The Next Revolution: B2B
By Leslie Walker
Thursday, March 30, 2000; Page E01
BOCA RATON, Fla. Plugging the Internet into the belly of big business will be harder, messier and slower than many people thought. But in the end a smarter and more powerful beast will emerge, one unlike anything we've known.
That was the consensus I heard during three days of brainstorming by the sea last week at the iB2B conference, a first-of-its-kind event sponsored by the Internet trade magazine the Industry Standard. The conference focused on business-to-business electronic commerce--"B2B," for short--and triggered intense debate over who will regulate, control and ultimately reap the rewards from Internet-based marketplaces being formed in hundreds of industries.
Speakers bemoaned the chaotic way business-trading Web sites are evolving, but they also marveled at how valuable these digital marketplaces may become in a fully networked economy. In addition to taking a slice of the transactions flowing through them, Internet business markets collect massive amounts of valuable data--about supplier performance, for example, and the future buying demand of big companies. Architects of the new electronic marketplaces expect this data to tell companies things they never knew before.
"The information generated in these platforms . . . will be even more valuable than the transactions themselves," predicted Karen Morgan, co-founder of CheMatch, an online hub for chemical companies.
The idea behind the conference was to bring together leaders of the old and new economies to talk about how the Internet is reshaping the supply chains of traditional companies. But far more of the 750 executives who attended came from Internet firms than from old-line manufacturers.
Had more of the old guard attended, they might have bristled at the keynote speech from VerticalNet chief executive Mark Walsh. After touting the 56 fledgling Web marketplaces his company has created or bought, Walsh scoffed at the recent partnerships formed by big players in the automotive, food, aerospace and retailing industries. All have announced plans to create their own Internet markets, where they will pool purchasing power to save money in procurement.
Rather than creating neutral exchanges open to all buyers, Walsh said, "what you are seeing with these consortiums is a banding together to hammer vendors." He predicted that some buyer-dominated sites will fare poorly because the competition among exchanges will be so fierce. "I believe we will see the revenge of the seller.com," he added.
No one doubts there will be cost savings from expanding the universe of suppliers available to corporate buyers and streamlining the purchasing process online--economists say at least 8 percent in most industries. The tension is over who will keep the savings.
As industry titans awaken to the potential value of electronic markets, they are chafing at the prospect of Internet upstarts making money off their supply chains. This has touched off a flurry of announcements from old-line companies that are forming their own online markets, banding with rivals to do so or negotiating an ownership stake in the Internet software companies whose tools create the markets.
"Large companies are bringing liquidity to these marketplaces--the buy and sell activity--and they want to take equity in these deals in return," said David Roddy, vice president of Tradeum, which makes business trading software.
Merrill Lynch Vice President Edward McCabe put an even finer point on it: "We hear the brick-and-mortar guys saying, 'We are going to hold liquidity hostage, and the ransom is going to be equity.' "
The event drew not only big players including VerticalNet, Freemarkets, Ariba and Ventro, but also start-ups with names such as Liquidation.com and TheSauce.com. Liquidation.com is a market for surplus goods that chose to locate in D.C., in part so it can be close to what it estimates is a $10 billion-a-year market in surplus goods from the federal government. TheSauce.com aspires to be an online office and buying assistant for the nation's 25,000 independently owned restaurants.
A typical forecast of how much business trading will move online came from Rick Villars, vice president for Internet and e-commerce at market research firm IDC. He predicted the total value of goods and services traded on the Internet by 2004 will be $2.5 trillion, with 87 percent--or $2.2 trillion--coming from B2B activity.
Villars drew a standing-room-only crowd as he described how he thought the $2.2 trillion pie would be apportioned among business trading sites. He described three emerging models of B2B markets: buyer-controlled procurement sites, such as the one Ford, General Motors and DaimlerChrysler recently said they will create; supplier-controlled "extranet" markets such as the one recently formed by a group of paper manufacturers; and true digital markets, which are independently owned and involve many different buyers and sellers.
Villars said 56 percent of all business-to-business commerce online will flow through the digital markets by 2004, with supplier and buyer sites getting smaller portions. "Eventually it will all come together," he added. "The extranets and e-procurement sites will start to take advantage of the digital markets."
Interconnectivity among Internet trading markets is the ultimate goal of the B2B development frenzy, analysts said. Tradeum's Roddy envisions a day four or five years out when Internet technology will make it possible for a corporate buyer to get lumber from one digital market, arrange shipping for the lumber from another market, buy insurance from yet a third--and then have the information from all three transactions automatically shared among all the markets.
"People will buy combinations of products from different exchanges," he said.
First, though, Net business markets must build their own houses before they can think about opening communication channels to others. Most are still struggling to reel in enough buyers and sellers to reach critical mass.
"This was the starting gun of the real work that lies ahead for B2B," John Battelle, chief executive of the Industry Standard, said after the conference ended. He said he learned that more financial rigor is needed and that the proof of many B2B concepts still lies ahead.
At the conference, venture capitalists were everywhere bemoaning investor exuberance for B2B technology companies. Many said it would be a long time before enough trading moves online to justify the big bets investors have made.
"People's willingness to change takes a while," warned Bill Burnham, a general partner with Softbank Capital Partners. "There are a lot of unrealistic expectations, especially in the vertical industries, about how long this is going to take."
TechThursday columnist Leslie Walker will host a live Web chat today at 1 p.m. with Naveen Jain, chief executive of Infospace.com, to discuss the wireless Web and mobile communications. To participate go to www.washingtonpost.com.
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