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Perspective

Will Local Focus Make for Winning Model?
Fortnightly Magazine - September 1 2000

can be a big asset in this line of business. Their ability to move more quickly than the regulated units is especially crucial in e-commerce, where imitators are quick to seize on any good idea.

Will Local Focus Make for Winning Model?

The regional hub is a natural progression of e-commerce, which began with single-seller B2C efforts such as Victoria's Secret and Amazon. Sellers such as Dell and broad retailers such as Grainger easily adapted the single-seller model for B2B markets.

Other companies, such as Ariba and Commerce One, soon flipped that one-seller-many-buyers concept into a single-buyer model. These single-buyer pioneers exploited a crucial innovation in technology, the emergence of the XML data standard. XML, or extensible markup language, in its several variations makes it practical for systems using diverse data formats to exchange information. The technology makes feasible broad electronic exchanges involving aggregations of buyers and sellers.

Consumers have resisted aggregation, although Priceline and other vehicles are trying to discover the magic formula. The B2B world has been much more receptive, as businesses seek the lower unit prices that can be negotiated with a large-volume buy. Several models for B2B multi-buyer exchanges have emerged.

Independent Vertical. The first B2B multi-buyer exchange to develop involves a dot-com company that matches buyers and sellers of a relatively narrow range of industry-specific goods, such as chemicals or scientific equipment. These hubs have trouble getting off the ground because their bargaining power is limited until they attract large numbers of buyers and sellers, so early participants do not realize much benefit.

Buyer Vertical. In a second vertical form that has emerged, buyers combine to purchase a range of industry-specific goods. Automobile manufacturers, major petroleum companies, and, recently, a group of utilities (Pantellos) have formed buyer vertical groups. The members of these groups may be competitors, but they aim to coordinate closely enough to operate at Internet speed.

Universal Horizontal. The third B2B model aims to serve any business, anywhere, that wants to buy any type of good or service. That is a massive undertaking, but AOL and PurchasePro are jointly developing a universal horizontal, as are others. The critical mass of buyers and sellers necessary for profitability is difficult to attain.

Regional Horizontal. The regional horizontal hub quickly achieves critical mass and profitability, because it is anchored by a utility with a service ethic and image in its regional business community and a century of experience in large-scale purchasing. The "liquidity problem" of so many B2B exchanges is avoided.

Regional horizontals in large markets do not require much market penetration to be profitable, and can catch on quickly. Our model offers incentives such as equity in the hub and rebates to attract a core of large "charter buyers," major commercial and industrial customers of the utility. Most companies and non-profits throughout the country have not yet embraced the Internet as a means of reducing purchasing costs. Joining a hub is a good way to take their purchasing online with little or no outlay and the prospect of not only lowering their purchasing costs, but also