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Tech Industry

Net business trading soaring

While the popular press focuses on consumer holiday shopping, business trade over the Internet is five times greater.

    While the popular press is focused on consumer holiday shopping, business trade over the Internet is soaring, according to an market research firm that?s revised projections made 18 months ago.

    Business-to-business commerce will reach $43 billion this year, five times more than the $7.8 billion in retail projected by Forrester Research. By 2002, the gap will double again, as business sales reach 11 times the total of consumer sales.

    Both sides are exploding--updated Forrester projections for 1998 are roughly twice what the firm anticipated in mid-1997--and approximately three times higher for years starting in 2000.

    For trading among companies, Forrester now projects $842.7 billion in business trade in 2002, up from an August 1997 prediction that the category would reach $327 billion in five years? time. By 2003, Forrester thinks nine percent of total sales to businesses will be done over the Net, comprising $1.3 trillion in transactions.

    On the consumer side, Forrester's old projection was for $25 billion in 2002. Its latest update puts the retail figure at $76.3 billion.

    Forrester estimates comprise orders placed over the Internet, including Web-based extranets, Internet EDI (electronic data interchange), and Web site sales.

    Not surprisingly, Forrester sees that business commerce in the computer and electronics industry, at nearly $20 billion in online sales this year, has reached "commerce threshhold" and is in a hyper-growth phase.

    By 2003, the research firm thinks aerospace and defense, petrochemicals, utilities, and the auto industry to reach similar status.

    Meanwhile, "Commodity markets will see price wars because of the online market," said Forrester's Steven Bell, who authored the report. In response, commodity sellers will be forced to add services to hang onto their customers--financial reports, analyses of purchases, and summaries.

    Driving adoption is the "network effect," a condition in which one company or tier of buyers in an industry begins buying online, persuading its suppliers to do the same. Often, as is now the case in the auto industry, Bell says, those suppliers see the cost savings and pressure their suppliers to go online for purchasing too.

    In the petrochemical industry, as another example, refiners and distributors are trading billions of dollars in oil and suppliers using EDI, which adapts the forms-based trading directly between computers to the Net, not secure private networks. Much of that trade is done using virtual private network (VPN) technologies, which create secure tunnels on public backbones.

    For electric and natural gas utilities, federal regulations require that wholesale trading be conducted over an open network, and many have adopted the Internet because it's cheaper than other alternatives. Forrester found that utilities currently trade $7 billion in gas and power over the Net, and $23 billion closed electronic systems.

    Conservative utilities remain concerned about security, but most companies don't worry about hackers anymore, Bell said.

    "The real security issue is people hacking into Web sites, and this is not about Web site," Bell said. "People are using [Internet security protocol] IPSec to tunnel secure links between themselves. And a huge amount of trade is done using IDs and passwords."

    Laggard industries, according to Forrester, include construction, heavy industries like mining and steel, and industrial equipment, each of which is doing more than $100 million annually today. Industry-specific trading hubs are emerging where players within even laggard industries are selling to each other.