THE DAY AHEAD: What''s next for B2B
COMMENTARY -- In 2001, B2B will stand for back-to-basics. The greed of 1999 was replaced by outright fear in 2000 as business-to-business stocks surged and then collapsed.
The carnage in the B2B stocks has been vicious. Ariba, which has held up better than its peers, is trading at about 52 a share, down from a high of 183. Commerce One trades at 22, down from a high of 165; FreeMarkets is trading near 19, down from a high of 370; PurchasePro hovers around 16, down from a high of 87; and VerticalNet is just above 5, down from a high of 148.
Despite the turmoil, B2B execs remained upbeat at a conference in New York last week. Ariba CEO Keith Krach even called the year in B2B "scary fun," like a roller coaster ride. Krach may be having fun, but his rivals would just call the year scary.
Here's the outlook for B2B in 2001:
B2B stocks will rebound -- The prevalent theory is that B2B stocks will rebound when the stock market does. Good luck trying to predict the latter. Why would B2B stocks rebound? B2B is one of the few corners of tech that doesn't have fundamental problems. The spending is there, the need is there, and old economy companies will spend heavily on B2B to save dollars.
Chris Vroom, an analyst at CS First Boston, said he expects a "wave of recovery" because B2B technology is the next big thing in IT. Vroom said the B2B enablers -- the software companies such as Ariba (Nasdaq: ARBA), Commerce One (Nasdaq: CMRC), i2 (Nasdaq: ITWO) and Manugistics (Nasdaq: MANU) -- will be the first to rebound. This rebound, however, could be derailed if B2B exchange volume doesn't pick up.
Old hat exchanges -- The press release wars over what company is building an exchange are apparently over. Exchanges, both public and private, will proliferate. The consortium worries that initially whacked B2B shares in early 2000 will subside.
Best of breed vs. one-stop solutions -- Vroom said that his checks indicate that execs are sold on the best-of-breed software approach -- melding a host of B2B applications together. Oracle CEO Larry Ellison said that approach is too costly. Not surprisingly, Oracle (Nasdaq: ORCL) is pitching its one-suite theory. The battle will continue.
Software model wins -- Why does VerticalNet (Nasdaq: VERT) suddenly want to become a software company? It's a proven model that works. Commerce One and Ariba plan to take transaction revenue at some point, but for now they're software companies. When the capital markets dried up, the software model (using existing licensing revenue to fund new products) worked the best. Investors can get comfortable with the software licensing model -- especially when cash isn't a commodity. Commerce One, Ariba and i2 will all benefit from being software companies.
Selected transaction models will work -- All that upside from transaction fees may actually occur in the second half of 2001, but there are no guarantees. The big issue is critical mass and getting folks to use the exchanges. Transaction revenue won't take off until old economy companies make the Net their preferred way of doing business. That'll force exchange usage.
Nevertheless, a few B2B players relying on transaction fees will do well. PurchasePro.com (Nasdaq: PPRO), which focuses on small businesses, seems to be a winner, according to analysts. FreeMarkets (Nasdaq: FMKT) is a toss-up. Vroom is bullish on FreeMarkets, but Lehman Brothers analyst Patrick Walravens isn't sold on the company. Walravens said FreeMarkets' dominance of the auction space is being challenged by self-service auctions, fixed vs. volume pricing and diminishing returns. In fact, the U.S. Navy, Transora and Covinsint each signed auction deals with FreeMarkets' rivals.
FreeMarkets' ability to expand its products will be the key to returns in 2001.
Show me the model -- If you haven't noticed, investors have no patience for companies that went public and then figured out their model later. There are tons of B2B companies in transition and VerticalNet is the poster child for the movement. The first half of 2001 will be a make-or-break time for the company.
VerticalNet's sale of NECX to Converge Inc., an electronics consortium, will push the company's revenue figures back a few quarters. VerticalNet won't have guidance for 2001 until January, but analysts are expecting a big revenue hit. Chase H&Q analyst Jim Pettit said he expects revenue guidance for 2001 to move from $430 million to $450 million to $200 million to $225 million. TDAIN
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