Digital Matters - Issue 28

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."