Trading Hubs Get Down To Business

Whether it's extranet catalogs, auction sites, or even freight services that you're looking for, there's a site that can deliver the goods. Nearly 300 ventures are creating a new Web business model centered around vertical sectors.

They are building business trading hubs-also knowns as Infomediaries-that cater to business constituencies ranging from metal manufacturing to industrial machinery and trucking services.

These new trading hubs are eliminating the need for individual corporations to build their own extensive supplier and partner extranets. The idea is to create one-stop shops that bring sizable savings to customers, while delivering vast markets to sellers. In the process, the middle entities that run the hubs-dubbed the market makers-get a slice of the sale. Often, the cut can amount to between 5 percent and 10 percent of the value of the transaction, fees paid for by the suppliers. Typically in the past, offline acquisition costs have had to include hefty commissions for several intermediaries, accounting for as much as 40 percent of the purchase cost.

"These online trading communities are matching services for buyers and sellers-that's a win-win for everyone," says Charles Finnie, managing director and senior Internet analyst at investment bank Volpe Brown Whelan & Co.

"The key is that these trading hubs bring down costs for both buyers and sellers and are able to reach international, geographical markets without any major infrastructure investments," Finnie says.

These Web trading communities basically create electronic catalogs and automated procurement conduits. While their prime goal is to bring together hundreds of suppliers, manufacturers and buyers in one virtual spot, they encompass a wide spectrum of business models, including auctions and bids; and complex supply-chain, internal costing and financial models.

Finnie, who closely tracks the trading hub trend and the companies that run these sites, says the number of online trading communities has doubled to 300 within the last six months. The hub companies are drawing more than $500 million in venture capital and public investment, he says.

They're generating lots of revenue, as well. Forrester Research Inc. reports that vertical market trading hubs generated more than $753 million last year-still small when compared to $43 billion for the whole business-to-business arena in 1998. In the meantime, Volpe Brown Whelan expects trading hub revenue to hit $20 billion by 2002, when it projects there will be as many as 1,000 hubs.

Tip Of The Iceberg
Regardless of the numbers, both industry analysts and the infomediaries declare that the existing vertical portals are just the tip of the iceberg.

Mark Walsh, president and CEO of VerticalNet agrees. And he should know. Launched in 1995 as an information portal and digital meeting place for vertical sectors, the online company is building as many as 50 business trading hubs-sites that will be extensions of VerticalNet's existing information sites.

"The people coming to our site first wanted information, and then jobs, and then we provided leads to vendors who were advertising on our information site, and now they want to shop," says Walsh.

VerticalNet's goal is to become the master trading hub operator. It hopes to lure the 500,000 visitors that frequent the company's information sites every month to the forthcoming business sites. Further, VerticalNet is firming up technology licenses and acquisitions to quickly create its own catalog and procurement models. And the company plans to build country-specific catalogs and procurement models for the global market within several months.

Clearly, owning one's own technology has many advantages. "When we own the technology, we can quickly convert the half a million monthly visitors at our 38 [vertical information] sites and 1,600 advertising suppliers into lucrative trading portals that would offer one-click buying" says Michael Hagan, co-founder and senior vice president at VerticalNet.

VerticalNet last month acquired Isadra Inc., a company that developed an advanced software tool for quickly creating catalogs and executing real-time price updates and availability information. In addition, VerticalNet has licensed messaging software from WebMethods Inc. that will act as the glue between back-end enterprise planning systems and mainframes.

It is in the process of acquiring nearly 15-percent equity in e-commerce vendor TradeEx Technologies Inc. The Trade Ex product will let VerticalNet create different pricing models for different suppliers and set up previously agreed-upon contracts for volume purchases.

The result: "We will have e-commerce templates that can be used to quickly build robust vertical business portals that can provide back-end integration and are scalable," says Walsh. "We are not creating electronic versions of print catalogs, but will bring together content, context and community to build transactions."

The first of the VerticalNet trading hubs will be ready for business by the end of July and will be targeted at the electrical equipment and industrial products fields. VerticalNet will shortly announce distributor deals with Graybar Inc., a leader in the electrical market, and others.

Ambitious? Not from Walsh's point of view. He believes in moving quickly into these markets and is thinking about being the No. 1 player in each one. In addition, Walsh figures that if one or more of the business portals do not pan out and attract customers, he has others. "Owning a portfolio of properties means we won't be dead if one of the industries does not embrace the business portal model," Walsh points out.

