Is Bigger Better?
May 22 2000
Business-to-business e-commerce companies, which not all that long ago were the darlings of both Sand Hill Road and the business press, have watched their valuations drop suddenly and dramatically. The new popular wisdom: Startup b-to-b marketplaces will be squashed by consortia of established brick-and-mortar giants who form their own marketplaces.
The "proof" behind such a claim seems overwhelming. In late February, General Motors , Ford and DaimlerChrysler announced a plan to form a marketplace for the world's auto manufacturers and their suppliers, partners and dealers. A month later, Boeing, Lockheed Martin and Raytheon hooked up to form an Internet trading exchange for the aerospace and defense industry. A day after that, Johnson & Johnson , Abbott Laboratories , GE Medical Systems, Medtronic and Baxter International introduced a global health care exchange to facilitate the buying and selling of medical equipment, devices and health care products. Similar announcements have followed from other industries.
In a world where global giants are joining to form vertical industry marketplaces, can startup marketplaces survive and thrive? The answer is an emphatic yes.
The big corporate partnerships are largely coming out of oligopolistic industries where a handful of giants control 60 percent, 70 percent, 80 percent or more of the purchasing power. However, the majority of industries are not oligopolies. Most are moderately or highly fragmented - and a handful of the largest players might control only 30 percent, 20 percent or even 10 percent of the purchasing power.
Consider, for instance, the forest products industry. The value chain in this area starts out with trees on one end and finishes with lumber buyers on the other. The final product of this industry - lumber - is a $100 billion a year business in the U.S., and a $165 billion a year business globally. In North America, 6 million individual landowners offer their trees for sale. Over 10,000 forestry representatives work to sell the trees on behalf of the landowners. About 10,000 logging companies cut down the trees. Some 3,000 sawmills, including 300 large ones, turn the trees into lumber. Roughly 2,000 distributors move the lumber to the 75,000 manufacturers that use it to make finished wood products and to the 25,000 lumber yards that act as retailers. It is a highly fragmented industry at every level of the chain.
Three of the industry's giants - Georgia Pacific, Weyerhauser and International Paper - recently announced plans to form a marketplace, yet they control only 15 percent of the market.
Consequently, unlike the auto industry where the Big Three control so much purchasing power that they may be able to squash any rival marketplace, the forest products industry could be more promising for a startup. Established players in oligopolistic industries can force buyers and suppliers to join a consortium-led marketplace. Not so in a fragmented industry.
In fact, consortia-based marketplaces in fragmented industries may be at a disadvantage relative to startup-led marketplaces. Large companies are slower than startups to adopt new business models or to commercialize new ideas. The track record for consortia of established companies is even worse.
It seems certain that marketplaces that operate in oligopolistic industries and are initiated by consortia of oligopolists will have advantages over startups. But there remains bountiful opportunities for startup marketplaces to succeed.
Within oligopolistic industries, opportunities for startups can be found upstream or downstream from the oligopolists - where there is sufficient fragmentation of buyers, suppliers and products. In highly fragmented industries, the opportunities are wide open and will likely favor the speed and agility of the startup.
Tom Kippola is managing director of the Chasm Group, a member of advisory boards for Internet Capital Group and Voyager Capital, and coauthor of The Gorilla Game: Picking Winners in High-Technology.