No Overnight Success for B2B

Just two years ago, analysts, venture capitalists and the media were feverish with excitement over the prospects of the infant business-to-consumer (B2C) e-commerce industry. Dazzling projections spurred unrestrained funding followed by giddy news coverage as one dot-com after another joined the IPO party. But the rug was pulled out from under some of the brightest B2C babies before they had a chance to get up on their feet, and low murmurs of disillusionment quickly became a dull roar. A shakeout was coming.

As the B2C gloom descended, a new e-commerce hero was born: the business-to-business (B2B) industry. The projections were blinding, investment dollars flowed like a river, and once again, the press buzzed. Despite cautionary advice about a long, bumpy road ahead, B2B expectations remain high. Perhaps too high. Many B2C babies are being thrown out with the bath water, but some of their B2B cousins are gestating in an environment so harsh, they may never see the light of day.

A Nut for Every Bolt

B2B is about all the widgets and gizmos that keep industry giants running. The idea is that huge companies can save big bucks by going to Internet mega-sites designed to expedite the purchase of supplies and equipment, instead of having to deal with individual vendors. Virtually every industry has seen the launch of at least one B2B exchange during the past year. Marketplaces are springing up for automakers, IT giants, chemical suppliers — you name it — with loud blasts of accompanying fanfare.

For example, early this year IBM (NYSE: IBM) unveiled Component Knowledge, an online B2B procurement service for the electronic components industry. In the next few weeks, DuPont announced its B2B market for industrial goods and services; several “Baby Bells” jumped in with B2B marketplaces for the telecommunications industry; U.S. Steel said it would sell prime and non-prime steel products on the e-Steel Exchange; and Sears inked a deal with Oracle to form a global B2B marketplace for the retail industry.

B2B exchanges are in the works for the agriculture, mining, aerospace, hotel, and healthcare industries. The list could literally go on and on.

Fountain of Riches?

The U.S. B2B marketplace will trigger more than $6 trillion (US$) in trade by 2005, according to a recent report from Jupiter Communications. However, the staggering figure is less indicative of anticipated increases in spending than of a major shift in sales channels. And if the companies who now seem willing to enter the B2B waters do not enjoy some early advantages by taking their business to the Net, they could abandon the idea of vertical exchanges even faster than they embraced it.

The companies that make the software to power the sites, like Ariba, Oracle and IBM, to name just a few, are basking in Wall Street favor. After all, they will collect enormous revenues just to build the infrastructures for the mega-sites, and they can begin counting profits before the exchanges are even fully operational, let alone crowned with success.

Despite all the ballyhoo, some analysts question whether the B2B marketplaces are even fundamentally a good idea. If they are, it is crucial that they overcome the obstacles that threaten to defeat them before investors with short attention spans start looking around for the next fad.

Bottom Line Is Not the Bottom Line

Because industry leaders are driven by the bottom line, some B2B proponents say, the cost-cutting advantages of the online exchanges will overrule any downside to switching sales channels, such as disrupting long-standing relationships with established vendors. But can the B2B sites reduce prices enough to absorb the costs of building and maintaining their operations — and still charge high enough transaction fees to make handsome profits? Perhaps the critical question is, can they do so before their financial backers lose interest?

Industry observers who have not been seized by B2B mania contend that the price of goods is not the main concern of big businesses. In fact, they say, relationships built on trust and loyalty are more important. Businesses are more interested in reliability, quality and excellent service from vendors who have proven their worth over the long run, and they will not be lured to the anonymous Internet merely on the chance that they can save a few pennies on the dollar.

Antitrust Specter

Even if the mega-sites manage to overcome initial resistance on the part of some buyers, there is the looming question of whether government agencies may step in and put an end to some of the ventures — or at least seriously disrupt them — out of antitrust concerns.

Earlier this year, The American Society of Travel Agents (ASTA) formally requested that the U.S. Department of Justice (DOJ) block the sale of airline tickets by 27 U.S. and foreign carriers on an industry-wide Web site. The Alexandria, Virginia-based group claimed that the new site would violate antitrust laws and lead to price fixing.

Weeks later, the U.S. Federal Trade Commission (FTC) announced that it was beginning an investigation into an online auto exchange backed by the big three U.S. automakers. According to the FTC, the main concern over B2B exchanges is that they could ultimately deter competition by controlling pricing.

Security Nightmare

As if the prospect of drawn out antitrust investigations were not dampening enough, some analysts have raised dire concerns over the Internet security issue. A denial-of-service (DoS) attack on a B2B marketplace could cripple an entire industry — and would make the much-publicized assaults on several Internet giants earlier this year look like a day in the park by comparison.

Despite the uncertainties for both B2Cs and B2Bs, e-commerce overall has unquestionably taken root, and no one is predicting the demise of the Internet. Nevertheless, just as the failures of some dot-coms are devastating for the companies — and their financial backers — who bite the dust, the failure of the entire B2B business model could be exponentially disastrous for those who have sunk their resources and their hopes in that single basket, however large it appears to be.

If the B2B model does not work because it is flawed, it will be a pity. But if it fails because investors, analysts and the media are too short-sighted to give it a sufficient chance to mature, that will be a crime.