Critical Issues for Digital Exchanges.

• Author: Maginnis, Jerry

They're anything but conventional, yet DMPs are following the classic business cycle - innovation, rapid growth, investor euphoria and shakeout. Poised to shake up the global B2B arena, DMPs first have to survive.

No question about it: digital marketplaces (DMPs) -- also called digital exchanges -- are poised to shake up the global B2B arena. They've got everything competitive businesses are after: dramatically streamlined supply chains, reduced costs and shortened business cycles and buyers and sellers globally connected in real-time. But before they can lead any B2B revolution, DMPs will have to survive their own major shakeout. And 2001 promises to be a defining year.

DMPs are Internet-based market places that enable buyers and sellers in specific industries (vertical exchanges) or across multiple industries (horizontal exchanges) to con duct business in virtual, online environments. This direct B2B commerce is designed to lower transaction costs for buyers and sellers, thus reducing the buyer's effective costs to acquire goods and services while increasing the seller's exposure to new buyers.

DMPs are anything but convention al. Yet, they're following a familiar path, well-worn by many ventures before them, such as the automotive and at-home shopping industries. The classic business cycle -- innovation, rapid growth and proliferation, investor euphoria and shakeout -- is at hand for DMPs, too.

During 1995-1996, a number of DMPs were launched by small entrepreneurs. By 1999, major B2B players like VerticalNet, Internet Capital, Ven-tro, Ariba and Commerce One led the initial wave of IPOs, triggering virtualeuphoria in the sector. Between March and June 2000, an array of DMP initiatives were launched, including numerous exchanges hosted by industry focused consortiums. Marketplace expectations soared and subsequently fell as enthusiasm dampened for all things tech. And now: the shakeout.

Tricky Business?

No matter what the Federal Reserve does or doesn't do, it's clear that the days of euphoric market capitalizations and easy access to capital are history for most DMPs. But, make no mistake about it, DMPs are smart business. Leading analysts -- including Forrester Research and the Yankee Group -- have projected that digital exchanges will host nearly $3 trillion in B2B transactions by 2004. And B2B infrastructure investments are expected to top $80 billion by 2005, according to Jupiter Research. Traditional supply chains will continue to be revolutionized by the Internet and e-commerce. That's not to say, however, that every digital marketplace will survive.

Succeeding as a DMP is tricky business and many are finding out the hard way. In addition to the battering that the technology sector has taken...