1. B2B Exchanges: The Killer Application in the Business-
to-Business Internet Revolution-A Review
by Arthur Sculley and William Woods
Reviewed by Narges Shahsavarani
In B2B Exchanges, Arthur Sculley and William Woods analyze the feature of
the revolution that is occurring in “Business-to-Business” (B2B) transactions as
a result of the new acceptance of the Internet by corporations. The authors start
their claim with ‘ the Internet changes every thing in B2B’ and most of
corporations will have to change themselves over the next five years for
remaining competitive in the new economy. They demystify some jargon of
B2B and discuss the nature of business-to-business solutions on the Internet.
Some people still believe that the Internet as some type of academic experiment
or, a low security replacement for the telephone that allows individuals to send
email to each other. But in the recent years, the reliability and security issues
associated with the initial use of the Internet have been largely solved and
every business is now adapting the Internet in one form or another. Nowadays,
some innovative new uses of the Internet by business are revolutionizing the
way in which many goods and services are produced, price and distributed. The
authors continue some benefit of B2B exchanges on Internet, describe anatomy
of a model of B2B and common membership and ownership structures for
exchanges and also four trading model for B2B exchanges. Finally they have a
valuable part that is including Seven “Secrets” For Success for B2B
Exchanges.
They mention that the Internet revolution, or new economy, has created many
new companies, produced thousands of new millionaires. That phenomena in
the business word captured investors’ attention to the point where it seems that
every New York taxi driver is a day trader with some on line brokerage service.
Initially, investors’ attention was focused on companies that sell goods or
services to the general public, what they are commonly called “Business-to-
Consumer,” or B2C such as Amazon.com. Enabling consumers to sell goods or
services to each other is a “Consumer-to-Consumer,” or C2C model like as
eBay.com. Another new economic model is a “Consumer-to-Business,” or
C2B, in which the consumer states the price for instance like Priceline.com.
The quiet revolution that is developing in the world of B2B transactions will
generate more profits and millions than anything the C2C, B2C, and C2B
models can produce and will have a deep impact on the economy of each
country.
Sculley and Woods maintain throughout the book that online exchange is

2. where multiple buyers and multiple sellers come together in a virtual trading
space. The potential value of a B2B exchange is n^n, where n is the number of
users connected to that exchange. With Internet network buyers and sellers are
online together from all over the world and thereby to create dynamic pricing,
cost reduction and process improvements.
Based on Oxford dictionary, Sculley and Woods define exchange as “a
building, office, institution, etc., used for the transaction of business or for
monetary exchange.” The unique feature of a B2B exchange is that it brings
many buyers and sellers together in one central virtual market space and
enables them to buy and sell from each other at a dynamic price according the
rule of exchange .After that the book describe about ECNs (electronic
communication networks), one form of electronic trading system that
automatically match buy and sell orders at specified prices, the ECNs are
exchanges but not strictly B2B exchanges and ECNs register with the SEC
(U.S. security and exchange commission) as broker-dealers.
Sculley and Woods discuss about currently use of the Internet, it has been
working professional on B2B relationships. Many companies now consider the
Internet for procurement of goods from suppliers, management of their supply
chain, and product development. Advanced use of the Internet to contact
customers and suppliers in the production process will enable customers to
order products online such as customized car and then sit back, assured that the
car will be built to their specification and delivered to their door within a few
days and Internet has enabled online brokers to offer stock quotes and access to
research data for a fixed commission per trade at rates lower than traditional
broker. Also after explaining the role of Internet they speak about B2B
exchanges creating new intermediary opportunities as a form of “infomediary”.
At the end of first part they speak about why B2B exchanges are developing on
the Internet and they explain the effect of B2B exchanges on traditional
markets. The main effects are:
Lower cost;
Higher potential profits for manufactures with lower procurement costs;
Increase extent and liquidity in a market;
Lower inventory requirements;

3. Greater transparency and more orderly markets;
Elimination of geographical barriers and time zone differences;
Integration of purchasing system;
Improve product design schedules through integration with suppliers; and
Removal of distribution channel blockages, such as agents and brokers who
have a lock on particular market, resulting in a potential loss of jobs or
changes in the nature of the role of traditional intermediaries.
In the next part B2B Exchanges describe the anatomy of a model of B2B, using
particular examples throughout, which are drawn from existing successful
Business-To-Business Exchanges. The authors believe the B2B exchanges will
have some or all of the following user groups that they have different
objectives or interests: Owners that is the shareholders; Sellers or suppliers;
Buyers or procuring companies; Broker or other forms of
intermediaries/informediaries; Listed companies (such as for stock exchange);
Issuers of traded products (for example, securitized contracts); Data vendors
and service providers; The general pubic and The government.
Afterwards they discuss about four common membership and ownership
structures for exchanges:
Ownership by one group of users, with closed membership: An exchange may
be owned and controlled by one group of users (for example the traders or
brokers who act for buyers and sellers in the market). In this model, new
trading members are required to buy an ownership stake, often referred to as a”
seat” in the exchange. The advantage of this model is that the ownership group
can design the market to their advantage and profit. In particular they can
control membership by limiting who can buy a seat or limiting the number of
seats available. The biggest problem is that all other user groups may be
disadvantaged by the owners’ anticompetitive practices. Now broker owned
stock exchanges like the NYSE want to go public because of competition from
electronic markets like ECNs.
Ownership by many user groups, with open membership: In this model, the
application for membership, or ability to trade on the exchange, is not linked to
an ownership stake and new memberships are on a nondiscriminatory basis. A
member does not have to own a seat, but need a license to trade on the
exchange and use its facilities. This license maybe transferable by a member or

