Shakeouts in digital markets: Lessons from B2B exchanges

The boom-to-bust cycle for Internet start-ups has been remarkably compressed. This article reports on a longitudinal study of eight industries which found that only 43% of independent B2B exchanges survived in the two years following Spring 2000. Most of these start-ups failed because they misdiagnosed their advantage over existing ways of doing business. In reality, the Internet is mainly about re-formed applications that facilitate interactions and squeeze costs but do not change the basic structure and functioning of existing markets. incumbents prevail when a technological disruption re-forms an existing market rather than completely redefining industry boundaries and norms. Building on the lessons of past industry shakeouts, this article suggests that the prospective winners in digital markets will be found in three camps: adaptive survivors who find a protected niche by retooling their strategy for reformed markets; acquisitive incumbents who acquire the assets of pure-play companies at steep discounts; and pure play start-ups that capitalize on their early mover advantages in breakthrough markets.