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e -Marketplaces The End of the Beginning Is Near Ken Horner June 5, 2000. Today’s Discussion. B2B Market Overview e -Marketplaces Models and Transaction Mechanisms The Future of e -Marketplaces Tax and Regulatory Connections. e. e. $. B2B Market Overview.
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e-MarketplacesThe End of the Beginning Is NearKen HornerJune 5, 2000
Today’s Discussion • B2B Market Overview • e-Marketplaces Models and Transaction Mechanisms • The Future of e-Marketplaces • Tax and Regulatory Connections
e e $ B2B Market Overview
B2B: What is it and why is it important? • B2B is about the exchange of information between organizations for the purpose of conducting commerce. • The information exchange can occur using: • Internet • Private data networks • Voice networks • etc. • B2B enables organizations to move toward integration of business processes across extended enterprises (collaboration) leading to substantial operational & financial improvements
Why B2B Now? Market Factors Technology Factors • ERP Infrastructure Investment • Web Infrastructure • High Bandwidth Capacity • Data Storage Capability • Advanced Security Technology • XML provides for more intelligent data exchanges betweenweb sites andback-end systems • Market leading companies havegrowth problems • Financial Incentives: • Operating efficiencies,cost savings • New revenue opportunities • Regulatory tax benefits • Web spending is increasing • Real-time information improves supply and demand management • Internet wealth creation has been unprecedented • A lot more VC money chasing deals Source: MSDW Internet Research
B2B Market Potential It’s BIG and it’s growing rapidly e-Commerce Market Size United States P P P Source: Deloitte Research and Forrester Research • Note that B2B will far outpace B2C • Gartner predicts B2B worldwide in 2004 to reach $7.3 trillion
A Flurry of Deals in Recent Months Demonstrate Traditional Players’ Hurried Pursuit of the e-Marketplace Opportunity e-Marketplace Momentum Traditional Players Enter thee-Procurement Space PurePlayVertical MarketsGain Momentum • Autoexchange • Sears/Carrefour/Oracle • Boeing/Oracle • Shell/CommerceOne • Chevron/Ariba • Citibank/CommerceOne • Bank Of America/Ariba • Chemdex.com • VerticalNet.com • Plasticsnet.com • SciQuest.com • Partsbase.com • Networkoil.com Technology Enablers Arrive • Ariba • CommerceOne • Oracle Recentmonths 1999 Today 1998
Map of Existing B2B Digital Marketplaces e 100’s Now and More To Come Note: As of February 2000 Source: Broadview
A Significant Portion of the Future B2B Market will be in e-Marketplaces B2B Revenues, in 2004: $7.3 trillion e-Marketplaces 37% • Opportunities in this market exist for: • e-Marketplace Hosts/Market Makers • Software Application Developers • e-Marketplace Promoters • Bandwidth and Storage Players Other 63% Source: Gartner Group and Deloitte Research: “Online B2B Exchanges”
e e $ e-Marketplace Models and Transaction Mechanisms
B2B e-Commerce Has Evolved as Technology Has Advanced B2B e-Marketplaces S B S Suppliers S B B Buyer Solutions S S B B Buyers Aggregation of many-to-many transactions Website Sales S B S S B S Catalogs, procurement workflow B Information Distribution B S B Information, configuration, and Order-taking EDI Networks B B B B S S S B Information on-line, sales off-line B S B S Closed, expensive, non-scalable Time 1996 1997 1998 1999 2000 Time Source: Adapted from MSDW Internet Research
e-Marketplace Models May Vary Significantly Depending Upon Market Dynamics • Industry exchanges - vertical exchanges that manage many-to-many relationships and focus on specific industry needs • Product exchanges - horizontal exchanges that manage many-to-many relationships and focus on general needs • Exchange Portals - marketplaces dedicated to aggregating exchanges into a one-stop “super exchange” • Hub-Based Exchanges - a marketplaces where large vendors directly link to their suppliers and trading partners
Capacity Brokers – rid the industry of excess capacity; solves a problem and helps pricing; anonymous trading Gray Market Facilitators – for used and resold equipment away from the original manufacturer Collaboration Platforms – long time trading partners use the Internet for improved efficiency; pre-negotiated terms; many business processes beyond buying and selling Spot Buying – Emergency supplies and ad hoc needs for research Distributor Networks – Distributors can load balance inventory with each other; car dealer model Proposal Publishing – Request for proposals to initiate complex transactions in time; start of process but post contract project management continues for months Private Exchanges – closed communities; supply chains dominated by one anchor tenant; private sourcing networks Industry Community Boards – Industry meeting place; trade journal replacement; discussion forums; Web conferences Additional B2B Trading Exchange Business Models
