Going Once...Going Twice...SOLD!

Trading hubs are bullish on auctions as powerful entry points

Auctions might not be racy business models, but they sure are a quick and easy entry point for trading hubs ramping up vertical e-commerce sites. Auctions are also viable steppingstones for many maturing Internet sites on their path to becoming full-fledged e-commerce hubs.

One auction site that has followed this growth pattern is MetalSite, a business trading hub for the metals industry. Patrick Stewart, MetalSite's president and CEO, says the site launched in late 1998 as a domestic auction site for excess and used secondary steel inventory and has since blossomed into a global business hub that sells different types of prime and nonprime metal, including steel coils and aluminum. Along with expanding business has come the need to add logistics and financing capabilities-important components of a worldwide e-commerce hub.

The numbers are impressive. Stewart says the site handles 4,000 major transactions monthly, with average transactions valued in the $10,000 to $35,000 range. The number of suppliers has grown from a paltry three to 50, with a total capacity of moving 35 million tons. The hub's growth has attracted a $180 million infusion from the Internet Capital Group, making way for the company to establish MetalSite subsidiaries in Japan and Europe.

"Auctions were a low-risk opportunity for our sellers to get into the e-commerce market and a great entry strategy for us to create an instant marketplace to move excess and used products,'' says Stewart. "But in the past 18 months as we have grown, we have evolved into a hub that encompasses several business models-a product catalog at a list price, a request-for-quotation channel and a supply-chain company that shortens the order cycle.''

Other pioneers in the e-marketplace arena have similar growth patterns. VerticalNet Inc., which started in 1997 as an infomediary that offered advertising leads across 51 vertical markets, chose auctions as the e-commerce business model to easily transform its vertical sites into transaction platforms.

Mike Hagan, executive vice president of technology and business development and a founder of VerticalNet, says auctions make sense in areas where e-marketplaces look to sell capital equipment that has depreciated, and they quickly find buyers for excess and used inventory at a deep discount.

But, unlike the consumer side, as intermediaries mature, business-to-business auctions are required to provide several associated services, such as financing, escrow and appraisal. Once those value-added services are in place, e-marketplaces can add new inventory to their wares, supporting new business models.

"We don't look at putting auctions as a separate silo," Hagan says. "Businesses are looking for a product, and they don't care if they find it in a catalog or through an RFQ or as a customized quote and dynamic pricing service. The bottom line is you can't fracture the buying process into compartmentalized models.''

Leah Knight, an analyst for business-to-business e-commerce at the Gartner Group, agrees.

"Auctions fit situations where you have excess, used, off-spec, depreciated or brand-new products and equipment looking for a price discovery," Knight says. "Eventually, most vertical e-marketplaces will have to become global sites that don't restrict customers to deal with the time restrictions and one-shot deals of auctions.''

Knight, an e-commerce expert who tracks vertical e-marketplaces, has completed a market research study of business-to-business e-commerce growth. She estimates the overall value of transactional sales in business-to-business e-commerce to account for $7.3 trillion in revenue by 2004. That's a substantial growth for the market from the $145 billion last year and an expected market size of $403 billion in total transactions this year.

How much of this pie comes from auctions? Although Knight has not sliced the pie according to different business models, she expects auctions to continue to be a viable entry point for many verticals and even an added value for businesses that currently operate as exchanges or catalog aggregators.

ChemConnect Inc., a leading global exchange for bulk chemicals, is one such example. Launched as a real-time spot exchange in late 1999, ChemConnect's World Chemical Exchange has 4,000 leading chemical companies buying and selling excess inventory on its site. Average transactions range in value from $200,000 to as high as $5 million. Although the World Chemical Exchange started off as a public spot exchange, the intermediary has recently kicked off a private, closed auction site called Corporate Trading Room. Typically, a large chemical supplier invites preselected buyers and conducts a private auction to find buyers for very large quantities of excess or specific chemicals at a price above the typical contracted price. The auction is conducted at a preset time and lasts a finite period.

Linda Stegeman, senior vice president of marketing at ChemConnect, says one private auction yielded the company's largest single sale-$4.6 million for 11,000 pounds of an unspecified chemical. The entire auction took just an hour to complete.

"In the chemical industry, private auctions lend themselves to very large deals and to squeezing additional price efficiencies, making them a good complementary model for public spot exchanges where transactions are conducted in anonymity,'' says Raj Bhargava, ChemConnect's vice president of engineering.

"Eventually, we'll need three to five business models in our architecture, including e-catalog aggregation, auctions and spot exchanges, because as a global business hub, we need to provide commerce, community and content,'' Bhargava says.

