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FreeMarkets: Creating a NASDAQ for B2B

Yesterday, there was a strong rally in B2B stocks, showing that the doomsayers may be off-base. Evidence? It came from a legendary software company, Oracle . In the latest quarterly report, the company showed strong growth from its B2B solutions.

One of the stocks that rallied was FreeMarkets . Actually, I visited the company several weeks ago and was definitely impressed. To me, it was kind of like a stock exchange. All auctions are conducted from the Pittsburgh office, where there is a physical trading room. Bidders sit at desks that are hooked to laptops. The room can be a Tower of Bable, as the participants speak different languages.

Since inception, FreeMarkets has conducted purchase orders in excess of $5.4 billion from its trading floor. The cost savings are estimated to be $1 billion for customers.

Here's the concept: Companies constanly need to purchase large amounts of raw materials and supplies. Traditionally, such purchases have been inefficient. However, with the Net, the purchases can be centralized through live auctions. As a result, purchasers get better prices on supplies.

So why would suppliers like to cut their prices? Obviously, they do not. But they do want more volume and customers. FreeMarkets allows for this.

But FreeMarkets is not a simple eBay auction. It is built for the complexities of large transactions. FreeMarkets takes much effort in setting-up the auctions, such as by selecting bidders to participate, the initial terms, and so on. The underlying auction technology is called BidWare and it is is multi-parameter; that is, it allows for different currencies and even price fluctuations on long-term contracts (using a differential indexes).

Like all good companies, FreeMarkets originally focused on certain marketplaces, such as raw materials. However, the auction technology can be applied to many diverse industries. Recently, the company has auctioned tax preparation services.

Moreover, FreeMarkets has purchased several companies in the surplus equipment industry. Apparently, the market is highly fragmented, yet has great margins. Many companies have equipment that is tough to sell and often sits in warehouses.

Revenues have been strong for FreeMarkets. In the last quarter, revenues were $10.8 million, which was a 209% increase from the same period a year ago and a 38% sequential increase. The company did lose money: $8.4 million. But keep in mind: The company, in 1998, did show profits. In other words, FreeMarkets does have a business model that works and is sustainable. And at its current rate of growth, it should not be long until the company returns to profitability.