Scott, Here is another article about B2B. Leigh
redherring.com
Putting B2B under the microscope
By Sarah Lai StirlandRedherring.com, March 01, 2000 NEW YORK -- How do you measure a market that barely exists? Answer: By how hot and sweaty people get when they start talking about it. While that's a bit facetious, it might as well be the answer for the business-to-business (B2B) Internet market, which is as crazy, chaotic, and in-demand as Studio 54 at its height. Forrester Research (Nasdaq: FORR) estimates that the value of online transactions between businesses could amount to $1.5 trillion by 2003, while Merrill Lynch (NYSE: MER) sizes the market at $2.5 trillion.With numbers like that, the B2B phenomena definitely resembles the scene around Studio 54: the guaranteed pay-off goes to the elite insiders who are the first to gain entr‚e to a world that's hotter than hot. But while the insiders bask in the spotlight and make connections that propel them to further heights, the rest of the crowds, who stand in line to get in and perpetuate the frenzy, might end up paying for an experience that is essentially worthless.GUESSING GAMEThe consensus among the pros: valuations are a mix of educated guesses and looking over your shoulder to see what everyone else is guessing."To suggest that you can really go out there and say, 'OK, B2B sales for the vertical market is $100 billion, and let's say that Net market makers can make two percent of that with their business model ...' is somewhat fallacious," declared Broadview's managing director Alec L. Ellison, speaking at a conference hosted here by publishing and consulting firm Net Market Makers on Monday morning.Mr. Ellison's declaration reflects much of the financial community's beliefs, which in essence hold that the metrics normally used to measure company performance -- things like net income and operating margins -- are useless in the nascent B2B market. Since the vast world of B2B electronic commerce is just starting up, there's little to measure and not much of a landscape through which one can navigate or use to predict which business models will succeed.Still, investors obsessively talk about the topic because of the astronomical valuations that companies in the sector are receiving both in the private and public equity markets. A few examples from the public markets: Ariba (Nasdaq: ARBA)'s market capitalization is $25 billion; Commerce One (Nasdaq: CMRC)'s is $14.6 billion; and Verticalnet (Nasdaq: VERT)'s is $7.8 billion.But those valuations are driven by the simple economics of supply and demand: there aren't many of these companies around yet and everybody wants in on the ground floor. Thus the pros' advice on Monday was: examine the market opportunity, vet company management, evaluate their strategies and business models, and place your bets on a diversified portfolio of companies. Then, hang on for the ride. One more thing: don't analyze B2B companies in the same way as you analyze business-to-consumer companies, such as Amazon.com (Nasdaq: AMZN). In particular, don't base your decisions on financial analysis that uses price-to-sales ratios. Rather, look at how profitable the companies' strategies could be. The problem complicating the revenue picture is that B2B companies don't use standardized methods to recognize revenue, thus often rendering comparisons between companies invalid. At Merrill Lynch, for example, one major factor the analysts look for is liquidity, or the ability to trade easily and quickly. As the market matures, "transaction volume and average price per transaction ... will be key metrics," said Edward McCabe, a Merrill Lynch analyst who was also on a panel Monday.BANKING ON DREAMSBut since the B2B e-commerce market is more of a dream right now than a reality, Mr. McCabe says that he wants to see whether all the participants in the market are as thrilled about the concept as investors, since some people, such as suppliers, potentially stand to lose from an emerging marketplace that threatens to make the market more efficient and possibly to reduce their margins. Markets obviously need both buyers and sellers, and if sellers aren't happy with the new marketplaces, they won't take off."We think the lynchpin is liquidity -- that's the end-all and be-all of these marketplaces," said Mr. McCabe. "[Suppliers] have got concerns about channel conflict, about price transparency, about employee morale, distribution partner alienation ... all those kinds of things."As for other factors, such as which kinds of B2B marketplaces will be the most profitable, the panelists on Monday couldn't agree. While Mr. McCabe and Jamie Friedman, an analyst at Goldman Sachs (Goldman Sachs (NYSE: GS), believe that auction models might be the most profitable, another panelist, Peter Zapf, CEO of Asiacommerce, didn't think it would matter, since he thinks that companies will combine market models.An element in these early frenzied days is the consensus that whoever wins in a sector or industry will win big. That's because of the economics of exchanges, which says that the most successful exchanges are those with the most buyers and sellers who are willing to trade at any point in time -- i.e., the most liquid markets.But because things are at such an early stage, the panelists suggest that investors look for portfolio approaches to investing in the B2B sector, such as the Internet Capital Group (Nasdaq: ICGE). As Mr. McCabe recently wrote in a report, investors in publicly traded B2B companies must approach the sector more like venture capitalists, since the companies are going public much earlier than companies usually would, thus exposing stock market investors to risks usually associated with venture investing. In other words, to get on the dance floor means investors need to try some new moves.Discuss B2B trends in the ongoing B2B Boom discussion in our Think Tank discussion forum, or visit the forums home page. |
