Herr Pagel, following all the Internet hype, the subject of B2B marketplaces has gone fairly quiet. Why is this?
Pagel: There is a counter-reaction to every sort of hype. That’s completely normal. We saw a huge amount of hype over B2B in general and marketplaces in particular. The counter-movement is correspondingly strong. In addition, it is taking much longer to achieve the aims that are being pursued with these marketplaces than was originally expected. First of all, the participation in marketplaces requires extensive changes, on the part of the buyers and the sellers. In addition, many of the marketplace companies that were expected to be successful very quickly have just been newly established. And it takes time to for management teams to find their feet and for the company to acquire the critical mass of marketplace participants. As a result, not all the promises can be met in the short term.
How have B2B marketplaces developed since?
Pagel: At the start of the hype, the talk was of 10,000 and more marketplaces. Realistically speaking, around 50 to 100 marketplaces can currently be taken seriously, furthermore with very different business models. Originally, marketplaces were supposed to function as “market makers.” Today, they tend rather to be classical service providers. The focus is first on technical and organizational topics such as connectivity. This can be compared with a telephone company. First, the connections must be activated, and then business can be conducted using them. In addition, certain business-relevant data needs to be managed centrally, in order to ensure consistency and current relevance, as well as to reduce administration costs. Therefore, there is a large amount of information, such as catalog contents and vendor information, that is relevant for many marketplace participants. Third, we have the issue of process standardization in the supply chain. Those who want to use B2B transactions must ensure that the formats of the one system are compatible with those of the other. Those are the key issues at the moment.
Which business models have established themselves?
Pagel: As far as the business models go, transaction-based models were favored initially, in expectation of billions of business transactions. In view of the fact that these expectations were not fulfilled, however, it is mainly subscription-based models that have since won through. Here, the marketplace does not finance itself through the actual transactions, but for the most part through fixed contributions instead. Marketplace operators and participants benefit equally from this. While the marketplace operators can reckon on the income from these fixed contributions, marketplace participants are also more likely to take up the services that are offered and which they have already paid for.
Which services have established themselves?
Pagel: Here, we need to differentiate between horizontal and vertical marketplaces. While horizontal marketplaces mainly offer consumer products – from pencils and computers right through to office supplies or protective clothing – across all industries via catalogs, vertical marketplaces focus on industry-specific factors, mainly on the optimization of cross-company logistics and sourcing processes as a result of the marketplace. For example, the SupplyOn marketplace, which is an internationally active automotive marketplace from “supplier to supplier,” has enhanced its range of services in supply chain management by including supplier managed inventories. With this, a company hands over the responsibility for warehouse stocks of a bought-in component to its supplier, and is therefore able to reduce its warehouse stocks. In return, the supplier is provided with reliable information on demand at an earlier stage, which it can use to help optimize production planning. As a result, both business partners can reduce their costs, while at the same time increasing reliability.
What will the marketplaces of the future look like?
Pagel: The continued specialization and consolidation of marketplaces will lead to an even greater division of labor. We can differentiate between three different areas in which marketplace companies are active: operation of platforms and maintenance of connections, horizontal marketplaces, and vertical marketplaces.
Platform specialists handle the complete technical infrastructure of one or more marketplaces. This includes important aspects such as the connection of backend systems, document routing, and platform management, for example. By bundling the technical operation of various marketplaces, capacities can be optimized, and operating costs can be drastically reduced.
Horizontal marketplaces function primarily at regional level, and handle generic buying and selling processes. This includes first and foremost catalog and content management, procurement and sourcing of MRO goods and services, and billing. The services are offered both directly to marketplace customers and also to other marketplaces – in the form of web services, for example. Overall, we assume that only one or two horizontal marketplaces will survive in each region in the medium term.
In the sphere of vertical marketplaces, we are seeing a further consolidation from industry-specific marketplaces to “supply-chain oriented” marketplaces. Originally, marketplaces were almost exclusively set up by purchasing companies in an industry, who wanted to collaborate efficiently with “their” suppliers. Looking more closely, however, we see that the supplier community is the real driver of the marketplaces. For example, companies in the chemical, oil and gas, and mining industries tend to buy parts for their plants in largely the same way from identical vendors. Vertical marketplaces of this type therefore have a good chance of becoming the “single point of contact” for all marketplace-relevant purchasing processes that a company carries out. Focused on the specific procurement processes of the supplier community, vertical marketplace providers cooperate with horizontal marketplaces, so that their customers can also procure consumer goods via the marketplaces.
