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B2B's danger zone

While they celebrated their ventures with unbridled enthusiasm last year, today many business-to-business (B2B) entrepreneurs are looking for ways to survive.

At a business-to-business bash in Los Angeles earlier this month, trapeze artists entertained guests by dangling from wires suspended from the ceiling. The circus act seemed to symbolise the precarious high-wire act many independent Net marketplace executives find themselves performing these days.

While they celebrated their ventures with unbridled enthusiasm last year, today many business-to-business (B2B) entrepreneurs are looking for ways to survive. "It's a tough Christmas for a lot of people in this space," says Tim Clark, a senior analyst at Jupiter Research.

For independent Net marketplace entrepreneurs, the gathering at the Jupiter Net Market Makers' Ground Zero conference looked like a funeral, with talk of consolidation, bankruptcy filings, closures and funding running out. During the conference, one of the Net market maker pioneers, Ventro, announced plans to close two of its Web marketplaces, resulting in write-offs of US$380 million to US$410 million and the loss of 235 employees.

Under the Chemdex name, the company was a pioneer in promoting the idea of linking buyers and sellers on the Web. The publicly traded company saw its stock soar to US$243.50 in late February, only to slide to under US$2 per share. The company said it will close Chemdex, a life sciences marketplace on the Internet, and Promedix, a special medical products marketplace.

It was the latest in a series of blows that have beset B2B electronic commerce.

Earlier in the year, analysts predicted online marketplace numbers would reach 3,000 to 10,000, but now Deloitte Consulting predicts that during the next two years more than 1,000 of today's 1,500 online marketplaces will fail or merge globally.

Already, a handful of high-profile sites have failed. Among them, Efdex, a marketplace for the food and beverage industry, closed its U.K. operations after blowing through US$65 million in venture capital during its five-year life span. In early November, Hsupply.com, an e-services company aimed at simplifying procurement for the US$50 billion hospitality supplies industry, closed shop.

Pandesic, a joint venture between giants Intel and SAP, announced plans to close its doors this summer because it couldn't turn a profit. The application service provider, launched in 1997, had about 400 employees in its offices in Japan, the U.K. and the U.S.

Dozens of other Internet marketplaces have been acquired by competitors as the industry consolidation continues.

The beneficiaries of the consolidation have been industry-sponsored, or consortium, marketplaces. The party is just beginning for dozens that have sprung up this year in just about every industry, from automobiles and airlines to chemicals and food products.

The big dogs have largely eaten the lunch of the smaller independent exchange operators.

"Companies that we thought were dinosaurs a year ago are players on the market today," Clark says. "The independent Net markets answered badly to some very serious questions. They offered too little and charged too much."

The independents that look most vulnerable are those in sectors dominated by two or three multinational companies, such as aerospace, auto parts and food processing. They are also the companies that don't have any proprietary technology to offer industry customers. To survive, many independents have formed alliances with the same industry giants they once thought were too slow to challenge them.

Others have merged with each other to build on similarities and strengths, such as the merger between seafood marketplaces Fishmonger and Worldcatch earlier this year.

It's the old "If you can't beat them, join them" strategy. Foodtrader.com and Novopoint formed alliances with Transora in late October that called for Transora to link to their marketplaces for food commodities. Transora is a marketplace backed by such consumer products giants as Coca-Cola, General Mills and Procter & Gamble.

E2open, a collaborative e-marketplace for the electronics industry, struck a deal with independent PartMiner in early October to have PartMiner provide services, technology and cataloging to e2open.

Other independents, such as e-Steel show signs of long-term success by filling a need for the industry giants. E-Steel landed Ford Motor as a customer by offering the automaker better planning, order management and tracking tools than electronic data interchange transactions provide.

Ventro, the parent company of Chemdex, is still forging ahead with several marketplaces, but those have brick-and-mortar players such as American Express and Tenet Healthcare as partners.

Chief Executive David Perry believes Ventro's real future lies in becoming a marketplace service provider - or MSP. In other words, Ventro will provide technology, expertise and services to assist other companies in building and running marketplaces. Still, it will be a tough road for the independents to climb.

Jupiter Research has identified more than 60 industry consortium marketplaces in North America, with many more in Europe and Asia-Pacific.

Close to 41 percent of the industry-sponsored marketplaces have begun conducting transactions - although rather simple transactions - and another 33 percent expect to go live soon.

One key reason that independent Net markets stumbled is they focused too much on transactions and not enough on the way companies do business, says Jupiter's Clark. Jupiter found that supply-chain efficiency was the top priority of consortium marketplaces. For independents, supply-chain efficiency was the fifth priority, cited by 19 percent. Independents see cost savings as their key driver.

"The independents were dealing with solutions on the surface, but in the long run we didn't think they would prevail," says James Sayre, president of Cargill eVentures. Cargill joined DuPont and Cenex Harvest Cooperative to form Rooster.com, an online marketplace for the agriculture industry, earlier this year.

"The Internet economy forces people to find whatever their core competency is. You can't find someone that will be everything to everyone," says Paul Janicki, executive finance director at eBusiness at Dow Chemical.

Dow is an investor in Omenexus, a chemical marketplace; Elemica, another chemical exchange; as well as BASF, Bayer, DuPont, Ticona and others.

But don't count the independents out, Janicki says. "People are starting to see niches and creating businesses to fill those niches. The net effect is a lot more business is going to be done online."