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Industry titans flex their muscles

Unlike the business-to-consumer arena, in which traditional retailers and media companies like Wal-Mart, Borders and Time Warner took some time to warm up to the opportunity on the Net, the biggest business-oriented commerce companies are moving quickly and aggressively.

    Watch out, business-to-business dot-coms--the slumbering giants are awakening.

    In the past few months we've seen a flurry of online exchange announcements from old-economy titans such as General Motors, Boeing and Honeywell. Unlike the business-to-consumer (B2C) arena, in which traditional retailers and media companies like Wal-Mart, Borders and Time Warner took some time to warm up to the opportunity on the Net and haven't recovered from their tardiness, the biggest business-oriented commerce companies are moving quickly and aggressively.

    The business-to-business (B2B) opportunity is projected to reach $2.7 trillion by 2004, according to Forrester Research. This dwarfs the projections for last year's belle of the ball, B2C, which is projected at $184.5 billion in 2003. Unlike the B2C arena, however, traditional companies are likely to capture a greater share of the spoils.

    Having witnessed the rapid rise to seemingly unshakable dominance and the stratospheric market caps of companies like Amazon.com, America Online and Yahoo, traditional companies whose industries were slower to move online are determined not to become roadkill on the Internet. Demonstrating a nimbleness uncharacteristic for their size, they are partnering with competitors, announcing transaction-oriented sites, and educating themselves in the Internet jargon that is music to investors' ears.

    In the past few months, GM, Daimler Chrysler and Ford teamed to create an auto exchange; United Technologies and Honeywell joined forces to launch MyAircraft.com, an exchange for aerospace parts and services; and Boeing, Lockheed Martin, Raytheon and British Aerospace announced plans to create their own aerospace and defense marketplace.

    Launching a site that sells goods such as CDs to consumers is far simpler than bringing together buyers and sellers of complex industrial parts. The importance of product and market knowledge, as well as relationships of trust that have been built over years, create a more compelling argument for the involvement of traditional companies, particularly in vertical industries.

    High switching costs also increase the likelihood of early involvement of traditional industry titans. The potential negative consequences of failed delivery, unreliable systems, and breaches of privacy, for example, are too severe to make adoption easy.

    The endorsement of major old-economy players can be a catalyst to attract the critical mass of buyers and sellers necessary to make an exchange a success. A CD that is purchased online and takes longer than promised to be delivered may be frustrating or inconvenient, but is not the disaster that a late arrival of key inputs to a manufactured product would be.

    It is not surprising, therefore, that the old-industry giants are moving aggressively to claim their beachfront property. The challenges of moving at Internet speed and of finding ways to work with competitors may be obstacles that these new exchanges do not overcome fast enough, however.

    The reality behind the fanfare is that there's little more than a press release supporting several of the recent exchange announcements from leading traditional industry players. The time it takes to hire the management team, develop policies that the main participants can agree to, and create the exchange may be more than enough time for the more nimble start-ups to lock up the opportunity. In the end, it remains to be seen whether they have the tools to play the game.

    The old-economy companies are crossing an important, early hurdle in efforts to play a significant role in the emergence of exchanges in their industries. Without rapid execution, however, Wall Street's interest in these new ventures--and the opportunity--will rapidly evaporate.