I think we are in for a bit more pain before things turn around for the B2B Sector and the market in general. Here is about as negative an article as I can find. Negativity can often be used as a barometer for discovering how close to a bottom a group of stocks might actually be. Unfortunately in my local newspaper this morning I also found a positive article on the B2B Sector. First the negativity:
biz.yahoo.com
Friday April 14, 5:42 pm Eastern Time
Forbes.com
B2Bunk
By Daniel Lyons
BEYOND.COM MADE ITS LIVING until recently selling software over the Internet. And a lousy living it was. Beyond.com lost $125 million on revenue of $117 million last year. Its shares have plummeted from $38 to $3 as investors fled so-called e-tailer stocks. Fighting to stay alive, the Santa Clara, Calif. company has a new plan: Instead of selling stuff over the Web, it will run electronic storefronts for other shops that want to sell stuff over the Web, taking a cut of their transactions. Never mind that its customers are in a business--e-tailing--so bad that Beyond.com quit it.
The new strategy has one huge appeal: Beyond.com can now describe itself as a ``business-to-business,' or B2B, Internet company, thereby surfing the latest wave of Web madness. These days B2B companies are all the rage, just as B2-consumer sites were only a year ago. So outlets like Beyond.com, MotherNature.com and Fatbrain.com are leaping to B2B like chimps swinging from vine to vine to stay ahead of a raging forest fire.
Shamelessly, others are invoking the B-word. In March of 1998 B2B was mentioned exactly once on the PRNewswire, the mouthpiece of corporate America; March 1999, a mere 14 times; this March B2B was touted 692 times. Hill & Knowlton launches a network for its flacks to stay in touch with clients and calls it a ``collaborative business-to-business virtual work environment.' Thomas Rogers, the ex-NBC honcho who now runs trade-rag publisher Primedia, sees Fire Chief magazine as a ``powerful vehicle' for B2B because it matches buyers (fire chiefs) and sellers (makers of fire trucks). Ahem.
These hucksters are plunging into the B2B bath just as the plug is being pulled. Too many B2B firms are fighting over the same markets--and they are massively funded and, in many cases, ridiculously overvalued even after recent market declines. Merrill Lynch says a basket of ten B2B stocks is down 38% since February.
Some 600 online marketplaces in hundreds of industries have been launched, and more are announced each day. Each segment has room for maybe one or two major players, yet in health care 40 Web sites joust. In chemicals at least 50 sites compete, including CheMatch, ChemCross and Chemdex. ChemConnect shifted to B2B in July, racked up $127,000 in sales last year and lost $15 million; Goldman Sachs and Merrill Lynch are taking it public.
This madding crowd will have a tough time making B2B work. Building electronic links between suppliers and customers is tricky; luring customers is even trickier. The Web middleman's cut will decline as transactions grow. Worse yet, the B2B-ers could get crushed as big suppliers set up their own sites. The Big Three automakers, Boeing and Johnson &Johnson are doing just that.
``The problem is that 90% of the B2B stocks are overvalued and 10% are ridiculously undervalued--and the challenge is to figure out which is which,' says David Perry, chief of Ventro Corp. (formerly known as Chemdex), a B2Ber in Mountain View, Calif. In health care 40 sites will wither to maybe 10 this year, and to only 3 or 4 by the end of next year, he says. ``There's an opportunity here to build a $100 billion company. Those that do are ridiculously cheap today. The others are worth zero.'
The idea of using the Web for business has been flogged since the mid-1990s, but it wasn't until last year that the B2B craze really took hold. Companies like Ariba, Commerce One, Internet Capital Group, Ventro and VerticalNet offered stock to the public and saw their shares soar to absurd levels. Most have declined steeply--but are still wildly overvalued. Internet Capital Group, which owns stakes in 60-plus B2Bs, most of them moneylosers, last year itself lost $30 million on revenue of $16.5 million. Nevertheless, it has a market value of $19.5 billion. That seems almost sane: In December its market cap hit $56 billion.
Hype has at least some correlation to value, and the potential for B2B is indeed enormous. It lets big companies do their purchasing online, comparing prices, speeding up orders and scrapping paperwork. For connecting buyer and seller, the Web matchmaker typically takes a 1% -to-5% slice of the sale.
Sounds a lot like what we used to call wholesaling, and it also sounds like the kind of business that will see commissions get ever thinner. So why the frenzy? Breathless reports from investment banks and forecasters, plus a dollop of Chinese math: If we get just 1% of this $2 trillion market, blah, blah, blah.
Myriad promoters cite a Forrester Research report predicting online commerce will hit $2.7 trillion in four years, an astounding number. Parse it and it is less so: Hundreds of independent B2B sites may share as little as $1.4 billion in fees--or $2.3 million apiece, per year.