We expect one or two marketplaces to win through within a particular industry with similar supply chains. However, we do not believe that marketplaces will yield the huge margins that were originally expected. Supply and demand will level off, and result in attractive, but not extraordinary margins.
What is the situation regarding the financing of marketplaces?
Pagel: Only a few marketplace providers are already making a profit. In our opinion, these will stay. While the financing of the other marketplaces is secured into the third or fourth quarter, the current economic climate means that shareholders’ willingness to invest is limited, so 2003 will certainly not be the year of major ongoing finance. Now, it’s about delivering results, and becoming profitable with the funding that is there. In addition, the marketplaces must focus their offering, concentrate on the core competencies that they have built up over the last two or three years, and attract participants. In 2003, the number of providers will therefore continue to fall. However, the companies with staying power now will benefit from market consolidation next year, and may even be able to achieve larger margins as a result of excessive cut-backs. In 2004 and 2005, we may even see one or two new companies being set up, once it is clear that the business models are effective, and which ones have won through. As regards the development of software sales with B2B and B2C marketplaces, analysts such as IDC at least expect annual growth rates of more than 10 percent.
As far as staying power goes, wouldn’t you say that SAP is in a good position?
Pagel: Yes and that is clearly our selling point too. Initially, we waited to see which management teams and which of our customers’ marketplaces would develop, and how. We are now working closely with many successful marketplaces. Our marketplace customers are increasingly becoming partners with whom we can capture markets together.
For example, we use IBX, the leading horizontal marketplace in Northern Europe, as an additional channel for marketing our supplier relationship management solution (mySAP SRM). Here, our customers benefit in particular from the IBX marketplace services in the areas of vendor connection and content management.
For us, it is extremely important that our customers achieve a fast return on investment (ROI) for the software that they buy from us. In some segments, this cannot be achieved by good software alone. A service ECO system is needed as well, and marketplaces play an important role here.
And what is the situation regarding the SAP marketplaces?
Pagel: Like all other marketplaces, the SAP marketplaces – both those that are our customers and those that we have a share in – are experiencing a period of consolidation. Of course, we can only influence this in areas where we have a share of the marketplace, as these are the only areas in which we have a detailed insight into business development. And this has given us cause for optimism.
What is SAP’s strategy with regard to marketplaces?
Pagel: In the area of horizontal marketplaces, SAP is interested in winning marketplaces as customers. However, there are a few elements missing before a global network of these marketplaces is complete, but we are confident that coverage will be satisfactory by the end of the year.
As far as vertical marketplaces go, there is a strong concentration in the individual industries and supply chains, as I mentioned earlier. Our aim here is clear: We want to be active in all the industries that are relevant for SAP, and have at least one of the successful marketplaces as our customer or partner. Here, too, I believe we are on the right track. After all, marketplace operators are also extremely interested in working with us. In the case of the important backend integration, in particular, we are working closely with marketplace companies and our customers. Very fruitful partnerships and joint ventures have therefore developed that are in the interests of all of SAP’s customers.
How are you proceeding here?
Pagel: Initially, we are concentrating on the industries in which the supply chain processes are not too complex. Supply chains are extremely complex in plant manufacturing or the construction industry, for example, and we need to be patient and stay the distance here. There are other industries, such as the oil industry, or the chemical, consumer products, high-tech, aerospace and defense industries, where we can get a foothold much more quickly.
We are of course also working very closely with the marketplaces from a technology point of view. The recently announced integration and application platform SAP NetWeaver offers very interesting advantages for our marketplace customers. In particular, the improved options in SAP Exchange Infrastructure and SAP Portals are major plus points. Therefore, part of our strategy involves introducing SAP NetWeaver to a greater extent in the marketplace environment. In future, the Enterprise Services Architecture will enable us to run SAP applications on marketplaces even more flexibly than before.
Have you already seen concrete results?
Pagel: This month, we launched an enhanced version of our marketplace solution mySAP Marketplace. This release contains significant improvements in the area of sourcing, as well as much better performance and stability. In the areas of content management, connectivity and business intelligence, we are already using various SAP NetWeaver components. This goes a long way towards reducing the total cost of ownership.
From a product point of view, SAP’s clear aim is to further develop the solution and increasingly to use SAP standard solutions such as SAP NetWeaver. The fact that we are investing in this area in difficult times is really the best proof that we are convinced of the importance of marketplaces for our customers, and therefore for us.
What is your personal motto?
Pagel: The only ones who fail are those who do not try.