March 2, 2000 1:00 PM PST

B2B investing no certain road to riches

Will the magic last for business-to-business e-commerce?

Companies in this market are the rage on Wall Street and among venture capitalists. But analysts warn that despite the explosive growth of the area, investors have a long, bumpy road ahead before expected profits will materialize.

While this market is not as glamorous as business-to-consumer e-commerce--with household names such as Amazon.com and eBay--in sheer dollars it may soon dwarf its better-known cousin. The leading research firms have the business-to-business (B2B) market pegged between $2.7 trillion and $7.3 trillion by 2004 from about $131 billion in 1999. In comparison, Forrester Research projects business-to-consumer spending will reach $184.5 billion in 2004, up from $20.3 billion last year.

Business-to-business ventures typically deal in nuts and bolts--literally--and other industrial and commercial items. Firms selling specialized software and offering online exchanges promise to drastically decrease the cost of doing business, thereby increasing profits and making new, more economically sound ventures possible.

The sector is part of nearly every new business plan, analysts say. Companies are springing up daily, and even old-line companies such as General Motors, Ford Motor and Sears Roebuck are getting in on the action.

CNET TV: Business to business
CNET TV: Business to business

As if that isn't enough to attract investors, Andy Grove, Intel's chairman, recently said that if he were to start his career over, he would probably delve into the market.

"In the past six months, the key magic word has been 'B2B,' with everyone including it their press releases and using it during conference calls with analysts. It can be pretty disgusting," said Darren Chervitz, a senior analyst at the $270 million Jacob Internet Fund, which launched in December. "There is no question that B2B is a huge opportunity across many industries, but it is not going to be as easy as flicking a switch."

Most analysts agree that business-to-business will have a tremendous effect on companies--from streamlining purchasing and accounting to selling excess inventory--but many roadblocks exist that could conspire to slow the juggernaut.

"In my mind there are a number of issues and concerns that need to be addressed before this (sector) can move forward," said J.C. Simbana, an analyst at American Frontier, a Denver-based brokerage firm. Simbana cites concerns over slower-than-expected adoption, because of standards issues, and security problems that could keep many participants on the sidelines.

The model may be adopted more slowly than many companies expect because of inevitable compatibility problems between company networks and the software infrastructure available.

"The next stage is to make sure there is a standard out there," Simbana said. "If I am (General Motors), then I have to make sure all my suppliers are on the same platform."

This issue is underscored by the recent battle between leading carmakers GM and Ford, which were creating online marketplaces for their suppliers using Commerce One and Oracle, respectively. Last week the companies, along with DaimlerCrysler, merged their ventures in an effort to cut costs.

The rivalry between Commerce One and other software manufacturers makes sense, given the experience on the consumer side of e-commerce. For example: Once online auctioneer eBay reached critical mass in terms of the number of items available, most people began to turn to it for their auctioning needs.

"As a buyer you always want to go to the place with the most sellers because that is where you'll find the best selection," said Alan Mak, an analyst at Argus Research. "You don't want to be conducting a whole slew of electronic transactions over different marketplaces."

Analysts say this makes consolidation within the business-to-business sector inevitable.

But even hooking a large company's data to e-commerce software could be problematic.

"There may be overexpectations that a company will be up and running in a quarter or six months," said Lawrence York, portfolio manager at WWW Internet Fund. "But the task is suddenly monumental when you try to automate and tie back to the data stored" throughout the company.

Another stumbling block could be a potential resistance to change among various corporate cultures.

"Many corporations have an infrastructure for major purchases and sales that is still human," Chervitz said. "Selling steel today, for example, still involves taking people out to lunch, hitting the golf course--that will not be an easy thing to forget."

Security also promises to be a big concern--especially in light of the Shutdown
special report recent "distributed denial of service" hacker attacks--because taking down one marketplace where a number of companies buy and sell their goods would cripple entire industries rather than a few stores.

"The potential for it being a real impact on the economy is much bigger," American Frontier's Simbana said.

Despite the potential potholes, even bearish analysts expect big results from the sector.

"The basic premise behind the excitement over B2B e-commerce--both market opportunity and size--and the value it will create is incredibly sound," said Mark Ein, chief executive at VentureHouse Group, a start-up venture fund based in Washington, D.C. "B2B is going to really revolutionize some industries."

 

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