B2B is certainly much more difficult to study and understand than B2C since as consumers we do not directly use the products and services offered by most of the B2B companies. I order books from Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> all the time. I have yet to buy waste water factory equipment through VerticalNet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VERT)") else Response.Write("(Nasdaq: VERT)") end if %> or a herd of cattle through eMerge <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EMRG)") else Response.Write("(Nasdaq: EMRG)") end if %>. Nevertheless, it's worth learning the lingo and studying further since the potential for the B2B companies to create value is enormous.
B2B commerce, both online and offline, simply dwarfs B2C commerce in size. After all, when a consumer buys any product, it is but the last step in a long chain of events and transactions that went into creating the final product. For example, think of how a car is created. It basically starts out as a rock in the ground. The metal is mined by a mining company. The metal is then purified and perhaps sold to a steel company. The steel company modifies it a bit more and then sells it to a parts factory. The steel is made into parts and sold to the auto companies. (All companies involved thus far must buy equipment from other companies.) The cars are then sold to dealers who, in the only step that is really B2C, sell to consumers. Since there are many more B2B than B2C transactions along the way, that means there are that many more ways in which processes can be streamlined and markets made more efficient.
But don't take my word for it that B2B is big business. Look at just about any market research company studying online B2B commerce and they all say the same thing -- it's going to be huge. One of the most quoted firms is Forrester Research. Forrester expects that B2B e-commerce will be responsible for approximately $1.5 trillion worth of goods and services changing hands domestically by 2003. For comparison's sake, this is about 14 times larger than their estimate for B2C e-commerce.
Beyond moving a much greater amount of goods, B2B companies are aiming to rehabilitate processes that badly need remodeling. Electronic commerce is all about reducing market inefficiencies in getting products and services from suppliers to buyers. To be concise, the process of buying in the corporate world is, even today, extremely fat and filled with red tape. Both B2B and B2C companies are offering ways for commerce to lose weight, but the offline B2B trade is much fatter to begin with.
B2B companies can basically be broken down into two groups -- horizontal (across many industries) and vertical (within an industry) companies. Leaders in both sectors have tremendous sustainable competitive advantages.
For the vertical companies that act as market makers within an industry, there is a powerful phenomena known as the Network Effect. Basically, this happens when a market's attractiveness greatly increases with additional buyers and sellers. The market that hosts the most buyers will be the most attractive to the sellers, and vice versa. Most vertical markets should be "winner takes most" markets for the companies that lead in a given vertical industry.
For the horizontal companies that are selling solutions across many different industries, their clients will have tremendous switching costs. The software products become ingrained in a company's operations, and getting a company's employees up to speed on a software platform is also not cheap. In short, businesses that make an up-front investment to join a market or start using a software solution are going to be reluctant to write off that investment and lay out more cash for a different B2B service.
Not only are the switching costs much higher in the B2B sector, but the companies that either host B2B commerce or supply the required "picks and shovels" have superior business models compared to the online retailers. While B2C companies may be working out retail inefficiencies by trying to minimize the inventory they carry, the B2B companies will, for the most part, be entirely "virtual" businesses. Meaning, they will not carry inventory and will merely be acting as matchmakers, much like eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> does in the C2C realm. This can lead to tremendous returns on invested capital since the working capital needs of such virtual businesses is practically nil.
With featherweight working capital requirements, B2B companies will find it much easier to grow their companies to scale. Moreover, the B2B firms generally do not need to worry about product fulfillment, that is, getting the products into buyers' hands. The online retailers, while needing less of a physical presence than their offline peers, still need to invest in expensive warehouses and distribution facilities. The B2B firms are not really in the shipping and distribution business, though they can certainly arrange for such things.
In order to best measure the success of our prognostications, I have picked five companies that I believe exemplify B2B e-commerce, and Rick will do the same for B2C e-commerce. The five companies I've chosen as representatives of B2B are:
Ariba <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARBA)") else Response.Write("(Nasdaq: ARBA)") end if %> Company Snapshot
i2 <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITWO)") else Response.Write("(Nasdaq: ITWO)") end if %> Company Snapshot
Internet Capital Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICGE)") else Response.Write("(Nasdaq: ICGE)") end if %> Company Snapshot
Siebel Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEBL)") else Response.Write("(Nasdaq: SEBL)") end if %> Company Snapshot
VerticalNet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VERT)") else Response.Write("(Nasdaq: VERT)") end if %> Company Snapshot
Over the last year I've argued in other Duels the bullish case for three of the five representative B2C companies listed in Rick's argument. They are all strong companies chasing a good opportunity to change the retailing world. However, as consumers, we're minuscule buyers compared to businesses. In short, I'm bullish about the future of both types of e-commerce, but B2B seems to represent a much larger opportunity.
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