Macro to Micro: B2B Shifts Focus
By Joe Bousquin
Staff Reporter
8/8/00 9:58 AM ET
The giant opportunity in business-to-business is about to get a whole lot smaller, but only because that's where the money is.
Big B2B companies like FreeMarkets (FMKT:Nasdaq - news), Ariba (ARBA:Nasdaq - news) and Commerce One (CMRC:Nasdaq - news) are increasingly peddling their wares to small and medium-sized companies.
For these companies, going after the small guy could mean new revenue from an untapped market. But it could also signal competitive pressures for companies like PurchasePro.com (PPRO:Nasdaq - news) and Onvia (ONVI: - news), two companies that target small and medium-sized business.
While U.S. B2B spending is projected to reach $2.7 trillion by 2004, roughly 85% of U.S. companies fall into the small to medium-sized market. (While exact criteria for that category are fuzzy, many observers use revenue of $1 billion or less as a cutoff.) And companies with 100 employees or fewer account for 53% of U.S. economic activity, according to data from the U.S. Bureau of Labor Statistics.
Bigger Isn't Necessarily Better
At the same time, getting big corporations up and running with B2B has been slow going; there's a huge amount of technical integration work that has to be done to get their systems online. Smaller companies, with less technology already in place, offer a potentially quicker opportunity for B2B firms to turn the sector's hype into reality. And results have suddenly become important because investors have grown wary of the big promises -- and low delivery rate -- that B2B has proffered so far.
"There's a belief that getting transactions moving for small companies will be faster, and that's because there aren't as many legacy systems involved there," says Ben Smith, vice president of global high-tech ventures at consultant A.T. Kearney. "To get them moving, you need little more than a browser and a Web connection, so it's a way to get some activity and liquidity going by focusing on the smaller companies."
IBM (IBM:NYSE - news) and software provider Ariba, for instance, recently created a joint platform to bring medium-sized suppliers online to give them more of a B2B boost.
"Spurring the smaller suppliers to get engaged in this is one way to actually change the world," says Paul McErlean, IBM's e-commerce vice president of sales and marketing. "It's not just by working down from the top 50."
Let's Get Big
All of this is a far cry from what B2B once was, or at least how it was initially presented to the public markets. With its trillion-dollar estimates and visions of plugging worldwide conglomerates into a global hive of economic trade, B2B, at first blush, was all about being big. Now, however, it's quickly becoming clear that companies are looking to make the small time as well.
"I'm not gonna leave 85% of anything on the table," says Glen Meakem, chairman and chief executive of FreeMarkets, the Pittsburgh-based B2B electronic auction place. The company, which has run $7.6 billion in auctions so far, mostly for large industrial companies, has recently started targeting smaller firms. "Now that we've experienced so much success at the Global 2000 level, we're aiming our cannons at the middle-sized firms."
Even Commerce One, which to date has gone after global big wigs like General Motors (GM:Nasdaq - news) and Boeing (BA:NYSE - news), is starting to aim low. While it has gained headlines for the Global Trading Web it's trying to create to connect large corporations to each other around the world, it also recently made an investment in Corio (CRIO:Nasdaq - news), an application service provider that adapts and rents out e-commerce software for smaller businesses.
"It is going to be critically important for us to enable small and medium-sized enterprises with our Global Trading Web," says Jeff Smith, general manager of Commerce One's recently launched venture unit. "Before Corio, we didn't really have anything targeting the small and medium-sized enterprise using our BuySite [software]. Corio came to us with a value proposition to go out and drive into a new market."
This is Our Turf
Of course, going after the small guy isn't a completely new concept. PurchasePro and Onvia have been going after smaller businesses for some time, often with little competition. In fact, their success, combined with the complications that come with B2B at large corporations, is probably what has attracted the big fish to their pond.
"It will all come down to execution," says Chris Vroom, an analyst at Credit Suisse First Boston who rates PurchasePro a strong buy. (His firm has performed underwriting for the company.) "If the solution that's been developed by PurchasePro adds greater value to the small business than using the hosted application, the company will use PurchasePro. If PurchasePro doesn't execute, Commerce One and Ariba will gain market share."
But there are also some issues for bigger firms when they try to go "down market." For one, pricing is difficult. If Ariba licenses its software for $2 million to one customer, it can't just turn around and offer the same product at a lower price to a smaller firm. That's mitigated a bit by the fact that many B2B contracts are written based on how much a product is used.
"We do believe there's significant potential for companies like FreeMarkets, Ariba and Commerce One to develop hosted applications to be utilized for small business customers," says Vroom. "But we think that the providence of those companies will remain for the foreseeable future with the Global 2000 customers." (Vroom has buy ratings on FreeMarkets and Ariba and no rating on Commerce One. His firm hasn't performed underwriting for FreeMarkets or Ariba but has for Commerce One.)
Still, it sounds like small is getting a whole lot bigger when it comes to B2B.
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