Setting up a site isn't exactly easy. It took Ventro, which runs four sites in the medical, life sciences and industrial areas, 19 months to develop its first marketplace, 6 months to launch a second. A bigger challenge is drawing participants; most want to deal with one or two Web windows at most.
If GM, Ford and others can allay antitrust fears and set up a joint site of their own, independents may be relegated to ghetto markets. VerticalNet, for one, has Web sites in 56 narrow businesses, from meatandpoultryonline.com to solidwaste.com. Yuck.
Worse still, transaction fees may decline as the orders get bigger. ``These B2B models based on getting a percentage of every deal are wrong, because percentages don't scale,' says Arno Penzias, a partner at New Enterprise Associates, a venture firm in Menlo Park, Calif. This Nobel laureate and former head of Bell Labs knows something about communications networks. ``When George Soros uses the telephone for a billion-dollar trade, he doesn't get a call from AT&T saying, 'Our share is $20 million,' he says.
How will these companies ever earn the rich multiples the market is giving them? Neoforma.com of Santa Clara, Calif. hopes to get 20% to 30% of online health care sales. Its cut of transactions could hit $11 million this year, $30 million in 2001. Its market value is $940 million--31 times the revenue it hopes to deliver in 2001. ``It's a healthy multiple,' Chief Robert Zollars admits.
Adding confusion, some B2Bers report sales based on the entire value of the goods that pass through their systems, though they don't make, warehouse or ship the goods. While Neoforma reports only the fees it collects as revenue, Ventro's claim that it will grab $145 million in revenue this year is based on the ``grossed-up' figure--that is, for many transactions, Ventro recognizes the entire value of the orders, rather than its own small cut. Its real income is a tiny fraction of that $145 million, but its market value is $2.3 billion, 16 times this year's pumped-up sales.
Ventro says accounting rules require this approach if the middleman takes title to the goods being ordered. Still, ``the concern is that these companies are fooling investors into believing there's more revenue growth than there truly is,' says Michael Dubrow, a senior analyst with Jacob Asset Management in New York.
Expect more madness, because venture capitalists are still falling all over themselves chasing the fad. In November CMGI AtVentures announced a $1 billion fund aimed at B2B. ``The whole category has been overhyped. Over the next 12 to 24 months we will see a real separation of wheat and chaff,' says Charles Finnie, a general partner at CMGI AtVentures.
You get the capital when you can. Buzzsaw.com is a Web site for the design and construction industry that dreams of picking up $10 million in fees this year. In March Chief Executive Carl Bass raised $75 million in second-round funding. Buzzsaw turned away offers from a dozen venture firms. One rejected VC sent a personal check for $40,000, begging to be let in on the deal as an individual. ``I still have the check on my desk,' Bass says.
No wonder Beyond.com decided to reinvent itself. The moment of truth came in September. It had earmarked $8 million for TV ads to keep plying its ``naked guy' campaign (man in the buff shops from home) but pulled the plug. ``We realized our ads were being lost in the noise because of the proliferation of dot-com companies,' says Richard Neely, acting chief executive.
The $8 million was diverted into beefing up the back office. Beyond.com was already operating online stores for a few companies; now it runs outlets for 23 firms such as software developer Symantec. Neely hopes this new business will top $60 million in revenue next year, but that's deceiving: Its own cut of that total would be maybe $9 million.
MotherNature.com, another struggling e-tailer, is latching on to B2B, too. The vitamin e-tailer will develop online storefronts for small vitamin firms and take a cut of sales. It will also try to supply off-line stores, representing obscure products big vitamin distributors don't carry.
``E-tailing is out of favor on Wall Street, and raising capital is problematic. So we need to find other revenue from B2B. And it doesn't hurt that the investment community is happy with that sector,' says MotherNature's chief, Michael Barach. How cynical is that?
Primedia Inc., publisher of trade magazines like Telephony, Cable World and Fire Chief, declared itself a B2B player a few months ago and saw its stock go from $11 to $33. ``We're the key place where decision makers congregate each month to get the information they need to make decisions in their industry. That's a powerful vehicle for commerce,' Rogers says. Uh-huh.
Online bookseller Fatbrain had always sold to businesses, but a few weeks ago it relabeled its ``Corporate Solutions' area on the Web site. New title: ``B2B Solutions.' Not to be outdone, Lands' End, the catalog outfit that has always sold to businesses, sent out a press kit in March hailing this trade as a B2B endeavor. This, while it neglects its retail constituency. Someone who tries to order several shirts in different styles is forced to sit through a download of the shirt-ordering applet for each one--at an agonizing 1Ï-minute wait each time.
Forget the shirts and order a rain parka. There's rough weather ahead.
Research: Nicole Ridgway.
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