4. the exchange may insist that new members join the exchange directly so that
membership rights are non transferable. The advantage of this approach is the
ability to balance the competing interest of each user group. The disadvantage
is that it can take a long time to get all these potentially difference groups to
work together. The example of the open membership model is the Bermuda
Stock Exchange (BSX).
Ownership by one or more commercial investors, with open membership: In
this model the exchange is set up and operated by one benign investor or a
group of investors and is run completely on a for-profit basis. Membership is
the ability to trade on the exchange, is not linked to ownership, and new
memberships are available to applicants on an open access, non discriminatory
basis without the requirement to purchase a seat (For example PlasticNet).
Ownership by government: When a B2B exchange is perceived as a providing
the important public benefit, the government maybe tempted to assert its
national interest during the development of such a market within their
authority. An example of exchanges with government ownership is The Taiwan
Stock Exchange.
At the end of part two they describe four trading model for B2B exchanges
include catalogue aggregators, post and browse, Auction markets, and
continuous auto-execution systems.
Catalogue aggregators: Must be neutral, independent sites that are operated by
a third party if they are to bring many competing sellers together and earn
buyers’trust in the information on the site.
Post and browse (one-on-one negotiation): Just like a private members’room, a
post and browse function creates a virtual community, a group of people
interested in buying or selling a particular product that can make a connection
through a web based bulletin board.
Auction markets: The ability of multiple buyers and sellers to collectively set
price for a wide range of people and services represents a radical departure
from the older, fixed price model in industrial age and also they mention buyer
and seller driven auctions will became increasingly popular, because of the
scale, reach, interactive, and real time attributes afforded by the Internet.
Continuous auto execution systems: work only for same standardize products
with high liquidity.

5. After describe four trading model of B2B exchanges they explain how Off-line
exchanges have established revenue models largely based on the structure of
stock exchanges, but the B2B on-line space is creating new forms of revenue
opportunities. B2B exchange can generate almost a dozen types of revenue,
those are including: transaction fees, percentage of cost saving, posting fees,
subscription (or membership) fees, listing (or hosting) fees, information selling
fees, information licensing fees, advertising and permission marketing fees,
revenue sharing, software licensing fees, private networks. Lastly they mention
to scale up quickly, B2B exchanges must partner with key suppliers, commerce
community, and information providers.
In the third part of the book based on their combined total of 20 years
experience with stock exchanges and 4 years of investing in B2B Exchanges,
the authors analyze the key issues in building a successful, credible and
effective B2B Exchange. Some of the secrets for having successful exchanges
are as follow:
Secret 1: Stay focused-specialized in a vertical
The most important secret to success in the initial phases of developing a B2B
exchanges is to target a specific industry in which you have strong expertise
and then specialized in a vertical within that industry. Specializing on a single
vertical provides the ability to scale up quickly and gain liquidity that are so
important in the early stages of an exchange. This makes a self-fulfilling
“snowball effect” once some level of liquidity is established. After you became
a dominant in one vertical, it may be possible to branch out into other verticals
within that same industry.
Secret 2: play to win-the need to dominate
Try to became dominate in market in your chosen vertical is very important for
B2B exchanges, building a strong brand name spends the majority of your
resources on building a strong customers’care and support program in the early
stage. Liquidity is everything, at first if necessary to build market share and
increase trading volume, you should sacrifice profit.
Secret 3: maintain commercial neutrality
Successful exchanges must be stayed independent, protecting users’
information, establish an advisory board comprised of representatives of all
user groups to ensure each group is represented in the decision making process
for the exchange and user committees for this purpose, providing a neutral third

6. party for all other parties and also make credible and build trust.
Secret 4: Ensure transparency and integrity
We should make a self-regulatory organization (SRO). There is a critical need
for transparency in pricing and the product and also B2B exchanges need to
maintain the integrity of the pricing mechanism.
Secret 5: Add value by building a virtual community
The key of secret number 5 is to provide value-added features that make the
exchange “the one-stop shop” in your industry vertical. Successful B2B
exchanges will create powerful virtual communities that will increase the
lifetime value of existing customers and decrease the acquisition costs of new
customers.
Secret 6: Make the right strategic partnerships
Choosing the right strategic partners helps you scale up quickly toward
domination. Potential partners for a B2B exchange can come from a variety of
sources including: deep-pocket investors, buyers in the chosen market space,
sellers, existing broker intermediaries, new informediaries, content providers,
IT vendors, and trading system software developers. If you do not have enough
expertise in your chosen vertical, be sure to partner early with someone who
does vertical knowledge is key to success.
Secret 7: Operate as a virtual corporation
In this part they mention some key guidelines for virtual corporations such as
B2B exchange companies must be flexible and able to adapt quickly to market
changes, concentrate on your core industry expertise and outsource all non-core
functions, particularly the technology development, keep staff levels low and
finally hire a expert Chief Technology Officer to manage the outsourced
vendors.
The last part is about the future of B2B exchanges, Goldman Sachs Investment
Research estimates the value of transactions conducted on-line between
companies will reach $1.5 trillion by 2004. In B2B Exchanges the authors
reveal that transactions on B2B Exchanges, in the US alone, could exceed $600
billion in annual value and generate annual revenue for the exchanges in $3
billion by 2004.

7. In my opinion the authors draw on their experience in the stock exchanges to
advice on Internet exchanges and I suppose four insights highlighted by the
authors are very valuable: "Think private, act public," "Liquidity is key for any
exchange", "Only one exchange will dominate a vertical" due to increasing
returns and "Pricing is going dynamic". The authors also provide an extensive
appendix that provides short case histories of many of today’ more perfect
s
B2B exchanges. They provide good advice on the emerging B2B exchange
phenomena. I strongly recommend this book and website
(www.b2bexchanges.com) as a very useful guide to starting B2B Exchanges.