Too many players spoil online exchanges

Too many players spoil online exchanges
JULIA ANGWIN

WAYNE, APRIL 8: Just a few months back, Internet Capital Group Inc., was a leader in the hot sector of the Internet aiming to build business-to-business shopping exchanges online. It was a darling of Wall Street with a dizzying market cap of $56 billion. But today, its virtual shopping centres are virtually empty and its stock has lost $ 36.5 billion in value.

Investors are losing faith not just in ICG but in the promise of online business market places that allow companies to buy and sell everything from paper clips to cattle to each other. "It's been tough for everybody," says Mark Walsh, CEO of VerticalNet Inc., which has seen its valuation shrink to $4.4 billion from $10.9 billion a few weeks ago.

Business-to-Business dot-coms, once hot, are next area of worry. What's gone wrong? Much of the about-face can be traced to the big three auto makers. When General Motors Corp., Ford Motor Co. and DaimlerChrysler AG announced in February that they were planning to build their own online exchange, many investors questioned whether there was room in the market for independent exchanges built by companies likes ICG. Since then, a number of other industries have announced plans to build their own exchanges.

"We are concerned that big corporations don't want to give up a piece of the action,"' says Robert Turner, who is chief investment officer at Turner Investment Partners, a $3.8 billion fund in Berwyn, Penn., that recently sold its stake in some business-to-business stocks.

Indeed, the ramped-up competition from bricks-and-mortar companies has become so intense that ICG's chief executive Walter W Buckley now spends much of his time knocking on the doors of other CEOs, asking them to buy or sell on his exchanges.

It hasn't been easy. It turns out that industrial giants like DuPont Corp. want to own some of the prized Internet real estate themselves. Although the Wilmington, Del., company has agreed to form a joint venture with ICG that will provide a marketplace for chemicals, construction and apparel, it also has plans of its own: DuPont expects to divert $1 billion of its spending over the next two years to online B-to-B sites -- and not necessarily with its newest partner.

"We'll look at their companies first," says Charles O. Holliday, Jr., DuPont's chairman and chief executive. "If we don't like them, we'll go somewhere else."

General Electric Corp. has similar plans. The company owns an equity stake in ICG, but when it comes to selling plastic resins, it has built its own site -- GE Polymerland. "Our policy is not to put anyone between us and our customer," said Jay Pomeroy, spokesman for GE Plastics.

Last year, GEPolymerland.com had sales of $100 million. By comparison, ICG's site, PlasticsNet.com, sold only $445,300 worth of plastic resins and plastic manufacturing equipment in the first nine months of 1999. In hopes of boosting sales, PlasticsNet has partnered with Ashland Inc., a Covington Ky., plastics distributor that has promised to list at least 1,000 products on PlasticsNet. But even Ashland has its own Web site, where it sells plastic resins.

Other ICG partners are also trying to carve out their own turf. International Paper Co. has promised to sell some products through auctions on ICG's PaperExchange.com Inc., but the paper giant has also formed a joint venture with Georgia-Pacific Corp. and Weyerhaeuser Co. The three leading paper companies intend to build their own Web site that will let buyers and suppliers do transactions online. John Balboni, vice president of e-business at International Paper, said that the company prefers to reach customers through "intimate direct personal contact" on its own Web site.

ICG was formed in 1996, when co-founder Ken Fox and . Buckley left their posts at Safeguard Scientifics Inc., a Wayne, Pa. investment firm, to take part in the Intenet boom. They first bought a stake in Internet advertising firm Matchogic, which was later sold to Excite At Home Corp. Soon after, they invested in Internet directory WiseWire Corp., which was later sold to Lycos Corp.

But they struck gold in 1997 after purchasing a start-up called WaterOnline, which promised to help water-treatment plants buy pumps and other parts online. ICG helped transform WaterOnline into VerticalNet Inc., Horsham, Pa., which owns and operates 55 sites such as Solid Waste Online and Food Online.

Today, ICG focuses exclusively on B-to-B e-commerce companies. It operates 41 online exchanges ranging from auto parts to apparel -- and the high-tech outfits that build the tools to get these online shops up and running.

To maintain its acquisition pace (about three per month since ICG went public in August), Fox organizes "hunting parties" to target each industry ICG wants to enter. A team of three employees scours the industry for likely prey. Sometimes they buy a company that they think will be a winner; other times they decide to buy different pieces of companies and cobble together a potential winner. When the acquisition is completed, the hunting party members are given spears as trophies.

For its part, ICG hopes the companies it has invested in will work together in what it calls a keiretsu, the Japanese word for a network of companies that supply goods and services to each other. However, ICG recognizes that it doesn't have a large say in what the companies do because it isn't the controlling shareholder in many of them. On average, ICG owns about 36% of its affiliate companies.

Buckley's goal is to have most of the sites use similar software so that customers can buy from the steel site and the plastics site without having to re-enter their ordering information. And the network of B-to-B sites gives ICG an edge in attracting corporate customers, ICG believes. "We're playing the role of a kingmaker," says Fox. "You're either with us or against us."