Joining the Rush Into Online Exchanges

Folio: The Magazine for Magazine Management, June, 2000 by Elizabeth Gardner

TRADE-MAGAZINE PUBLISHERS SEE THEMSELVES AS NATURAL, NEUTRAL INTERMEDIARIES IN THE EXPLODING WORLD OF DIGITAL PROCUREMENT MARKETS. HERE, A LOOK AT FOUR LEADERS.

Suddenly, it's the age of the b-to-b online vertical community. Companies by the thousands in every industry are moving their buying and selling online) shifting to the Internet their searches for, negotiating over and procurement of the materials they need to run their businesses.

Hundreds, even thousands, of exchange sites are being established. And lured by projections of $7.3 trillion in worldwide online b-to-b sales by 2004 (the latest estimate from Gartner Group), trade publishers look at their deep industry knowledge and their longstanding relationships with readers and advertisers, and say, "Hey, we can get a piece of that."

The question is, how? Internet or no, it's not easy to move from a vehicle for information and advertising to a commerce middleman creating enough extra value to earn a percentage of each transaction--and do it better than companies for whom electronic commerce is their sole mission.

The current mantra for b-to-b Web site success is the "Three C's"--content, community and commerce. Publishers clearly have the first, and if they structure their Web sites correctly, their readers might be able to form the second--but neither of those inevitably leads to success at the third.

"Where you go. to learn is not necessarily where you go to buy, and sophisticated procurement people may not need product information as long as they have multiple sources to buy from," says Melissa Shore, a senior analyst with Jupiter Communications who follows the Internet business-to-business space closely. "It's a challenge for any content player to ease into a commerce role without a strong partnership with an existing commerce player, and there are thousands of Net market-makers out there." (See "Up & Running," page 43, for a small sample.)

Indeed, trade publishers are late to this particular party. Every crevice of the online procurement market seems to have been claimed by somebody. Some Internet companies, like VerticalNet, are trying to stake out territory in lots of industries simultaneously. Some efforts are aimed at narrow markets, such as ElastomerSolutions.com or Farms.com (cattle auctions). Software companies, like Ariba or Commerce One, build online ordering capabilities and catalogs into their procurement applications.

And in industries where either the buyers or the suppliers are highly concentrated, the top players are creating their own online exchanges. The Big Three automakers are teaming up on an online buying exchange. Five of the largest medical supply and pharmaceutical companies, including Johnson & Johnson, Baxter International and Abbott Laboratories, are collaborating on a marketplace for their customers. Many will doubtless follow if the first few pass muster with regulators on antitrust grounds.

For the most part, the first-mover advantage is gone, but that advantage doesn't ensure success in such an embryonic industry. "We are still in the early days of learning what the medium is about," says analyst Geoffrey Bock of the Patricia Seybold Group. "Commerce and content will turn out to be intricately intertwined in some unexpected ways."

Most trade publishers finally have some kind of Web effort in place, though many are still wrestling with basic questions: how much content to put up, whether it should be different from that in the print magazine, how often to refresh it, and how to get advertising onto the site without cannibalizing print products. But increasingly, building a robust, e-commerce-enabled VOC is priority-one for b-to-b CEOs.

Several are leading the way in snaring some of that transaction action. FOLIO: talked with four trade publishers who have taken this e-commerce notion as far as a wholly-owned subsidiary (or in the case of Cahners Business Information, a joint venture with a software developer). None of the companies will divulge exactly how much they're spending, but it's probably at least in the low tens of millions (about the size of a typical first round of venture capital). Nor are they all that willing to discuss current traffic figures, sales volume, revenue-stream splits and total revenue. Jupiter's Shore says there is no magic number for the size of a successful b-to-b exchange. It will vary from industry to industry, and the economics of each marketplace will depend on the magnitude of an average transaction. The shape matters more: It's important to have a large number of both buyers and sellers so that the power isn't concentrated on one side or the other.

Here's a look at the e-commerce strategies of each of the four VOCs.

PennWell Publishing, which has 40 print titles, first ventured onto the Web in 1994 with sites that served the petroleum and optoelectronics industries. In August 1999, it spun off those entities and more than two dozen others into an online subsidiary called PennNet.

PennNet's first venture into e-commerce is the Oil and Gas Journal Exchange, which at this writing was just about to launch. It trades on the 100-year-old reputation of PennWell's flagship Oil and Gas Journal, and will allow online auctions of oil- and gas-producing properties and equipment. PennNet, Foster City, California, has purchased a majority stake in EBCO, an established energy auctioneer, and recently acquired Global Logistics Partners, an international broker of used and surplus equipment for the energy industries.