Dead before they got started

The coming year will likely see the demise of many ill-conceived online marketplaces, before they barely pass the start line,...

The coming year will likely see the demise of many ill-conceived online marketplaces, before they barely pass the start line, writes David Bicknell

A year ago, chemicals marketplace Chemdex was described in one profile as "a chemicals superstore with an explosive cyber formula." It became the bellwether for the chemicals exchange sector, a sector seen to be so alluring that at one time there were estimated to be nearly 50 competing markets.

Last month, Chemdex effectively disappeared in a move which perhaps summed up the annus horribilis of the dotcoms better than any Boo, Boxman or Clickmango horror story.

By the end of a year where marketplaces became synonymous more with electronic exchanges than town and village stalls, one of the pioneers had disappeared. Chemdex was closed down by its parent, Ventro, alongside the closure of another exchange, speciality medical products market, Promedix, which Chemdex acquired in September 1999.

That it should have disappeared a year on, demonstrates that in the first half of this coming year the whole marketplace sector is in for a major shake-up. Many companies are facing the same tough decision taken by Ventro, a decision that looks likely to cost the company around $400m in restructuring charges.

So how has this come about? It revolves around a perception from a number of analyst groups, such as Delphi, that there are clear limitations in a transaction-fee based business model, forcing publicly quoted trading exchanges such as those operated by Ventro to seek new alternatives of gaining revenues.

Only two ways to go

There are two clear routes: make the most of their expertise in building an exchange to do it for others, or syndicate the application services used in the exchange.

Ventro had been trying to do both things simultaneously, while looking for buyers for the two marketplaces. But the demand for building exchange services has fallen, and, according to Delphi, the best case business model that companies such as Ventro can follow is one that features a so-called 'business services provider' (BSP).

Such a provider would offer proprietary software delivered as an online service, with specific community-oriented information, collaborative capabilities and embedded business processes. This service/software bundle would offer private communities access to the collaborative features of an exchange, through subscription-based fees that are a fraction of the cost required to set up an entire marketplace such as Chemdex, estimated at tens of millions of pounds.

The immediate cost to Ventro will see around 235 staff losing their jobs and $400m of restructuring charges necessary to cover the cost of writedowns on assets, and cancelling contracts.

Getting off the ground

The wider picture for many exchanges this year is that, as the disappearance of Chemdex, PlasticsNet and Promedix Covalex showed, many of them are in jeopardy. There is no future for thousands of exchanges, many of which have scarcely got off the ground, never mind begun trading.

Delphi has suggested that the demise of these three exchanges is just the tip of the iceberg, and many others will follow, resulting in the waste of hundreds of millions of pounds worth of expensively-written bespoke software and integration.

It adds that following the BSP model allows exchanges to amortise an investment that has already been written off, while also maintaining relationships with industry players developed during last year. The move is consistent with many marketplaces effectively playing the role of applications service providers - as if the world needed more ASPs.

That does not mean that every marketplace is history. Some will have a well-though out business model, or carry the weight of industry giants such as General Motors, Ford and Daimler Chrysler - which formed auto marketplace Covisint - to drive through success. Indeed, the challenge for such marketplaces is not having the weight to succeed, but moving nimbly enough to make that mass count.

But the warning signs are already there. In a year's time, we will have a clearer picture of whether the model for marketplaces really is that, just a model, or a reality.

A new survey, Corporate Performance and e-Business by Henley Management College has suggested that the imaginative use of e-business can lead a company to an improved, more integrated way of operating in the supply chain. It suggests that e-business is a strategic decision for the firm; is of growing importance in today's business landscape, and requires a clear and well-led approach to ensure effective implementation.

What it does not explain is how quickly the position can change. A year ago, Chemdex had a $4bn market capitalisation, was selling products from more than 1,500 suppliers, and was handling 2,000 transactions daily. One analyst firm put the global market for life sciences at around $15bn. Now, Chemdex has disappeared.

Anyone who believes 2001 will be less of rollercoaster ride for e-business than 2000 is in for a shock. Fasten your seat-belt.

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