Beginning of the end for B2B? Hardly

Derek Brown has the scoop on why hard times in this much-abused sector are paradoxically laying the foundation for a sound rebound.

4 min read
It's now apparent the economy?s woes and the "law of big numbers" finally caught up with the business-to-business e-commerce industry in the fourth quarter.

In perhaps the clearest indication of the falloff, consider the decline in sequential license-revenue growth recorded by companies across the business-to-business e-commerce landscape. According to published reports, license revenue at 11 prominent companies in the sector averaged 23 percent growth from the third to the fourth quarters last year.

Although that would qualify as a staggering increase by most traditional measures, this sequential growth rate remained well below the performance reported by these same companies over the previous four to five quarters.

Though I would offer that the above-mentioned fourth-quarter data was a largely isolated incident and that the industry would rebound immediately, muted forward-looking license-revenue projections tell a more somber story.

Even though 12-month license-revenue projections for several of these 11 business-to-business e-commerce enterprises were increased by 5 percent to 10 percent coming out of the fourth quarter of 2000, that's still sharply lower than the 30 percent-plus bumps that were frequently posted in the same reporting season during the last quarter of 1999.

What's behind the relative slowdown in the business-to-business world? For starters, look to the faltering U.S. economy, which has had a dampening effect on demand for e-procurement, not to mention software solutions associated with trading technology, customer relationship management, supply chain management and content management.

Given the uncertainty, Fortune 1000 companies are re-evaluating projected expenditures for the coming year. Their concerns range from questions about return on investment associated with large-scale business-to-business implementations to their own expectations for slower top-line growth over the near- and medium-term horizons.

At the same time, spending by Internet-based businesses has slowed to a trickle in the aftermath of the challenging funding environment (both publicly and privately) that has emerged over the past nine months.

What's more, the "law of big numbers" now appears to be a meaningful factor across the industry. This so-called law, which is a direct result of earlier successes, suggests that high rates of growth become increasingly difficult to attain as a company?s revenue base grows.

So, is this the beginning of the end for business-to-business? Hardly.

Projected benefits such as cost-savings, operational efficiencies, revenue generation and supply chain coordination that are associated with widespread adoption of business-to-business e-commerce, remain as sizable and tangible today as they were 18 months ago. Accordingly, I continue to believe that business-to-business e-commerce will remain a top priority and a key focal point for management teams around the globe, regardless of (or, perhaps, as a result of) economic conditions.

The trends surfacing in the fourth quarter of last year signal the inevitable end of one phase of the industry?s life cycle and the beginning of another. Likely consequences of this expected "maturation" include controlled growth, not hypergrowth; sales cycles measured in quarters, not weeks or months; more-defined market segmentation and product differentiation; and vertical and horizontal integration across the business-to-business e-commerce landscape.

These are all good things, in my opinion. Although it may not seem like it today, this relative slowdown is helping to accelerate economic "Darwinism" in the sector, more clearly distinguishing leaders from the proverbial pack and positioning them to more easily grow their market share. Perhaps more important, it is laying the foundation for a more sustainable, long-term environment into which emerging companies can sell well into the 21st century.

WR Hambrecht + Co makes a market in the securities of BroadVision (BVSN).

The information contained herein is based on sources believed to be reliable but is neither all-inclusive nor guaranteed by WR Hambrecht + Co, LLC ("WRH+Co"). Opinions, if any, reflect our judgment at this time and are subject to change. WRH+Co does not undertake to advise you of changes in its opinion or information. In the course of our firm?s regular business, we may be long or short in the securities mentioned and may make purchases and/or sales of them or options to purchase or sell them from time to time in the open market, as a market maker or otherwise, including purchases from or sales to customers on a principal basis. In addition, WRH+Co may perform or seek to perform investment banking services for the issuers of these securities. Most of the companies WRH+Co follows are emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in the reports included in WRH+Co Research may be unsuitable for investors depending on their specific investment objectives and financial situation and needs. No report included in WRH+Co Research is a recommendation that any particular investor should purchase or sell any particular security in any amount or at all, and is not a solicitation of any offer to purchase or sell from or to any particular investor. For additional information that may be available on the securities mentioned, please contact WRH+Co.