Special Features B2B: The Mood of the Moment

By Dave Marino-Nachison

(Dec. 21, 1999) --To borrow a phrase from the 1980s television advertising tag line of German industrial concern BASF, business-to-business e-commerce doesn't make companies run. It makes companies run -- better.

At least, that's the idea, and the promise that Internet-based automation of crucial and common business transactions will improve bottom lines across the gamut of industries has spurred one of 1999's more memorable herdlike sector run-ups, putting "B2B," as it is cutely called, in the rarefied company of e-commerce, auctions, online financial services, and Linux.

B2B e-commerce is hardly a new concept: It's been a huge part of the reason PC direct seller Dell (Nasdaq: DELL), among others, has been so successful in recent years. "What the Internet does," Dell CFO Tom Meredith told the Gardner brothers in an August interview on Fool Radio, "is, one, allow us to continue to enhance our customer touch, and, two, at the same time bring our suppliers into contact more directly with our customer so they can feel the pulse of real demand as opposed to third-party interpretations of demand." (Click here for the whole interview.)

That sums things up pretty well. So while investor attention has for some time -- Internet time, anyway -- turned toward consumer-focused e-commerce, investors are now discovering in leaps and bounds that the potential market for B2B commerce is measured in the trillions of dollars within the next several years, as opposed to the pedestrian hundreds of billions in online retailing that research organizations have projected.

But "B2B e-commerce," while an easy enough term to remember, doesn't tell you about the sector or its component companies, which have overshadowed beneficiaries like Dell as the firms making B2B e-commerce have come to the public markets. Here, I'll try to sift through it all and simplify -- hopefully not oversimplify -- matters a bit (before you go talk about it on our Business to Business on the Net message board).

Depending on what you read, you might see any number of ways B2B companies are classified. The simplest way I can come up with has two categories: purchases and processes.

Purchases

Inventory. "Stuff," to use a nontechnical term. Companies need it, whether for use (hospitals and medical equipment, for example), refining (automakers and metal), or sale (bookstores and, uh, books). Where they get it and what they pay for it are two pressing questions, to be sure, and B2B commerce is one way.

Take VerticalNet's (Nasdaq: VERT) e-hospitality.com website, for example. Companies that sell, say, espresso machines, can post their items online with descriptions, pricing, and contact information that can create leads -- without necessarily requiring intensive work from a salesperson -- and, eventually, sales.

Some sites will let you make a purchase right then and there. VerticalNet is just one example, some companies focusing on just one industry in much the same way trade publications do and did. (For a summer StockTalk interview with VerticalNet's CEO, click here.) Auction sites let companies auction off excess inventory to reduce waste.

And so prospective buyers get access to a broad, easily accessible comparison shopping resource with plenty of contact and pricing information. Not only can this improve the efficiency of buyers by helping them get the most for their dollar, but it can also increase the responsiveness and evolution of suppliers who can see what their customers do and don't respond to. Buyers want options, you might say, and sellers want to be an option.

And so a company like VerticalNet brings the buyer and the seller together, then swoops in and collects a fee for enabling the transaction. Not a bad deal considering it doesn't have to deal with inventory or fulfillment; imagine an eBay (Nasdaq: EBAY) for the big boys. In fact, industrial-level auctions are picking up in popularity as well, particularly where excess inventory from both retailers and former buyers are concerned.

A few other places to look: Chemdex (Nasdaq: CMDX) is one, CareInsite (Nasdaq: CARI) and PurchasePro (Nasdaq: PPRO) are two more. You might want to run down the rolls of venture companies like Internet Capital Group (Nasdaq: ICGE) and CMGI (Nasdaq: CMGI) for others on the way, though this strategy may work just as well for the next category....

Processes

For companies to reap the bottom-line benefits of B2B commerce on the Internet, they'll need systems. Systems that enable electronic transactions; systems that do customer profiling; systems that manage and update website content; systems that collate and interpret information; and systems that do some or all of the above, plus more.

"Who's going to make those systems," Jack Nicholson might have yelled in the motion picture "A Few Good Companies." "You?" Not me, but there are plenty of companies out there not the least bit intimidated by the Nathan R. Jessups of the corporate world.

To get a better look at this business, we sat down with the CFO of Ariba (Nasdaq: ARBA) for an August StockTalk interview (click here for the full text). Ariba is one of the companies that writes the software that allows the transactions, tracks and manages supply information, generates expense reports and other forms, and provides customers with product information -- all things that have the potential to be highly labor-intensive.

What else can you get from these guys? How about inventory and expense management, resource dedication, customer service automation, and website content management solutions -- for starters. All crucial for businesses big and small, and all being offered by a host of companies looking to drag this business to the Web and through their doors.

A few other places to look: You might want to consider the C's, including Clarus (Nasdaq: CLRS), Commerce One (Nasdaq: CMRC), Concur Technologies (Nasdaq: CNQR), and Clarify (Nasdaq: CLFY). If you want to move around the alphabet a bit, we've discussed AskJeeves (Nasdaq: ASKJ) as a B2B play on these pages. Other names include Proxicom (Nasdaq: PXCM), Viant (Nasdaq: VIAN), and Retek (Nasdaq: RETK).

Where Do You Go From Here?

There's plenty of opportunity for investors to make money in B2B, but looking for a surefire formula or can't-miss concept at this early stage is a bit wishful. Still, B2B commerce is important to companies' bottom lines both as drivers of sales and increased efficiencies, and enterprises small and large stand to benefit.

Investors should also keep in mind that B2B commerce manifests itself not only in the form of new, stand-alone companies like intermediaries and software scribes, but within established, profitable companies of all kinds. In much the same way that, say, Borders Group (NYSE: BGP) might be able to find new channels for its consumer wares through Borders.com, manufacturers of everything from PCs to Pok�mon (what do you suppose the plural of that is, anyhow?) can profit from the same advantages e-tailers cite when praising the Internet, such as 24-hour availability and customer profiling.

With that in mind, investors should consider that B2B commerce stands to affect virtually every investor in some way over the coming years, not because of what it is but what it does: make businesses run better. That's perhaps the most encouraging thought of all.

The Motley Fool in 1999 »

 Related Links:

  • Business to Business on the Net Message Board
  • "AskJeeves Answers Microsoft's Questions"
  • StockTalk, 8/31/99, Ariba
  • Motley Fool Radio Interview with Dell CFO Tom Meredith
  • StockTalk, 6/28/99, VerticalNet