These exchanges promise to automate buyingand selling within a particular industry and give big industrial markets the same kind of efficiency and transparencyfound in most stock markets.

By Bill Burnham

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 Internet exchanges.

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 transaction.

Next: Page 3 of 4 >

Previous page... What's more powerful than the net effect?

Newsletters

You have been successfully signed up. To sign up for more newsletters or to manage your account, visit the Newsletter Subscription Center.
See All
See All