To Be or B2B?

Have entrepreneurs, analysts, and investors given business-to-business
(B2B) e-commerce a bad name? Increasingly, Internet companies are
classifying themselves as B2B plays in order to raise private market
money (pre-IPO) or to attain sky-high Internet market value (post-IPO).

Analysts at large financial institutions such as Goldman Sachs aren’t
helping the situation as they support and pump up the B2B components of
the companies they cover and have in many cases underwritten. Investors
often hear the B2B buzz words on CNBC, initiate due-diligence following
these analysts, and then invest in any Net play that is declaring “we’re
B2B!”

The real problem may not be how the acronym B2B is being applied
however, but it may be its definition or classification to date. So I
would say that when something is so broadly defined, chances are it will
be broadly applied. In this case, the application means the creation
and destruction of billions of dollars in market value and
worth; companies and investors are either riding the wave or getting
crushed. Many are riding the wave and then getting crushed.

Take for instance the recent IPO of Snowball.com (SNOW),
an online network that provides content and e-commerce offerings to the
“Internet Generation” (13-30 yr. olds). Snowball is attempting to be a
niche Yahoo! (YHOO)
or Lycos (LCOS).

Surprisingly enough though, our favorite acronym B2B, was being thrown
around by the company’s CEO, Mark Jung, prior to and on the day of
Snowball’s IPO. Jung likes to believe his company is a B2B play because
of its ability to aggregate a solid base of users (6 million) and then
monetize those users through advertising and e-commerce sponsorships.
Now, Snowball is a well-organized and run company with a promising
future, but its current model does not support a B2B e-commerce
initiative or channel. The stock climbed from $11 to $15-5/16 in its
opening day and reached as high as 20. A week later, shares now trade
at $11. Another casualty of the B2B buzz?

Rick Neely, interim CEO and CFO at Beyond.com (BYND)
recently told me “the major impacts of B2C companies trying to
front as B2B companies are more confusion for investors and it also
becomes harder for true B2B companies to get their message heard.”

Neely uses a key question to try and differentiate between just selling
to businesses vs. being a true B2B player: “What does your service or
product do that enables businesses to do what they fundamentally could
not do before, how do you quantify that value?” Beyond.com recently
announced a change in its business model, focusing on the emerging B2B
e-commerce market instead of exclusively catering to software
consumers. The move comes at a time when Beyond.com’s stock is slumping
and investor optimism in the B2C sector has diminished. Still,
Beyond.com has strong B2B potential and is one of the few legitimate Web
companies which have successfully and honestly scaled their model to
include B2B e-commerce.

So how do we define and classify B2B e-commerce companies? I define B2B
e-commerce companies as Web based infrastructure providers
(software/services) or market makers (hubs) that help other
companies do business with one another. The sticking point is that the
B2B company must play a third party role. Either one of the two B’s in
B-2-B can not be represented by a B2B e-commerce company. This is the
whole idea of an “infomediary,” becoming the point of aggregation or

an agent to enable and initiate online B2B e-commerce transactions.

To me, the most attractive businesses on the Web are actually hubs, a
destination where users aggregate, read, talk, and hopefully make
transactions. Think eBay (EBAY)
in the consumer-to-consumer (C2C) space. Already prevalent in the B2B
space, companies such as Commerce
One
(CMRC),
Ariba (ARBA),
and VerticalNet (VERT)
have set up marketplaces where companies can buy/sell products and
services from other companies.

I tried to think of similar hubs in the physical world where people
happily aggregate and spend freely. Barnes & Noble and Starbucks
immediately came to mind. These are “hubs” where people go to read,
socialize, and to buy books, coffee, and teacakes. But, ah yes, both
companies hold inventory and don’t really provide the pricing and
consumer benefits of the Internet. So I sat down and kept thinking of
offline companies that hold little or no inventory and match buyers and
sellers.

What kind of offline company aggregates a large group of
buyers and sellers and initiates transactions to occur? Trade shows.
Think Internet World! (The Internet industry’s largest and most famous
trade show.) For online hubs the major costs become the infrastructure
(virtual site programming and design) and marketing expenses. This is
also true for Internet World…rent a building and promote the event.
The buyers are the audience (Industry professionals). The sellers are
the companies buying booths to promote their products and services to
these professionals (CMGI etc). The cool thing is that both the buyers
and sellers pay Internet World. Internet World’s role? A point of
aggregation for two parties desperately seeking to meet.

Another great example of a public Web company supporting such a model is
Onvia.com (ONVI).
Buyers and sellers of business products/services, traditionally had
trouble finding one another, especially companies entrenched in the
small-business market. Onvia provides an online hub, connecting buyers
and sellers in this market.

Onvia.com is a buyer-driven, reverse-auction marketplace that allows
small businesses to put their product and service needs out for bid,
free of charge, to qualified vendors. (So an entrepreneur might visit
Onvia looking to purchase 20 computers, 25 desks with chairs, and a 401k
plan for his new company.) Vendors can view as many quote requests as
they wish and only pay a fee when they submit a bid. Unlike a
traditional auction format, at Onvia.com, the lowest bid usually wins. Although the vendor’s choice also depends on the best perceived service and the product/service’s proximity to the buyer among other factors. Similar
to eBay’s model though, Onvia simply makes the connection…actual
transactions between buyers and vendors occur independently. To
understand the value add, it’s important to understand the simple
process:

1)Buyers submit quote requests detailing their product and service needs
(free of charge). Quote requests are then sent to qualified vendors.

2) Vendors are notified when they have received quote requests on their
Selling Activity page.

3) Vendors review the requests and decide whether they will bid or not.
To bid, vendors submit customized quotes.

4) Buyers receive quotes, compare, view vendor ratings (like eBay), and
then contact the

ir vendor(s) of choice.

Buyers benefit because the service is free, time and money is saved for
more important matters, and only qualified vendors are competing for
their business. Sellers benefit because they’re delivered qualified
sales leads online, reducing customer acquisition costs and expanding
their sales territory.

Lessons learned…Planning ahead

Beware of B2C and corporate service companies fronting as B2B plays. Be
able to readily identify B2B e-commerce companies. This means companies
acting as a third party (not one of the B’s) to help companies to
business with one another. These are infrastructure providers
(software/services) and market makers (hubs). The best examples are
Commerce One, Ariba, VerticalNet, and Onvia.com. Without contemplating
market valuation, it’s very safe to say that eBay has the most
attractive and successful business model on the Web today. Investors
should be looking to parallel this model and company across all sectors,
especially in B2B e-commerce.

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