Digital Matters - Issue 28

Business-to-business e-commerce is the vanguard of the Internet revolution

The New York Times recently reported that the combined 1998 revenues of every retailer on the internet — $8 billion, according to Forrester Research — did not match that of one e-commerce business: Cisco Systems, whose 1999 business-to-business e-commerce revenues exceeded $9 billion.

Cisco is by no means exceptional. Intel and IBM sell even more than that over the Internet. And a host of other companies, from automobile manufacturers to major pharmaceutical concerns to energy wholesalers, will soon join Cisco, Intel, and IBM in the 10-figure business-to-business e-commerce revenue club — that is, if they haven't already.

Business-to-business e-commerce is growing at breakneck speed. In 1997, Forrester Research predicted that the business-to-business e-commerce market would reach $327 billion by 2002. In November 1998, Forrester "resized" that estimate to $1.3 trillion by 2003. That $1.3 trillion figure would amount to almost 10% of all commercial business-to-business activity. And there are those who believe that Forrester will have to resize their $1.3 trillion estimate upward again — and soon.

Business-to-business e-commerce is the vanguard of the Internet revolution. Press coverage continues to focus on retail e-commerce, in much the same way (and for many of the same reasons) that it focuses on the stock market instead of the bond market. But the story of how the Internet is transforming commerce is being written right now, in the business-to-business arena.

The stunning success of business-to-business e-commerce ensures that retail e-commerce will soon transform almost all of our everyday transactions. There are a number of reasons why this is true, but consider just three:

First, the days of 28.8-Kbps and 56-Kbps modems are rapidly coming to a close. Bandwidth is on the way, and with it comes even faster speeds. Indeed, corporations and Wall Street are underwriting the telecommunications infrastructure with such wild abandon that some analysts have taken to fretting about "bandwidth glut." That is nonsense, but it does illustrate that the infrastructure to support a parallel universe of e-commerce is being built and will be capable of handling both the business-to-business and retail e-commerce "loads."

Second, as more "best businesses" find increased productivity and profitability on the Internet, more of them will insist that their vendors and customers become fully Internet capable. Savings on the Web are immense, even after you factor in the technological investment. Long-distance phone calls cost a penny instead of a dime. The Web cuts the cost of financial transactions by as much as three-quarters. Everywhere you look on the supply-and-demand chain, it's cheaper on the Net.

And corporations are getting with the program. Four months ago, General Electric CEO Jack Welch announced that he had seen the light — and its name was Internet technology. He decreed that by the end of 1999, every division of GE had better have a fully operational Internet capability — or else. No one had to tell GE's managers what "or else" meant.

Welch's edict reverberated throughout corporate America. You could almost hear Welch's peers saying to themselves, "If that's what GE's doing, we'd better be doing it too." All of GE's vendors knew instantly that they had to get wired or they'd lose their best customer.

These days, if the Internet is not central to your business, the belief among the ranking chieftains is that you will soon be out of business. As Andy Grove of Intel put it recently: In five years, every business has to be an Internet business.

Third, as boundaries are erased and time is compressed, transactional speed becomes imperative. The often-repeated wisdom, "The new economy favors speed over size" is only half of the truth. The other half is that giant, fast companies will crush quick, smaller ones. But this business of speed and time is, by itself, an overwhelming force. Once you get used to email, snail mail isn't the same. As more and more businesses (and their people) become accustomed to the world of Internet business-to-business commerce, the more they will insist that retail commerce operate on the same frequency.

How is business-to-business commerce configuring itself? And what does that tell us about how retail e-commerce will be configured? In a recent interview in the Economist, Varda Lief of Forrester Research identified three new business-to-business models: "First, there are aggregators, such as Chemdex, which helps buyers in fragmented markets select products by providing up-to-the-minute price and product information and a single contact point for service. Next, there are online auctioneers, such as Adauction, which offer a reliable channel for sellers to dispose of perishable or surplus goods or services at the best possible prices, and for buyers to get bargain prices without taking a leap into the unknown. And lastly, there are exchanges, such as NTE, that create liquidity in otherwise fragmented markets, lower average stock levels by matching bid/ask offers and act as neutral third parties, enforcing market rules and settlement terms."

These same configurations are emerging in retail e-commerce. America Online and Yahoo! are less portals and more aggregators, bringing millions of customers cheaper Visa cards, lower long-distance rates, and less-costly insurance products. Companies like RealEstate.com and Amazon.com have modeled themselves along the same lines. Citibank's whole strategy is based on the aggregation of 1 billion customers.

Retail e-commerce auctioneers include eBay, priceline.com, and a host of lesser-known sites. Amazon.com has also adopted this model, on the theory that the knowledge it has gained from aggregation gives it added value in the world of auctions. Exchanges are popping up everywhere, especially in the financial-trading world. This past summer, Charles Schwab and Fidelity joined forces to create a giant electronic-trading network (called an ECN) that functions as the equivalent of a stock market. The creation of this ECN has already caused major upheavals in the world's financial marketplaces. It is not hard to imagine that soon a gigantic ECN will allow people everywhere to buy and sell financial products 24 hours a day, 7 days a week.

What are the larger implications of the explosion of business-to-business commerce on the Web?

The first implication, to borrow a slogan from a bad movie: Size matters. In the early adoption phase of the Internet, speed was critical to success. If you got to market first, you won. In this next phase, size will be critical to success, because the incremental cost of adding customers is negligible. The greater the number of customers, the more formidable the aggregator, the more efficient the auction, the more liquid the exchange.

The second implication of business-to-business e-commerce is that more knowledge is mandatory. In the new world of business-to-business e-commerce, this is called transparency. Twenty years ago, General Motors told its vendors what it wanted, and that was that. Today, gm's vendors know exactly what gm is doing at any given moment and vice versa. As Michigan-based management consultant John Cleveland says, "Business customers and business vendors live in a world of 'perfect knowledge,' where every participant knows exactly where the other stands and for how long that player is likely to stand there."

Finally, and perhaps most important, e-commerce in the business-to-business market portends a dramatic shift in the price-value relationship. Big business-to-business e-commerce players like Cisco and Intel are not hammering their vendors on price, as one might expect them to, by means of a "constant bidding" process. Instead, they're more interested in maintaining a long-term relationship with a valued member of what they call the "Cisco team" or the "Intel team."

Coca-Cola recently revealed what has to be the stupidest idea it's come up with since New Coke: The company plans to use Internet technology to monitor the outdoor temperatures of its vending machines around the world. Who knows where this will lead? If the temperature rises above a certain level, say 80 degrees, will the price of an ice-cold can of Diet Coke go up a nickel or a dime?

Talk about a nickel-and-dime mind-set! If Coke had any understanding of the new price-value dynamic, it would realize that the price of a Diet Coke should go down a dime on a hot day, because the long-term value of customer loyalty greatly exceeds the short-term gain of 10 cents.

This is the key to Internet commerce of all kinds: Your customers aren't customers anymore. Your vendors aren't vendors anymore. They're either your teammates or someone else's teammates. If you're not on their team, they'll find someone who is. It doesn't matter if it's business-to-business e-commerce or retail e-commerce. Another team is just a click away.

John Ellis (jellis@fastcompany.com) is a consultant and columnist based in New York .

Add New Comment

0 Comments