B2B cited as next net shakeout sector

The next big Internet shakeout will occur among vendors of business-to-business (B2B) electronic commerce products and services, says Mark Daniell, managing director of international consultants Bain & Co. Asia.

“Failure rates in the old economy are beginning to play in the Internet space, meaning that 90 per cent of startups will not succeed,” he said during a presentation at the recent DotCommunity Asia conference. “Companies that want to succeed must have a sustainable advantage, demonstrated early on.”

Following the return to reality in business-to-consumer (B2C) e-commerce with the April market downturn, it will be the B2B sector’s turn to come under pressure, Daniell says.

Most B2B suppliers are acting as simple intermediaries between buyers and sellers, which is not a sustainable business model, says Daniell.

“The Internet is there to get the middlemen out,” he says. “Acting as a pure switch between buyer and seller will not work. B2B vendors must add value by expanding into software and services.”

As an example, Daniell points out that in 1999, the New York Stock Exchange made a profit of US$75.2 million from a transaction value of $8.9 trillion – a return on revenue of $8 for every $1 million transacted, or 0.0008 per cent.

Internet exchanges hold some advantages over existing exchanges, Daniell said. These include being able to provide greater information richness, and therefore more customized products, plus greater reach through the global Internet. But payment systems are still primitive and there are no standard terms for fulfilment and delivery, he says.

“The next wave of capital market evolution is B2B, but the economics there may be even tougher,” he claims. “I would raise a great flag of caution about exchanges.”

The market downturn in April also created new imperatives for Internet businesses, Daniell says. In particular, the emphasis on attracting customers and the first-to-market, new-to-world concepts have inevitably given way to old-economy values like building long-term strategic value.

“The idea that revenues are irrelevant and that profits are a distraction is pre-April thinking,” he says. “There is now a drive towards sustainable profitability. What we saw in April was just one shakeout, and there will continue to be others.”

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