Exchange future mixed

By Eugene Grygo, InfoWorld |  Business

SINCE THEIR START, business-to-business digital trading exchanges have been holding out the Holy Grails of better prices for buyers, more channels for suppliers, and the multiple efficiencies that are part and parcel of automation.

For the moment, though, the exchanges are focusing on going live, getting financial backers, gathering buyers and sellers, and making certain they offer ancillary services to keep those buyers and sellers happy. Those that are advancing to the stage of actually carrying out transactions are doing so with an eye toward the day when they will hit the high volumes that will make these risky ventures economically viable, industry analysts say.

It's a given that every industry will be hit with an exchange, and that if they have not arrived yet, they will. It is so well-accepted that "people are worried about being left out," says Lisa Williams, an analyst at The Yankee Group, a market research firm in Boston.

In many sectors, exchanges and their promises of Internet efficiencies are the first real signs that the New Economy has arrived. But there are important rules from the Old Economy that these exchanges and their participants will have to keep in mind.

The keys include the fundamentals of doing business and a federal government nervous about whether or not these exchanges are engaged in price-fixing and monopolistic behaviors. Underlying all of these concerns is a widely predicted consolidation via failures and mergers and acquisitions that some say may come in less than a year.

Wall Street investment and venture capitalist firms have begun shortening their reins on b-to-b exchanges, thanks to their counterpart pioneers in the business-to-consumer, e-commerce realm, says Randy Covill, an analyst at AMR Research, in Boston.

The days of the open-ended capital influx are over, and although investors do not expect to see immediate profits, there will be expiration dates for funding and an expectation to see "signs of profitability," Covill says.

"I think [the shakeout] will happen in the next six to 12 months," Covill says.

But before they pull the plug, investors will require that exchanges combine efforts on a business plan to get numbers moving into the black, Covill says. Letting exchanges drift "is doing no favor for them or the economy."

The investors will have their work cut out for them. Over the past 18 months, approximately 500 to 600 trading exchanges have emerged, according to AMR Research and The Yankee Group.

The single greatest key to survival is liquidity, or volume of business. This means exchanges will be aggressive in how they attract members. There will be the expected offerings of logistic and financial services, but exchanges have to remember the personal touch, says Lisa Williams, an analyst at The Yankee Group.

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