Lara Abrams, who tracks business-to-business e-commerce trends for the Aberdeen Group, concurs with the Gartner Group's findings. Abrams says hundreds of e-marketplaces are sprouting up across a broad spectrum of vertical sectors, and many find auctions to be an easy and fast channel for quick ramp-up.

"E-marketplaces are finding that auctions are the easiest way to get into dynamic pricing models that bring about efficiencies to older pricing,'' says Abrams.

And she's right. An informal InternetWeek poll of 10 vertical segments, ranging from agriculture to lumber and railroad, indicates that basic, straightforward auctions and other such variations are the easy road to setting up business hubs.

Take farmbid.com. Barely six months since its launch, it is fast becoming a leading agricultural e-marketplace for the farming community, riding on an auction and Web co-op model. With just 23 employees, farmbid.com has created an auction site that lets 50,000 farmers buy and sell cattle, pharmaceuticals for cattle, used farm equipment machinery and animal health products. The company turned to third-party integrator AnswerThink Consulting Group to create an NT-based auction solution in just five months.

"We were able to get our site up initially in just three months using auctions as an expedient way to enter into the marketplace," says Ted Farnsworth, farmbid.com's CEO.

Then, there is Poultryfirst.com. With $3 million in funding and a lot of excess poultry inventory made up of eggs, chicken and turkey wings and legs, three entrepreneurs founded a New York-based e-auction house called Poultryfirst.com. Barely a month old, the site provides an instant global market to small and midsized producers-a market that's been privy to only large producers.

"Our goal is to be a global e-commerce portal for the poultry industry, but we are starting off with the auction model that provides an instant market for the excess and surplus inventory,'' says Johnny Vega, founder and CEO of Poultryfirst.com.

But that's just for starters. While Vega focuses on just the excess inventory market that accounts for $6 billion globally, the second and third phase of the business plan targets the $50 billion prime market. Capturing a solid piece of that market will require catalog aggregation and a comprehensive site that offers many services, including logistics, credit and content about the industry via news and research data about poultry science.

Two other new marketplaces riding on the auction platform include Cymerc Exchange Inc., which deals in used communications and networking equipment, and TekSell.com, which deals in used voice, data and video products.

Where To Turn?
So which companies are these auction operators turning to for software and architecture? Which vendors offer the different variations of auctions? Choices range from the straightforward ask-and-bid English auction to Dutch auctions (where several bidders share the purchase, and not just the highest bidder), as well as reverse auctions (where sellers bid for a customer's request for quote).

A mixed coterie of software vendors sell comprehensive auction products to service the burgeoning auction market. Some offer packaged software, others act as application service providers, and another small group acts as integrators providing turnkey architectures.

Asera, Moai Technologies, Intelligent-Digital, SpaceWorks and Trading Dynamics offer an auction software suite and hosted versions. Others, such as OpenSite Technologies and FairMarket Inc., act as application service providers offering auction capabilities increasingly for business-to-business commerce.

Customer demand for full-fledged hub solutions that can support auctions, exchanges and catalog aggregation is bringing new vendors into the field. For instance, Tradeum, a provider of e-market exchange software, is adding auction and catalog aggregation capabilities to its bundled exchange software called Xchange Suite. The reason is customer demand.

"Although auctions by themselves might be a smaller segment of the overall exchange marketplace, it's a way to execute transactions for excess and perishable inventory, and our customers want us to support it,'' says Zev Laderman, Tradeum's CEO. "The point is we need to have a flexible platform that allows it to evolve to all different models of e-marketplace transactions, be it auction, aggregation or an exchange.''

Some vendors have found that acquisitions are a shortcut to owning auction software for the e-marketplace. The recent acquisitions of auction software companies by e-commerce powerhouses Ariba Inc. and Commerce One underscores the importance of being a supplier of comprehensive solutions. Commerce One acquired CommerceBid.com while Ariba bought Trading Dynamics late last year.

Commerce One and Ariba are also using their respective e-commerce portals to provide auction services. Commerce One's Global Trading Web has hosted two large auction events for General Motors. Ariba offers auction services via its Ariba MarketSuite, previously Trading Dynamics' MarketSuite.

In the meantime, Oracle Corp. is transforming into an e-commerce maven in its own right and is offering auction software as part of its Internet Procurement Solution and as part of a hosted offering as it has done for Ford Motor Co.

The service offerings from Ariba, Commerce One and Oracle, however, are different in that these companies do not operate as digital marketplaces, but as application service providers.

"We do not operate as an intermediary, but we host sites for our customers in conjunction with them,'' says Lou Unkeless, Oracle's senior director of applications marketing and the person in charge of the software vendor's e-commerce strategies.

