Europe’s 25 leading eMarketplaces generated just €350 million in revenue during 2001 — but have received a total of €2 billion in funding from industry backers and venture capitalists. Despite eMarketplaces’ current failings, the laws of network economics will compel firms to trade and collaborate through eMarketplaces refocused on data exchange — not unprofitable ASP offerings. Crucially, even fully funded eMarketplaces won’t succeed unless they deliver on one-to-all and all-to-one interoperative data exchange according to a new report by Forrester Research (Nasdaq: FORR).

“Europe’s eMarketplaces stumbled due to boardroom conflicts, integration hurdles, and unprofitable business models,” said Forrester Analyst David Metcalfe. “Of the 25 eMarketplaces we spoke with, a whopping 88 percent are unprofitable, and only 36 percent of these unprofitable eMarketplaces expect to reach break-even during 2002. Equally, we surveyed 30 large European firms and found that eMarketplace usage remains low. During 2001, only 6 percent of our respondents purchased more than 5 percent of their direct materials through a Net market, and a whopping 80 percent majority sold less than 1 percent of goods through an exchange.

“The expectation that eMarketplaces would redefine market structures overnight did not come to fruition. A harsh reality materialized instead, defined by small organizations, limited offerings, and trickling cash flow. To overcome the deterrents to using Net exchanges, eMarkets must refocus their offerings on a complete packaging of three core competencies — interoperative data exchange (IDE), hosted XRM applications, and collaborative process outsourcing (CPO).”

After building an integrated hub-and-spoke network, Forrester advises that Europe’s Net markets should create additional value by licensing and deploying the new breed of Net-native apps. By the end of 2002, eMarketplaces must switch from enterprise apps to XRM, target ASP solutions at fixable problems, and market their Web services know-how. The growth of collaborative processes based on data exchange and XRM apps will require businesses to adopt new ways of operating internally and across firms. So, to drive revenues from these pains, eMarketplaces need to position themselves in 2003 to zero in on outsourcing opportunities and convert shared technology into shared processes.

“Of the exchanges we evaluated, only four have the potential to execute on a strategy combining data exchange, XRM apps, and outsourcing,” Metcalfe added. “Elemica’s razor-sharp focus on integration requires investor patience — by 2003, the eMarketplace will provide robust data exchange covering EDI and XML. But to grow revenue, Elemica must solve pervasive problems — such as 90 days of working capital tied up in inventory — by implementing XRM apps like Viewlocity during 2002. With financial backing in excess of 200 million euros and huge industry support, Covisint and E2open splurged on applications to create customer interest and gain traction. Finally, FreeMarkets’ focus on providing an outsourced sourcing event service paid off in the fourth quarter of 2001, when the firm announced an operating profit. FreeMarkets will continue to penetrate into new categories of spend in its 120-plus customer base.”

For the Report “eMarketplaces: Rebound And Deliver,” Forrester spoke with execs at 25 eMarketplaces, based or operating in Europe, and surveyed 30 European companies with an average investment of €7 million in Net markets.