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Tech Industry

Caveat Venditor: Seller beware!

"Love is lovelier, the second time around. Just as wonderful, with both feet on the ground." - Frank Sinatra singing The Second Time Around, lyrics by Sammy Cahn, music by James van Heusen.

    "Love is lovelier, the second time around. Just as wonderful, with both feet on the ground."
    - Frank Sinatra singing The Second Time Around,
    lyrics by Sammy Cahn, music by James van Heusen.

    During the road show for the initial public offering of online bookseller Amazon.com, CEO Jeff Bezos noted that technology frequently penetrates new markets in two distinct waves. In the first wave, companies simply automate the old way of doing things. This type of innovation is useful and does improve productivity, but rarely does it dislocate existing ways of doing business.

    The second, more important wave of innovation crests when companies find ways to use the technology to completely change the original process. This is when technological change has its greatest and finest impact.

    That we are still in the midst of the first wave of electronic commerce, or e-commerce, is obvious. Just look at the metaphors we've chosen: Web malls, digital cash, electronic wallets, digital coupons. Companies build online stores and then advertise in an attempt to herd customers into them. How much do you pay? That depends on the CPM (or cost per thousand stores. High-volume sites charge the advertisers for access to eyeballs. views), a term and concept stolen directly from yesterday's advertising model. Consumers search for companies, and companies struggle to be found. The game is the same; only the medium has changed.

    The second wave is now just coming into sight, but when it crests, merchants aren't going to like what they see. Over the next few years the breakthrough success stories in e-commerce will be those that seek to lower transaction costs and effort for the buyer, not the seller.

    For 30 years, we've been using technology to benefit merchants. By lowering the cost of selling or streamlining the process, merchants bought solutions based on their expected rates of return. As a result, there must be billions and billions of dollars tied up in VeriFone terminals, point-of-sale systems, and back-end clearing systems. Today, companies are encouraged to move to the Web as a distribution network for similar reasons. Early movers expect to expand their revenues and dramatically lower their costs of sales and support.

    Global information systems, such as the Internet, will let purchasers establish a highly efficient marketplace similar to the stock market or, perhaps more apt, the commodity futures market. Systems like the Net make it easier for consumers to get the word out on what they want to buy and what they're willing to pay. Then they wait for sellers to knock on the door.

    Four distinct buyer-focused e-commerce business models are emerging, the first two for business-to-business sales and the second two for individual purchases:

    Model 1: Automated Purchasing
    In the business-to-business market, large companies are on the verge of implementing elaborate workflow procurement systems to automate the purchase of non-production goods and services. The cost savings of automating the purchase, approval, and auditing process will be dramatic. Moreover, companies using these systems will have more protection from entry errors and clever employees who routinely skirt corporate policies.

    Employees will use browsers to input requests for goods, such as pencils, and services, such as travel. The application server will then take care of qualification and route the request to the appropriate manager for approval. Suppliers will be asked to package their catalog in a format dictated by the software provider, which will obviously not provide the best opportunity for the seller to differentiate its wares. Some of the small companies focused on aiding the buyer in this manner are Ariba and Elekom, early leaders in "MRO" (maintenance, repair, and operations) purchasing software, and Extensity,* a leader in travel expense management products.

    You may wonder why I believe that these small and unsubstantiated players will have such a dramatic effect on the e-commerce market. When several Fortune 100 companies implement these solutions, the suppliers will be placed in a position of supporting the interface or potentially sacrificing sales. Let us not forget that EDI emerged in a similar way. Wal-Mart's suppliers didn't request EDI, rather Wal-Mart forced it down the supply chain. I foresee a similar evolution for the automation of non-production goods and services procurement. One purchasing manager I spoke with is even considering teaming up with other companies that use the same software to jointly request bids from suppliers. Ouch!

    Model 2: The Anonymous Exchange
    The second emerging model on the business-to-business e-commerce front is that of an anonymous exchange. In highly structured markets (such as insurance, mortgages, and even electronic parts), the product that is purchased is relatively homogenous. Buyers and sellers can make decisions without specifically knowing the identity of the party on the other side of the transaction. By leveraging low-cost IP nets, these industries can evolve into a true marketplace where buyers and sellers converge and prices are kept at or near optimal levels. Decisions are made based on information, not identity. And transactions are cleared in a lean and efficient manner. Two start-ups using this model are IMX Incorporated* in mortgages and FastParts in integrated circuits. IMX links mortgage brokers with lenders, and FastParts allows electronic companies to exchange electronic components, sometimes even between competitors.

    Clearly, this model can be beneficial to both the buyer and the supplier, as this more efficient model may create incremental sales that previously went "unmatched." At the end of the day, however, both of these systems are likely to put pricing pressure on the overall market they automate. Historically, informational friction could prohibit the true buyer from finding the lowest potential price. With these exchanges now in place, the company choosing to make a purchase can enter a priceless offer and wait for multiple parties to bid. This favors the purchaser and endangers the large organization that was able to profit from informational inefficiency.