It's becoming clearer that the Web's real promise lies not so much in auctions and consumer sales, but in the exploding business-to-business (B2B) market.
By 2003, market analyst group Forrester Research predicts, B2B commerce will generate $1.3 trillion in revenues - 12 times what it expects of the consumer market.
Kevin Jones, an analyst at Net Market Makers, counts 300 players but he expects that number to pass 1000 or more by the end of this year. And for companies that can facilitate B2B ecommerce, the rewards will be huge. A 5 per cent commission on $1.3 trillion in sales represents a $65 billion opportunity.
The young ones
The race to capture all those dollars is creating a stir, in particular among the young companies commonly known as ‘vertical portals’. These are destination websites that focus narrowly on a particular industry - steel or plastics, for instance - and offer a combination of news, research reports, chat room and ecommerce for similar users.
It takes more time to build a successful business-to-business, said Ravi Mhatre of Bessemer Venture Partners. But because B2B companies are automating extremely complicated processes, he thinks they have a better chance to ‘own’ their categories than B2C companies.
With the gigantic reach of the Internet, he believes a new generation of startups will be able to create organised and price-efficient e-exchanges that will offer companies huge savings over the way they have bid and sold goods and services in the past.
One of the most evolved members of this new group is VerticalNet. The company operates 43 different portals aimed at such areas as the meat and poultry industry, bio-research and solid waste. Nearly half the sites offer some kind of ecommerce, either by auction or straight sales.
Like many Internet startups, VerticalNet's public offering was hot. On the first day of trading shares shot up 180 per cent to $45. The company's recent valuation of $1.6 billion makes co-founders Michael McNulty and Michael Hagen, both 36, each worth about $60 million on paper.
In 1998's third quarter, VerticalNet sites had 1.3 million users and 5.6 million page views, according to the company. In the fourth quarter, those numbers jumped to 1.8 million users and 7 million page views. VerticalNet said it provides the four C's: content, community, context and commerce. VerticalNet's original content, supplemented by wire services, is updated daily and can be linked to other related stories or products.
VerticalNet has inspired imitators, too. New York-based WinStar Communications, the $244 million (sales) provider of telecom equipment to small businesses, is preparing to launch Office.com in the third quarter, with a dozen or so categories.
Eventually, the company plans to target professionals in 120 categories, including engineers, lawyers and computer programmers. Like VerticalNet, it aims to generate revenues by running banner ads in its news and chat rooms, and by peddling items such as office supplies and computers.
And Steven Sponder, president and founder of Bizprolink, is trying to seize that opportunity with the launch next month in the US of his expanded ‘hub’ site, Bizprolink.com. The site will be home to 100 business communities, from pharmaceuticals to photography, from agriculture to automotive.
Within each community businesses can buy and sell whatever they need. In return for a 3 to 7 per cent commission on each transaction, Bizprolink provides the businesses with advanced tools for ecommerce. These include a credit rating service and several payment options that go beyond the credit card.
Sponder said his Internet startup produces websites for a variety of ‘vertical’ business audiences in fields such as food service, architecture and accounting. He has built 102 vertical industry portals, or B2B communities. "We're more expansive and the largest community on the Web," he said.
The flagship community was built in 1994 for the hospitality industry in partnership with Microsoft for the launch of Microsoft Network, and it’s still around as one of the 102 communities.
"Right now we have 14 strategic partnerships, companies that provide tools and content, such as Mapquest and Cybercash who will provide content to customise it for each industry.”
Sponder said there are two forms of competitors: individual professional specific websites - a site for dentists, say - that would compete with the dental community; and one from the vertical industry portals, another network of vertical communities with the same model, the same process, as VerticalNet.
He pointed out that the industry segment is in its infancy and there will be a lot more startups coming up. “Our goal is to be one of the first ones out of the gate," he said.
"This will be a worldwide website with the businesses in the US initially. Over the next twelve to twenty four months we plan to target 15 additional countries including Australia, Brazil, China, Hong Kong, Japan, the UK, and France.
“Right now we have people in these countries that manage content, and we provide the ecommerce transaction tools. The top three areas for traffic right now are the UK, France and Japan."
Buying and selling
Sponder explained that the company is positioned to be the first point of contact for buyers and sellers within the same industry, "like Amazon.com is the first point of content for buyer and sellers, the same for eBay. Our goal is to capture upwards of 70 per cent of B2B transactions.”
Sponder said his company receives a ‘finder fee’ from online sellers such as Amazon and Office Max if buyers link to the seller from the Bizprolink site.
"We started out small and are growing incredibly fast. We have two deals on the table with an ecommerce tool provider and the worlds leading consulting organization, so we feel we are on verge of establishing ourselves as the leading hub," he said.
He noted that the company likes the fact that its competitor is VerticalNet. "We're fifty times its size and having a competitor legitimises the marketplace and has driven the public's awareness of B2B. I consider VerticalNet a dinosaur with a narrow niche community with little traffic. And we’ve gone after more broad and mainstream industries. They'll be the Prodigy and we'll be the America OnLine (AOL)," he said.
The new breed is also represented by B2B Internet company PurchasePro.com which offers a website for small- and medium-sized businesses to buy and sell a wide range of products and services. The Nevada-based company priced four million shares at $12, the middle of its expected range. However, the shares more than doubled following its initial public offering, trading at 25 15/16 in the company's market debut.
Charles ‘Junior’ Johnson, PurchasePro.com founder, said, "There is no disputing that business is changing. PurchasePro is on the cutting-edge of making electronic communication the future of how buyers and suppliers will interact." Purchase Pro charges a nominal monthly subscription fee for vendors to join the network.
Johnson's PurchasePro uses the Internet to link companies with other companies. Specifically, PurchasePro has developed a software program that uses the Windows environment to link suppliers with buyers. The company has built a community of about 2000 subscribers in a network that interacts whenever a company needs to make an acquisition.
Founded in 1997 and originally designed for the specific needs of the hospitality industry, PurchasePro has expanded into industries such as food and beverage, furniture, and fixtures equipment. The company's patent-pending software and proprietary network include instant access to a database of manufacturers, distributors and suppliers.
The company said they will pursue relationships with large companies to get access to their smaller partners. Best Western International, Building One Services, Marriott International and Prime Hospitality use PurchasePro.com's services.
Experts believe the business-to-business new economy adoption level is five years behind business-to-consumer but that over the next three years it will explode.
Yet Gartner Group analyst Blaine Mathieu noted, "The B2B ecommerce marketplace already accounts for a higher dollar volume of transactions than the B2C [business to consumer] market and the difference will continue to increase into the future. If someone says that the B2B market is ‘behind’ the B2C market, I'm not sure what they are specifically talking about.”
And Giga Information Group analyst, Andrew Bartels, agrees. "The market is taking off, it’s already happening." Last year Giga forecasted the B2B market would be $30-35 billion worth of volume in business on the Internet. It will grow to somewhere between $500 billion to $700 billion in 2002, Bartels said. “It's going to be big."
Bartels pointed out that it’s not a leadership question, but rather it’s a question of who's going to be adapting. The degree to which companies recognise moving their orders to one another and moving away from the sales reps and mail order forms, and on to standardised Internet order mechanisms, will mean success.
"The logic is compelling and it brings great benefits in order flow, moving the orders closer to the original customers. On the Web you get the customer to fill in the form and work through the environment: they get a chance to see and evaluate, and then hit the send button. All linked together using the Internet, the technology makes the process work better," he said.
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