Auction Integration
Some hubs are turning to integrators to build solid exchanges because of the millions of dollars needed to build architectures in-house, time-to-market concerns and lack of internal skills.

Poultryfirst.com, for instance, has only 11 employees, does not have the IT skills and has to operate on a shoestring budget of $3 million. The company turned to Quidnunc, an integrator that's putting together the LiveExchange auction software from Moai Technologies with aggregation and content pieces from Art Technology Group, cobbled together with customized back-end integration. Over time, other components, such as links to logistics and financial services partners, and catalog aggregation and exchange software will be rolled into the architecture, says Poultryfirst.com's Vega.

Other start-up e-auction sites are happy to subscribe to auction services from application service providers, such as OpenSite and FairMarket Inc. One example is e-Wood.com, which is using FairMarket's auction portal. What are the advantages to e-Wood.com? With just $1 million in funding and 15 employees, e-Wood.com is already handling a substantial number of transactions for lumber materials between small and midsized contractors, retailers, wholesalers and sawmills.

Since its launch last October, e-Wood.com posts nearly 1,100 open listings daily and has conducted more than 10,000 transactions, with an average dollar value of $1,400. Some of the highest bids have reached the $50,000 mark.

The cost to e-Wood.com? Just a monthly flat fee of less than $5,000 and less than 1 percent commission of the total value of transactions. The site was up in two months. The alternative would have been hundreds of thousands of dollars for building the architecture and at least six months to a year to ramp-up time.

"Besides the immediate benefits of time and money issues, with an ASP we have been able to conduct different kinds of auctions-the English auction that's straightforward for large truckloads of lumber, Dutch auctions where several buyers share the purchase, and even reverse auctions where sellers are bidding for buyers' offers,'' says Arnold Kraft, president and CEO of e-Wood.com.

The railroad industry's crossrail.com is another auction marketplace that has turned to an application service provider to host its site. Barely a month into its launch, crossrail.com uses OpenSite's Auction portal and has already run nearly $20,000 in transactions of supplies and parts for locomotives, including entire locomotives, turbochargers, pistons and bearings.

"We chose the auction model because of speed, and it fits the secondary market," says Vinod Wadhwani, a co-founder and CEO of CrossRail. "Also, other models require more time and money to build and to launch.''

Wadhwani says the company also plans to add catalog aggregation capabilities in the future when it moves into new equipment space. He says building the auction site in-house would have meant hiring several IT programmers, a minimum of six months' waiting time and a $1 million budget. In contrast, subscribing to OpenSite meant a one-time flat fee of $20,000 (a sales volume it had already reached) and a monthly service fee of $1,000. To top it, the site was up in three weeks.

Off-the-shelf solutions, however, are not for everyone. Metal-Site, a pioneer that initially had to rely on in-house IT expertise to develop its basic auction capabilities, has continued to expand its hub architecture internally. However, the company relies on third-party software-such as WebLogic's middleware, WebMethods' back-end integration software, and application development pieces like Allaire's ColdFusion-to add new capabilities.

MetalSite's Stewart says that does not come cheap. The company has spent nearly $30 million on its global architecture.

ChemConnect, much like MetalSite, is relying on homegrown architecture for its e-commerce infrastructure with help from third parties for back-end integration. The hub is built on a Java-based application infrastructure, incorporating back-end integration software from WebMethods and application servers from WebLogic.

"I want to see some more maturity in the third-party auction and other business process software before we implement them, because I don't want to be caught in a situation where we are stymied when customers want advanced capabilities and we can't get it from the third parties,'' says ChemConnect's Bhargava.

Among trailblazers, VerticalNet is an exception in terms of building internal architectures. Because the company started as an infomediary and entered the transaction model later than others, it could take advantage of the latest developments in off-the-shelf software.

VerticalNet's Hagan says that the company is presently deploying OpenSite Technologies Auction suite and its Dynamic Pricing Toolkit in 35 of its 53 vertical sites.

Of course, the evolving auction model does bring with it a series of complex issues, such as training the constituency in handling complex bidding processes and use of software.

"The key to successful bidding and sealing of bids lies in training users to be savvy in handling complex bidding processes and doing it quickly,'' says Aberdeen's Abrams.

ChemConnect, for example, has an entire group of customer service representatives who train users on the auction and exchange software before they are signed up as active users on its site.

Auctions have served as a quick and easy way for e-marketplaces to launch their sites in a matter of weeks, rather than months or years. Moreover, auction forays have come from being the first step for many pioneers to being a full-fledged global hub that can handle a variety of models, including auction, aggregation and exchanges. So, whether you're sold or not, auctions are here to stay.