e-Marketplace Mechanisms Each of these transaction mechanisms creates a distinct market dynamic Auction - provides a venue for the purchase and sale of products & services that are often one-of-a-kind, non-standard, or perishable; pricing is dynamic and competitive bidding process usually results in upward price movement Catalog - takes content of multiple vendors, digitize the product information and provide buyers with one-stop shopping over the Internet; allows buyers to search for products more efficiently; creates value by aggregating buyers and suppliers Reverse Auction – provides a venue for the purchase and sale of products and services; initiated by the buyer; competition among sellers results in downward price movement
Revenue Line Items Auction Commissions 30% Electronic Commerce 25% Software Licenses 20% Content Subscriptions 15% Advertising 10% Total Revenues 100% Gross Margin by Line Item Auction Commissions 80% Electronic Commerce 10-15% Software Licenses 90% Content Subscriptions 50% Advertising 90% Blended Gross Margin 55% Sales&Marketing 25% Product Development 10% G&A 5% ! What Do the Numbers Say? Goldman Sachs believes a typical exchange might produce the following operating results Operating Margin 10-15%
e e $ The Future of e-Marketplaces
If Things Go As Planned….. Deloitte Consulting’s Crystal Ball Says That: • We will repeat history as it seems many people have failed to learn from it. • Complexity will be overwhelmed by simpler solutions. • Taxonomies or the lack thereof will limit the rate of adoption. • The financial marketplaces and operational practices will provide good guides as to regulator roles.
Successful e-Marketplaces will Address the Following Critical Success Factors Recipe for Success Create Network Effect (Volume and Liquidity) First Mover Advantage CRITICAL SUCCESS FACTORS Sticky Value Proposition User-Friendly Interface Domain Expertise (Content and execution capabilities) Integrate to Back-end Systems (Seamless integration) Brand Name (Trust and execution capabilities)
What could go wrong? Despite the “hype” there are still many obstacles to overcome • Numerous technology platforms with still limited functionality • No cross-industry technology and process standards exist • Implementation time and investment are greater than expected • Buyer and supplier readiness • Undeveloped regulatory environment • Largely undefined business models
And the “Crystal Ball” Also Says… Number of e-Marketplaces • Massive consolidation will follow rapid growth • From 9000+exchanges in 3 years to several major player per industry • “Deep” is better than “Broad” • Industry verticals have a higher chance of success due to their more focused nature • Regional Vs. Global Players • Initially regional markets will dominate to avoid additional transaction complexity (currency exchange, tax and duty implications, etc.) • Regulatory bodies will play key role on moderating the growth • Antitrust implications of on-line markets (Auto-exchange) • Tax implications (sales tax, custom duty, etc) 9000+ e-Markets 4000+ e-Markets 1998 2000 2002 2004 2006 Time
e e $ Tax and Regulatory Connections
e-Marketplaces Could Create Efficiencies….or Monopolies Regulators are taking a closer look at some of the big e-Marketplaces • Federal Trade Commission and Department of Justice are looking into the Automotive Industry Exchange planned by GM, Ford, and Daimler/Chrysler • Department of Justice and Senate Commerce Committee plan to investigate an on-line ticketing exchange funded by Delta, Continental, Northwest, United and American Airlines
Regulators as Moderators of e-Marketplace Growth Defining the rules and the business model will accelerate the growth of e-Marketplaces • Anonymity of bidders • Limited pricing forecast to avoid signaling • Membership rules • Confidentiality of transaction information • Tax and duty responsibilities (members vs. the exchange) • Steep penalties for “cheating”
Tax Worries – How to get ready? Preparation for the explosion of on-line B2B buying is essential • How should current rules be treated in an on-line environment? • Intangible property ownership • Sales taxes • VAT and customs duties • Transactions classification • Operational geography • Tax anti-deferral rules • Where is the “nexus”? • How to ensure compliance? • Information management and reporting • Responsible parties (exchange vs. customer) • Third party roles
In Conclusion… Chaos, turmoil, uncertainty, fear and doubt will reign for some time to come. But…. • That shouldn’t stop you from getting involved and crafting a point of view. • We are positioning ourselves as both facilitators and conduits for information and issues for all the parties. • The opportunities are enormous and the impacts will be profound. We encourage you to work with us and our clients.