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Navigating the B2B maze
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May 23, 2000: 2:07 p.m. ET
Finding an e-commerce site or exchange that works for your small business
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - Business-to-business exchanges and Web sites are all the rage. The securities firm Morgan Stanley Dean Witter is tracking more than 700 B2B sites, and expects the number to reach 2,000 by the end of this year and 5,000 by the end of 2002. More than 200 press releases were issued in the first three months of this year touting B2B Web sites or exchanges.
The numerous companies promoting B2B e-commerce claim it has the potential to address structural inefficiencies of the traditional marketplace, streamline complex processes, reduce costs and improve productivity.
Forrester Research, based in Cambridge, Mass., projects that B2B e-commerce will grow from $406.2 billion in 2000 to $1.8 trillion in 2003 and $2.7 trillion in 2004. Along the same lines, Forrester projects that business auctions over the Internet will rise from $8.7 billion in 1998 to $52.6 billion by 2002.
But how can a small business sort through all those B2B offerings to see if any represent good opportunities for selling products or buying raw materials and services? And are these sites small-business friendly?
More hype than reality
Unfortunately, there is no central directory of B2B Web sites and exchanges that is as comprehensive and easy to use as the telephone Yellow Pages or the Thomas Register, although several consultants and Web sites have compiled lists of these exchanges. In addition, many B2B Web sites and exchanges still are in their infancy and are more hype than reality at this point.
"Most have a trickle of volume and the bulk will remain of marginal import in the scheme of things," Morgan Stanley Dean Witter analysts Charles Phillips and Mary Meeker said in a recent research report. "We saw an exchange for the worldwide market in Ferris wheels recently -- we started to wonder if we are reaching the peak."
Vernon Keenan, an Internet analyst at Keenan Vision Inc. in San Francisco, recently completed a survey of 620 B2B exchanges and found that fewer than 10 percent of them are active, or posting content and process transactions.
For a small business, trying to use a B2B Web site or exchange today is "kind of like showing up to the mall while they are still pouring concrete," Keenan said.
In addition, there is no independent authority that rates or scores B2B exchanges, and the exchanges haven't agreed on a shared way to certify that some participants are women- or minority-owned small businesses. Thus, a business that wants to be recognized as women- or minority-owned has to prove its credentials to each individual exchange.
"The B2B exchanges are not small-business hostile, but they're mostly small-business ignorant today," said Rick Villars, vice president of International Data Corp.'s Internet and e-commerce strategies practice. "If you want to buy things from them, they are decent in terms of basic functionality, but if you want to sell on them, it's much harder to participate."
Selling goods and services over a B2B exchange often involves integration between the exchange and a company's accounts payable and order entry systems. Software to accomplish that integration is not fully developed yet for small businesses, Villars said.
Still, small businesses may find some B2B Web sites and exchanges to be worth checking out. Keenan's survey of them can be downloaded free from www.keenanvision.com.
Storefront presence on the Web
Instead of trying to join a specialized B2B exchange, small businesses might want to start by expanding their "storefront" presence on the Web. San Francisco-based Bigstep.com is devoted to helping small companies build an e-commerce Web site, communicate with customers, market the site and track visitors, among other services. Bigstep.com announced in March that it had received $50 million in venture funding.
Bigstep.com says that fewer than 10 percent of the more than seven million U.S small businesses have e-business sites. However, more than 3.3 million small businesses will create such sites by 2002, the company says. Its basic services are free; Bigstep.com plans to earn revenue from "value-added services," such as selling domain names and banner advertising space.
SmartAge.com is another site based in San Francisco that provides B2B small business e-commerce and online promotional services. Like Bigstep.com, it enables members to create and promote their Web sites, attract customers and buy and sell products online. Last March, Smartage.com filed with the Securities and Exchange Commission to become publicly traded. The company is just getting off the ground, having lost $13.8 million on revenue of $2.6 million last year.
Software maker Microsoft Corp. (MSFT: Research, Estimates) also offers small businesses a way to cut through the B2B hype and clutter with its bCentral Web site, which enables companies to set up commerce Web sites, market a business online, conduct business auctions, and get loans and financing.
Vertical exchanges
For small companies that want to move beyond a Web site into a true B2B exchange environment, Horsham, Pa.-based VerticalNet (VERT: Research, Estimates) might be the best place to start. VerticalNet owns and operates 56 industry-specific Web sites designed as online B2B communities, known as "vertical trade communities."
Each of these communities is designed to attract people who select and purchase highly specialized industry-related products and services. Examples of VerticalNet communities include adhesives and sealants, the bakery industry, dentistry, food ingredients, long-term care, machine tools, pulp and paper, and solid waste treatment.
VerticalNet is still small but growing rapidly. The company's revenue reached $27.5 million for the first quarter, ended March 31, compared with $10.1 million in the preceding quarter and $1.9 million in the first quarter of 1999.
Its stock has plummeted to 40-1/8 recently from a 52-week high of 148-3/8, as B2B investors have begun to separate hype from reality. Still, the company sports a $3 billion market capitalization and has received a $100 million equity investment from Microsoft.
Last March, VerticalNet reached an agreement with Microsoft under which the software firm will purchase at least 80,000 virtual "storefronts" and e-commerce centers from VerticalNet, which Microsoft then will sell to third-party businesses. Microsoft agreed to pay a minimum of $162 million for the storefronts (about $2,000 each), which will be placed on one of VerticalNet's vertical trade communities.
Selling to the big guys
Small businesses looking for a chance to sell materials and services directly to the big guys using the Web should check out Pittsburgh, Pa.-based Free Markets Inc. FreeMarkets (FMKT: Research, Estimates) conducts auctions where thousands of small companies get a chance to sell supplies and services to a group of 47 large companies, including United Technologies, Quaker Oats, Owens Corning, Eaton Corp., and SmithKline Beecham.
In the first quarter this year, $1.4 billion worth of goods and services were sold through FreeMarkets auctions, and the company claims it generated $300 million in cost savings for the buyers and sellers who participated. FreeMarkets is free for the roughly 4,000 suppliers who participate. The company earns its revenue from fees paid by the large companies that are the buyers.
To take part in FreeMarkets auctions, suppliers have to fill out a questionnaire about their qualifications; the buyers then decide which suppliers will be allowed to participate. FreeMarkets helps develop and enforce the rules for each market it establishes.
FreeMarkets' first-quarter revenue rose to $10.8 million, from $3.5 million e year earlier. As with VerticalNet, FreeMarkets' stock has plummeted as investors in B2B companies reassess share values. It recently traded for 51-3/4, down 86 percent from a 52-week high of 370. Still, the company has a market capitalization of $1.9 billion.
The market is the entire planetFor small businesses seeking to buy or sell through B2B exchanges, the key point to remember is that efficient markets will develop first for products that are common, standardized and have a large number of buyers and suppliers. It's much tougher to create markets for highly specialized or custom products, no matter how good the computer hardware or software.
Still, the global nature of the Web eventually may enable some virtual communities to develop that support fairly specialized goods. Said Morgan Stanley analysts Phillips and Meeker: "The company that wants to make left-handed bowling balls just might find a big enough community to make a living when the relevant market is the entire planet instead of Peoria." 
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