Expanding Beyond Consumers, AOL Sets Its Sights on Business-to-Business Services - TheStreet

Expanding Beyond Consumers, AOL Sets Its Sights on Business-to-Business Services

The content giant mulls working with other companies on a plan to offer products and services on local Web sites, a la Digital City.
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Having won the online content wars, America Online (AOL) is ready to get down to business.

The Dulles, Va., company is quietly preparing business-to-business (B2B) services, starting with a venture targeted at small local businesses that may debut as soon as the end of the year, according to Barry Schuler, president of AOL's Interactive Services Group.

AOL's efforts are significant given the potential size of the market. Online B2B commerce conducted by U.S. companies will rise to $1.3 trillion in 2003 from $109 billion in 1999, according to a prediction from technology researchers

Forrester Research

. That growth would far exceed the online business-to-consumer commerce market, which is expected to grow to $184 billion in 2004 from $20 billion this year, Forrester estimates.

The first hint of the B2B strategy surfaced at a July conference held by the

Kelsey Group

, a research firm that studies local advertising and e-commerce. In a panel discussion, Dan Fowler,

Digital City

vice president of sales, said AOL had been working on a B2B strategy for the past year and would likely debut it sometime between November and January on the AOL service, Digital City, and other company properties.

Schuler, who oversees the AOL service and other properties, told

TSC

this week that the company expects to release a B2B offering in late 1999 or early 2000 aimed at small businesses. It will be organized by geographical areas, Schuler said, like AOL's Digital City, which operates more than 60 different Web sites across the U.S. featuring localized news, entertainment information and personal ads. The new B2B venture would enable small businesses to find locally purchased products such as office supplies and professional services.

In addition, Schuler said, AOL will make a major announcement next month regarding

Netscape's

B2B strategy. "We have a bunch of things going on in the B2B space," Schuler said.

Just like the alliance between AOL's Netscape and

Sun Microsystems

(SUNW) - Get Report

, the move into the B2B arena means that the online content king is reaching out beyond consumers into professional markets -- where it has enjoyed far less success.

But AOL might not go it alone.

For example, Tom Maffettone, CEO of

dbusiness.com

, a privately held company based in Fort Lauderdale, Fla., that develops local B2B portals, says he's in ongoing discussions with AOL. Maffettone's company operates a string of business-oriented Web sites for a variety of cities, including Washington, D.C., Atlanta, Denver and San Diego. "We've been in discussions on and off with them for a little while now," he says.

AOL seems likely to go beyond the local B2B market, which is only a small fraction of the larger B2B universe. The Kelsey Group estimates that the local e-commerce market will grow from $410 million in 1999 to $1 billion in 2004.

Specifically, AOL is looking at entering the so-called vertical B2B market, which is devoted to specific industries. A number of Internet companies already do this, including

Chemdex

(CMDX)

, which runs an online market for the life sciences industry, and

VerticalNet

(VERT)

, which operates a variety of sites such as

E-Dental.com

,

Plant Automation.com

and

Machine Tools Online

. The vertical B2B effort is "in the planning stage," Schuler said.

Schuler suggested the company could team up with VerticalNet, whose CEO, Mark Walsh, is a former AOL executive who led the AOL Enterprise division that provided various services to businesses starting in 1996. The unit was disbanded in mid-1997. "I'm always heartened to hear of potential business opportunities with giants like AOL. Next to VerticalNet, AOL is my favorite Internet company," Walsh said.

Though it wouldn't be impossible, AOL might find it a challenge to venture into vertical markets alone, said Walsh. "It's harder than it looks."

Andrea Williams, e-commerce and content analyst at

E*Offering

, says she isn't surprised that AOL is moving into the B2B space, given CompuServe's business users and the presence AOL already has in the business market with Netscape.

"Obviously, that space is very hot right now," says Williams. "Investors are salivating over any B2B opportunity that crosses their path. It could offer a new spin to AOL -- another reason to get investors excited about AOL stock." Williams has a buy rating on AOL, the firm's second-highest rating. E*Offering hasn't done underwriting for AOL.

Many people have believed that the local online market, whether it's advertising dollars or transaction revenue, "was the end of the rainbow," Williams says. "Those markets haven't materialized yet. Everyone knows we'll get there eventually -- if anyone can accelerate the emergence of that market, AOL is a good candidate."

Walsh and other observers say the most promising area for AOL is the small-office/home-office market -- also known as SOHO -- because so many SOHO workers are already customers of AOL. The company's services had 5 million small-business users in March 1999, with 3.2 million of those on the flagship AOL service, according to a spokeswoman.

Still, AOL has to contend with the belief that the company just isn't as talented in marketing to businesses as it is to consumers. "Which we agree with. Which is why we did our partnership with Sun," said Schuler, adding that partnering is a good way for AOL to expand beyond its traditional expertise.

"Hopefully, it'll work," Schuler said. "Time will tell."

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