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.

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