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

r a license or a filing of a report. NIC is at the forefront of the
B2G
procurement/infomediary opportunity.

Recently, NIC entered into an agreement with the Office of the Governor
of
Hawaii to create an enterprise-wide portal solution. The company also
recently announced that Idaho would enter into a similar agreement. NIC
also provides applications and services for Arkansas, Georgia, Indiana,
Iowa, Kansas, Maine, Nebraska, Utah and Virginia.

NIC is experiencing 65 percent year-over-year revenue growth. For the
three
months ended 12/31/99, revenues were $16.5 million. In addition, the
net
loss for this period narrowed to $3.5 million, or $0.07 per share,
compared
with a $3.9 million, or $0.09 per share loss in Q4:98. On January 21,
Prudential Volpe Tech initiated coverage with a “strong buy.”

It looks very likely that B2G will be the next wave Internet stock
investors
ride to the shore line. . .or the bank. NIC is a first mover and market
leader in the space. Trading at 51-1/4 with a $2.7 billion market cap,
EGOV is trading at a substantial discount to its B2C and B2B counterparts
when you consider its addressable market, high barriers-to-entry, strong
revenue growth and leading position in a trend that has yet to emerge.

Stay tuned as [email protected] will soon sit down with NIC’s president,
CEO, COO and director, James Dodd.

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