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Business-to-Government: The Next Frontier for Eyeballs and Transactions

Business-to-consumer (B2C), business-to-business (B2B) and even consumer-to-consumer (C2C) e-commerce are channels that most Internet stock investors are well aware of by this point. But what about business-to-government (B2G)? A lot of investors might be thinking bureaucratic red-tape, old legacy speed and strict regulations. These investors are exactly right!

But this is no time to sound warning alarms. Think Opportunity! Many analysts, including myself, are pegging B2G as the next big wave. Investors should be thinking along the following lines:

1. Bureaucratic red tape: The Internet was engineered to cut such tape. Physical and Intellectual boundaries can be broken, changing the ways in which people communicate, while providing access to information once hidden or unavailable. Red tape equals transactions. . .transactions (in the physical world) carry heavy costs associated with time and labor. The Internet streamlines the process, reducing transactions and cutting costs, while benefiting B2G companies that are bringing local, state and federal government online and helping these entities cut costs and become more efficient.

2) Old legacy speed: Government needs to get online along with the rest of society. International Data Corp. estimates the number of users accessing the Web will increase from approximately 100 million in 1998 to approximately 320 million by the end of 2002. As an industry, government reaches the most people and spends the most amount of money. B2G e-commerce infrastructure providers and infomediaries will provide the tools and speed to get government online.

3) Strict regulations: Great! The Internet is notorious for its low barriers-to-entry. B2B offers much reprieve from B2C where online book shops and toy stores can theoretically be created in just days. B2G offers an even more over-powering and promising proposition to Internet stock investors. Government contracts and licenses (mostly exclusive) and strict regulations will benefit the early movers in this space. A network effect premium or critical mass is achieved when a company delivers a product and/or service that can not be ignored by users/consumers/sellers. In other words, it becomes a liability to not become a part of the network. Think of e-mail. As more people go online and correspond via e-mail, it becomes a liability to not be communicating online via e-mail. The fax machine is another great example. Local and state governments, more often than not, find themselves placing transactions and processing information with other local and state governments. So a somewhat uniform platform and software application system will have to be in place for B2G to prosper. In addition, most businesses and industries will want to be B2G compatible.

It seems then that early movers in B2G will hit a critical mass and achieve a network effect a lot faster than where we've seen it accomplished in the other channels of e-commerce.

Many of the players in this space are still private, including govWorks.com, which closed an $18 million second round of financing in November through Mayfield Fund, KKR and Vignette among others. govWorks.com is an online infomediary for civic services such as paying parking tickets, paying taxes and searching for local government jobs.

Luckily, the B2G market leader is available in the public marketplace: National Information Consortium (EGOV) sets up "free" Internet-based portals for local and state governments, enabling the respective government agencies to do business online with its citizens and corporate customers. NIC then takes a piece of the transaction and processing of information fees taking place at the portals. Transaction fees amounting to NIC revenue could result from consumer/business applications for permits, a renewal request fo