The Next Wave of E-Commerce
By
Suzanne Galante
Staff Reporter
SAN FRANCISCO -- Investors have pushed e-commerce stocks into the
troposphere based on consumer purchases of CDs, books and computer goods online. Next on the list: business-to-business e-commerce.
Some industries, like the automotive industry, were using EDI -- electronic data interchange -- several years ago to conduct business electronically. That technology is restrictive and proprietary, so many of these businesses are now shifting to the Internet to cut costs, remain competitive and provide more information to customers. Working to gain a bigger piece of the global corporate networking market, AT&T ( (NYSE:T - news) ) recently bought IBM's ((NYSE:IBM - news) ) Global Network, which has tens of thousands of business customers. (In another area of the Internet universe, high-speed access and content, AT&T is concluding its acquisition of Tele-Communications Inc. ( (Nasdaq:TCOMA - news) ), which is the largest
shareholder of @Home ( (Nasdaq:ATHM - news) ), which is buying Excite ( (Nasdaq:XCIT - news) ). Whew!)
Everyone wants a piece of this business. Analysts believe that amid the mayhem surrounding the consumer e-commerce stocks, the business-to-business e-commerce stocks are not getting the attention they merit. Whether it's building the tools to set up an e-business, helping companies run their online purchases more efficiently or bringing buyers and sellers together, analysts say the companies developing these products are going to be the biggest beneficiaries from the next wave of e-commerce.
"Business-to-business
is going to be a key driver of the Internet even long after the consumer companies come and go," says Edward Meehan, a generally bullish e-commerce analyst at Legg Mason. "Every business has to use the Internet to cut costs. They'll do it to remain competitive."
Forrester Research predicts $109.3 billion in business-to-business e-commerce in 1999, compared with an estimated $43.1 billion last year. The research firm expects a whopping $1.33 trillion by 2003 -- rising to 9.4% of business sales, up from just 0.2% in 1997.
The above criteria include the hardware providers like Cisco ( (Nasdaq:CSCO - news) ), the design firms like USWeb/CKS ( Nasdaq:USWB - news) ) and full-service companies like IBM. Demand will drive the Ciscos and IBMs of the world, but the biggest winners might be those that provide e-commerce solutions for a specific niche.
Neoforma, for example, combines commerce, content and community services to health-care professionals, hospitals and vendors. Chemdex brings science industry researchers, businesses and suppliers together. Both are part of a new breed of companies leveraging
the Internet to unite buyers and sellers. Neither is public, but keep an eye on them. Chemdex presented at Volpe Brown Whelan's Internet
conference last October, and Neoforma presented at Hambrecht &
Quist's health-care conference last week.
Computer Literacy
( (Nasdaq:CMPL - news) ) developed tools to help companies build their own stores on their intranets. "Initially, the Internet was a consumer phenomenon," says Chris MacAskill, the company's founder, president and CEO. "It was individuals who saw the benefit and their needs were pretty simple, but it quickly became a sophisticated business tool." Unlike the frenzy surrounding consumer-oriented names,
CMPL's stock is more humbly priced at 12, down from 20 in November.
EarthWeb ( (Nasdaq:EWBX - news) ) brings together vendors
and IT professionals through highly targeted technology content Web sites. "Users come for the ads," says Jack Hidary, EarthWeb's president and CEO, "as much as the content." The sites are forums for users to get information and source code and to communicate with peers. EarthWeb, after a rocketing IPO that took shares into the 80s last fall, now trades at about 40. It remains well above its offering price of 14.
"Within five years," says Volpe analyst Charlie Finnie, "the majority of business-to-business transactions will involve an intermediary," an aggregator of information from buyers and sellers that acts as a middleman.
CMPL's primary products are books, but it's experimenting with software. If the software trial is successful, a company source says, full deployment could be implemented as early as the first quarter of 1999. NationsBanc Montgomery Securities analyst Steve Horen, who rates the stock buy,expects revenue of $65.5 million in fiscal 2001, compared with $10.9 million in fiscal 1998. (His firm is an underwriter for CMPL.) "This dramatic growth is fueled by the company's extremely effective customer acquisition model," he said in a recent report, "and strong repeat buying
trends averaging above 50%."
Consumer intermediaries aren't new.
Onsale ( (Nasdaq:ONSL - news) ) brings vendors and
consumers together in an auction format. Preview Travel ( (Nasdaq:PTVL - news) ) and Expedia, a unit
of Microsoft ( (Nasdaq:MSFT - news) ), do the same thing for the
travel industry by collecting data from a variety of sources and providing
an unbiased place to get information.
"Vendors are conflicted," Finnie
says, "because they can't give complete advice about their competition."
That makes intermediaries necessary.
Business-to-business clientele is
also "extremely price insensitive." They aren't spending millions building
a consumer brand. Yahoo! ( (Nasdaq:YHOO - news) ), for example, spent $22.9
million, or 42.7% of revenue, on sales and marketing in its third quarter.
Chemdex, he says, spends less than 10% of revenue on marketing.
Traditional EDI vendors like Sterling Commerce ( (NYSE:SE - news) ), Harbinger ( (Nasdaq:HRBC - news) ) and Web Methods will also continue to benefit, says Bill Burnham, an analyst at Credit Suisse First Boston. "A lot of the big companies like Wal-Mart ( (NYSE:WMT - news) ), Kmart ( (NYSE:KM - news) ) and J.C. Penney ( (NYSE:JCP - news) ) are all using EDI," says Burnham, and they will not switch until the Internet side is more mature.
In some industries, we have crossed the chasm, says Harris Miller,
president of the Information Technology Association of America, and
the technology is becoming the rule rather than the exception. Those on the exception side will likely find themselves at a competitive disadvantage.
Legg Mason's Meehan says this group offers more substance and less
hype. "Investors can make a killing on a given day on theglobe.com
( (Nasdaq:TGLO - news) ), but how much staying power does it have?" asks Meehan. "Until Internet stocks calm down, anything
other than that is less exciting. But long term, management and sound
business models [are the best performers];. We think business-to-business is where you will find real long-term value."
© 1999 TheStreet.com, All
Rights Reserved. |
