Will B2B Winners Please Stand Up?

Second-quarter results prove that business-to-business e-commerce is real, but they also show investors the growing differences among companies in the sector.

One need only look at the dramatic revenue increases from B2B software providers like Ariba (ARBA), Commerce One (CMRC) and PurchasePro (PPRO) for validation of the concept: Corporate America is making B2B one of its top priorities and is willing to spend money on it.

B2Bs that are Boomin'... Sequential Revenue Growth, Q1-Q2 2000.

Source: Companies' Quarterly Reports

But B2B outfits that operate electronic marketplaces, where businesses buy and sell supplies and materials over the Internet, showed less-than-stellar results. That's because connecting companies' computers to those marketplaces so they can talk to one another is still a difficult task to pull off.

So firms like Ventro (VNTR), National Information Consortium (EGOV) and RoweCom (ROWE) disappointed analysts and underscored the fact that before B2B marketplaces can run at full speed, a lot of kinks need to be worked out first.

...and B2Bs that are Bummin' Sequential Revenue Growth, Q1-Q2 2000.

Source: Companies' Quarterly Reports

"Fundamentally, a lot of people had lumped companies that were pursuing the software licensing model in with the exchange models themselves," says Ben Smith, vice president of global high-tech ventures at consultant A.T. Kearney. "As we're seeing now, those things are clearly quite different."

The Basics

Business-to-business firms, or B2Bs, enable companies to buy and sell goods and services to one another over the Internet. Some firms, like Ariba and Commerce One, are selling software programs that allow companies to trade with one another over the Internet. Others, like Ventro and RoweCom, are launching Web sites where companies can go to buy and sell goods in an online marketplace.

Earlier this year, B2B stocks saw a wild surge upward amid high expectations that B2B, estimated to see $2.7 trillion in trade by 2004, would change the way the world does business. But those stocks quickly came back to earth as investors learned that talking about changing the world and actually changing it are different things.

Second-quarter results underscored that.

"I think the major takeaway from the second quarter's results is that we are clearly now in the buildout phase. We're building the infrastructure and laying the pipes," says Jon Ekoniak, B2B analyst at U.S. Bancorp Piper Jaffray. "The players that are laying the pipes, the Aribas, Commerce Ones and PurchasePros had excellent quarters. But the players that need those pipes before they can deliver what they've promised to their customers, we've seen that they really need that infrastructure before they can bolt on."

Understanding More

Onlookers say this differentiation shows a growing understanding of B2B among investors. And that distinction, even if it's broad, is critical. It means people are starting to understand some of the different aspects of B2B. That, in turn, suggests that smoke-and-mirrors and "major" announcements in countless press releases won't be enough to stoke investors' fires anymore. Instead, they'll look for results.

"The second quarter was important for B2B," says Chris Vroom, an analyst with Credit Suisse First Boston. "It showed the companies with persuasive business models really outperformed and those without them fell short. We think it's certainly a healthy differentiation. That distinction will continue to be important going forward."

That distinction was most apparent at the online exchanges.

Ventro, for example, which runs online exchanges in the life sciences industries -- that's lab equipment to you and me -- didn't sell as much equipment over its site as analysts had expected. They were hoping for about $35 million in goods to move over the company's sites, while only about $29 million actual did. Ventro blamed that in part on "implementation issues" with its customers. Namely, as Ventro's CEO David Perry explains, selling the technology to companies that want to conduct business over the Web and actually installing that technology are two different things.

A Tale of Two Concepts Investors are beginning to differentiate between B2B stocks like Ariba and Ventro.

Most analysts say Ventro's problems were company-specific. But some of its problems are sure to be felt more broadly: Namely, it's hard to make all of B2B's complex computer programs work together.

More Bodies

Smith, the A.T. Kearney consultant, says part of the problem is getting the bodies -- namely consultants -- capable of plugging the stuff in.

"The integration kinds of things, as well as some of the new resources and new skills that are needed to make this stuff tick, a lot of the professional service firms in the industry as a whole, have not been prepared for those demands," Smith said.

That issue was a clear motivator behind software provider Commerce One's decision to acquire consulting firm AppNet (APNT).

But Ventro illustrated another problem facing B2B: While some marketplaces are independent and neutral of the buyers that participate in them, others have aligned themselves with one side or the other in the marketplace. That can help attract buyers and sellers initially -- to build the all-important liquidity that marketplaces hunger for -- but it can also alienate other companies.

"Ventro has really taken it on the chin because they've aligned themselves with the distributors," says Vroom of CSFB. (His firm rates Ventro market perform and hasn't provided underwriting for the company.) "That's hurt them in realizing the broadest supply base. Some suppliers won't trade with them."

So for now, it seems that staying with companies doing the heavy lifting in B2B makes the most sense.