Investors rush to B2B commerce - Industry Trend or Event

CommunicationsWeek International, Oct 23, 2000 by Peggy Salz-Trautman

Business-to-business commerce is seen as a steady ship amid the turbulence that has characterized dot.com companies. But is this picture true?

Business-to-business (B2B) electronic commerce may be the chink of light in the gloom that has settled on Europe's market for Internet stocks.

An analysis of venture capital investment in European Internet companies, published by Initiative Europe Limited, of Redhill, England, an independent tracker of private equity investments, suggests 2000 will be another record year for fundraising, despite turbulence in the valuations of quoted dot.com companies. And the lion's share of that investment is going to B2B ventures.

Swing of the pendulum

A separate report on electronic commerce in Europe from London-based Andersen consulting Limited found that 93% of businesses surveyed had not changed their e-commerce plans, despite the market correction. And 47% of companies said they are now doing business procurement online, compared with a handful in 1998.

But B2B companies and their investors should not be too complacent. Some analysts say that the B2B sector could simply have reached the same stage as the business-to-consumer sector did a year ago and that some B2B projects will crash just as some B2c projects did later.

"The pendulum has swung too violently in the other direction," said Andy Bottomley, director of research at Durlacher Limited, of London. "People say it's B2B or bust. But the truth is that it's in the middle. Bad ideas have been aggressively capitalized in both parts of the market."

According to Initiative Europe, the volume and value of B2B investments decisively outstripped those of B2C investments in the second quarter of this year. The two sectors were level pegging in the first quarter. And B2B and related service companies attracted 378 investment deals, amounting to 2.1 billion Euros, accounting for the biggest share of all Internet transactions.

"It's clear the [finance] market favors B2B as the reliable business model," said Nicholas Gordon, research analyst at Initiative Europe.

The market is taking a more sober view of B2C concepts and turning its attention to funding B2B services and enabling technologies, which accounted for nearly 60% of all venture capital investment in Internet companies in Europe between January 1999 and July 2000, according to Gordon.

Initiative's research showed an exodus of investors away from "flaky ideas and B2G Internet companies to companies that emphasize management, strategy and the chance of revenues," said Gordon. "We can expect stability in the B2B sector and for it to be one of the very important sectors going into 2001."

A key area will be electronic marketplaces or trading exchanges, usually targeted at specific vertical sectors, with the bulk of revenues raised through advertising and commissions for transactions and sales of goods and services.

"It's a stronger business model and a more compelling proposition than what we've seen in B2C companies," Gordon said.

Indeed, according to Yankee Group Europe, of Watford, England, it is the B2C companies, particularly those Internet service providers that cater only to consumers, that will be caught in the crunch.

"Consumer ISPs are seeing rapid consolidation and suffering under competition from aggressive pricing," said Andy Greemnan, a senior analyst at Yankee Group. "The main problem in the consumer services market is finding a sustainable source of revenue... it's a problem companies in the B2B sector simply don't have." But some analysts say that is too complacent a view because good--and--bad business models are important in both the business and consumer sectors.

"There will be lots of B2B ideas keeling over like tenpins both [in Europe] and in the [United States]," said Durlacher's Bottomley. But vendors of B2B e-commerce services maintain they are on a runaway growth path.

Big boys' game

"The numbers indicate sustainable B2B growth in Europe with [our own] customer acceptance and adoption growing at a tremendous rate," said Daniel Wilson, Brussels-based vice president and managing director of European operations for FreeMarkets Inc., which claims to have launched more than 5,000 online trading exchanges or e-marketplaces.

Analysts remain skeptical. "B2B is a big boys' game," said Durlacher's Bottomley. "It's incredibly fragmented on the hubs' [global trading exchanges] side and you need massive volumes to generate economies of scale. It's OK if you are a Glaxo [Wellcome]... but if you [try to do it] from a small office in Bracknell [England] you will be wiped out."