Tech Outlook: B2B Players Fish for Small Fry

Outlook by sector:

PCs

Net stocks

E-tailers

B2B

Optical networking

Wireless

Venture capital

When you're building a house, it's best to lay the foundation first. But in business-to-business e-commerce, a lot of companies have been trying to build skyscrapers from the top down.

So despite the hype that swept the sector early this year and in the latter half of 1999, B2B e-commerce players still have a lot to learn. One trend that stands out after 2000's first half is the success of B2B software providers. Corporate America can't seem to get enough of their products, which allow companies to buy and sell stuff online. Another lesson is, despite the temptation to "take on the big fish," there's much to be gained in going after the small fry that constitute most of America's business world.

Haves and Have-Nots Ariba and Commerce One rebound...

But Ventro and Rowe.com languish

Business-to-business firms enable companies to buy and sell goods and services to one another over the Internet. Firms such as Ariba (ARBA) and Commerce One (CMRC) sell software programs that allow companies to trade over the Internet. Others, such as Ventro (VNTR) and RoweCom (ROWE), operate online marketplaces, Web sites where companies can buy and sell goods.

The software providers' gains have been on display recently, namely in the dramatic revenue increase posted by Ariba in the second quarter. The Mountain View, Calif.-based software company had $80.7 million in revenue, an increase of 101% over the previous quarter.

Meanwhile, B2B exchanges like Ventro and National Information Consortium (EGOV) have stumbled lately, partially due to the success of companies like Ariba. As the current saw in the industry goes: While it's easy to sell the big guys bunches of software, it's a lot harder to plug in that stuff and make it work quickly. Thus, online exchanges have been seeing less traffic than some had hoped, because big companies can't get out of their own doors and into the marketplaces quickly enough.

So Commerce One, which is trying to hook huge corporations into its Global Trading Web, has seen its shares feel pressure lately. Its big vision is commendable, but companies focusing on the basics thus far have shown better results.

That phenomenon, in turn, has spawned a new focus in B2B: The big guys are going after the small fries. While much of B2B has centered on wiring huge corporations to buying hubs on the Internet, 85% of U.S. companies fall into the small or midsize category. As challenges have emerged in wiring and integrating the systems at large corporations, many B2B firms have started going downmarket to get small suppliers online first. Because their systems are generally less complex, the thinking goes, getting them online for B2B isn't nearly as complicated.

If that's true, by getting the small guys wired, B2B in general can gain some real-world momentum with results beyond just the hype and hoopla of countless exchange announcements. The results of PurchasePro.com (PPRO), which saw revenue jump 109% in the second quarter by targeting companies with revenue of $50 million or less, underscore the opportunity there.

Going forward, one thing's clear. The B2B enabling companies -- the software providers who are laying the foundation for this new commerce -- are doing well now, and that will probably continue as corporations scramble to get online. But online exchanges, which could be very profitable themselves in the distant future, are going to take a while to get up and running at full speed.

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