While GartnerGroup predicts that business-to-business (B2B) e-commerce will reach a staggering $7.29 trillion (US$) by 2004, the real sweet spot for most successful B2B players is not likely to be the Web portal arena.
Even though the Internet is already awash with Web sites that exchange everything from farm equipment to toxic waste, most analysts feel the real winners in the exploding B2B landscape will be companies that build the infrastructure and install the applications that make such transactions possible.
This dynamic could be one reason why B2B software maker i2 Technologies did not hesitate to fork over $9.3 billion in stock for Aspect Development, a competing maker of transactional software.
What baffles many old-line observers is that these relatively new high-tech firms eclipsed the planned $9 billion buyout of Times Mirror Co. by media powerhouse Tribune Company, which owns 11 major daily newspapers, 22 television and 4 radio stations.
The reason these mergers are comparable in value can be summed up in two words: market potential.
“In general, valuation and the projected size of the B2B market have gotten so big they have become hard to fathom,” Geoffrey Bock, an analyst with Boston, Massachusetts-based Patricia Seybold Group told the E-Commerce Times. “It’s beginning to sound like the federal budget.”
In Bock’s view, it is important to focus on what a company can actually bring to the B2B table to avoid being swept away by exaggerated perceptions of marketplace potential.
“Again, it’s not so much the market cap of an entire sector one should be concerned about — but instead a company’s strategic advantage in the market,” Bock explains.
Specialization is Key
For instance, Bock points out that such companies as Oracle, Ariba and IBM are already cashing in on this burgeoning market by selling generic B2B software packages. However, he believes that a handful of smaller software companies that specialize in the nuts and bolts of the buy or sell transaction will be the real high fliers.
“By specializing, such companies can cut the time to market for their customers,” Bock says.
For example, Bock cites Rockville, Maryland-based B2B software maker SpaceWorks as a company so well versed in the selling side of e-commerce that it was able to deploy GE Aircraft Engine’s B2B capabilities within a 35-to-45 day time frame.
“Other companies couldn’t have delivered as fast,” Bock says. “Remember, a marketplace is a lonely place without sellers.”
B2B Gold Rush
SpaceWorks’ involvement in developing B2B selling solutions began long before it was fashionable. “We’ve been in this business for five years now,” SpaceWorks President and CEO David MacSwain told the E-Commerce Times. “Now there’s a gold rush because of a seismic change in the interest toward B2B e-commerce.”
While MacSwain admits that SpaceWorks plans to go public when market conditions are favorable, he says growing a successful business is more important than the quick exit strategies being currently executed by some CEOs.
On the subject of out-of-whack valuations in the B2B arena, MacSwain does not claim any special insight. “There’s a lot of bets and no one really knows,” he says.
Consolidation Will Come
George Reilly, research director for GartnerGroup, told the E-Commerce Times that while the proliferation of B2B marketplaces is being fueled by the desire to improve business processes, it is also being driven by hype.
“What we’re seeing now are companies announcing B2B sites that won’t be up and running for six months,” Reilly says. “We’re still in the land grab stage, where companies are trying to leverage their buying power.”
Reilly also feels that there will be major consolidation of the many B2B marketplaces that are being launched daily. Explaining that the industry will not require “half dozen or a dozen marketplaces in vertical markets such as chemicals or printing,” Reilly adds, “There will be a consolidation, and the winners will be those that can execute transactions with value added.”
According to Reilly, online exchanges will not survive if they only create a space for B2B transactions to take place. To be a winner, players will also have to offer credit, delivery and inspection services.
“When you’re buying a roll of steel, logistics and credit become an issue,” Reilly points out. He cites Ariba as a company that understands the importance of value-added offerings. “Ariba started out by focusing on just providing buying solutions, but now, through recent acquisitions, it’s broadening its services,” Reilly adds.
Market Correction Coming
Addressing the question of whether B2B stock valuations will come tumbling down, Reilly is cautious but not pessimistic.
“There have been some dramatic corrections in the business to consumer markets — and you will see some of it in B2B,” Reilly warns. “But in general, the B2B marketplace is faring better.”
According to Reilly, one reason is that many strong infrastructure players that form the underpinnings of the Internet are also powering the B2B marketplace. He notes that while the B2B e-commerce marketplace may not be sexy, it is still a good place to be. “There’s opportunity at every point on the value chain.”