The strategy works since VerticalNet is one of the few start-up Internet companies to generate any revenue last year-nearly $4 million. But it is still catching up to the established business trading hubs, such as Chemdex Corp., MetalSite Inc., PaperExchange.com and the National Transportation Exchange Inc., all of which have at least a six- to 12-month head start. And, in the cyber age, first to market has a distinct edge in brand name and customer loyalty. Even e-Steel Corp., a site for the steel industry that is expected to launch later this month, has at least six months lead time over competitors that are still in incubation.

Not every trading hub is made the same. They range in sophistication from those that are merely extranet catalogs with procurement capabilities to those that track order status and handle payments online, such as Chemdex. Then, there are those that provide tight integration between the back-end systems of suppliers and buyers, as in the case of the National Transportation Exchange, which matches buyers of truck space with some 225 fleet owners that operate about 200,000 trucks. Some trading hubs, such as Chemdex, control invoicing because they charge for the whole transaction and take their cut before handing their share of the loot over to the distributors. Meantime, PaperExchange.com, which currently charges suppliers a 3-percent transaction fee, is shortly moving to a model that offers "clearing and logistics services via international partners," said Rod Parsley, vice president of business development at PaperExchange.com.

Nonetheless, the key to the success of business trading hubs lies in two factors: recruiting a sizable cross section of suppliers and expanding the basic market itself. For instance, MetalSite, which primarily sells secondary (used) metal, plans to eventually deal in higher-quality primary metal; Chemdex, which started off in the chemical and biological supplies area, has extended its reach into the laboratory supplies market and has made an exclusive arrangement with the industry's leading distributor, VWR Scientific, to link its more than 1,500 distributors to the Chemdex site. And, PaperExchange.com, which started off in the containerboard and fine paper segments, is incorporating all major grades of paper, including newsprint and scrap paper products.

But, what is the recipe for success?

"Don't get out of the Trojan Horse unless you are inside the castle," warns VerticalNet's Walsh.

In other words, Walsh says the trading hubs need to be certain that there is a large community of customers who are willing to shop at the business portal. "You can't first build a site and wait for customers to come, as many are doing," he maintains. "In our case, we built the [vertical] community first and then introduced transactions."

In fact, many of the hubs, including Chemdex, Metalsite and PaperExchange, have had to build trading portals and recruit well-known suppliers and manufacturers to entice customers. They had to draw customers from the traditional offline sector, while Walsh claims that he has a community of customers ready and waiting for his virtual doors to open.

Experts predict a big shakeout for business portals as they move forward. "Not everyone is going to be a winner in this market, because the size of the suppliers and sellers will determine the popular sites," Finnie says. "You see, sellers go where the buyers are and buyers go where the supply is the richest and usually, market share leaders get more market share because they tend to draw the most suppliers, and hence, more buyers."

Consequently, can there be two business portals for the metals industry, namely Metalsite and e-Steel? Can the market support two sites peddling chemicals and laboratory supplies, such as Chemdex and the still-unnamed site to be hosted by VerticalNet in that space? Clearly, economic factors dictate a consolidation.

Consolidating Hubs
As the business trading hubs consolidate, the survivors will have to integrate different e-commerce sites with disparate technical architectures and business processes. The woes will be compounded if the architectures consist of proprietary commerce engines and applications. Then, there is the task of assimilating massive amounts of customer data at cyber speed.

Experts say that technical architectures of business portals will play a key role in merger decisions early in the discussions. "The actual consolidation of trading hub organizations involves more than mere integration of technologies. The architectures will play a major part in the actual decision making of mergers; standards-based architectures will win out," says

Jeetu Patel, vice president of research at Doculabs Inc., a research consultancy that tracks e-commerce.

And, once the merger agreement is made, the business portals will barely have weeks to present a common brand to customers, all the while ensuring no degradation in the performance and response time of the actual site. "Whereas traditionally companies had months to close a merger and bring about a unified strategy and product offering, they will have no lag time in the cyber age because they can quickly lose a lot of goodwill," Patel says.

Despite growing pains, trading hubs provide fast, low-cost access to hundreds of manufacturers and suppliers. They are also an easy way to buy and sell globally. They could well be the catalyst that propels business-to-business e-commerce into hyperdrive.