Internet Exchanges Help Level the Playing Field for Small Firms

By MARLA DICKERSON

Jan. 19, 2000 12 AM PT

TIMES STAFF WRITER

David Lowe knows that EBay is the online place to sell a few Beanie Babies or baseball cards. But when his family’s Los Angeles wholesale clothing company needed to unload 12,000 sets of children’s pajamas and warm-up suits in December, he headed for TradeOut.com, an Internet trading exchange that helps businesses find buyers for excess inventory.

Lowe and his mother, Sai-Chen Chen, head of Oriental Products Inc., sold only 360 pieces through that initial online experiment. But they are far from discouraged. The Internet buyer paid them double what they could have gotten through a traditional liquidator. They garnered more than a half-dozen additional sales leads that may pay off in the future. And the whole effort cost them very little time or money.

Move over, Onsale and EBay. The real action in Internet auctions is in business-to-business transactions, where such trading sites quickly and quietly have outpaced their better-known consumer cousins. An estimated 200 to 300 electronic exchanges are now operating on the Internet, the vast majority of them catering to companies looking to buy or sell stodgy staples such as auto parts, coal and hay bailers.

Analysts are projecting that giant corporations such as General Motors Corp., which recently chose San Francisco-based online marketplace builder Commerce One to link it with its base of 30,000 suppliers, will save hundreds of millions of dollars annually in procurement costs thanks to reduced paperwork and transparent pricing. Shares of Commerce One have soared, underscoring the ascension of business-to-business commerce as the hottest investment vehicle in cyberspace.

But investors and big corporations with far-flung supplier bases aren’t the only ones profiting from exchange technology, which Forrester Research projects will help push business-to-business commerce to $1.3 trillion by 2003. Small-business owners are finding that Internet marketplaces in their myriad forms are giving small firms some of the clout of the big guys.

Entrepreneurs like Lowe are selling overstock on auction sites such as New York-based TradeOut.com rather than accept pennies on the dollar from traditional liquidators. They’re pooling their purchasing power on buyer aggregation sites like Shop2gether.com of San Jose. They’re bartering digitally to save cash through companies such as Los Angeles-based LassoBucks.com. They’re even borrowing a page from government and big corporations by putting their purchases out for competitive bid. Using request-for-quote services such as Santa Monica-based BizBuyer.com, even small-business buyers can get multiple bids on everything from long-distance service to janitorial supplies.

In the process, industry watchers and small-business owners say, entrepreneurs are saving time, lowering their transaction costs, reaching more customers and suppliers, and securing better prices.

“It was a lot less trouble than calling a broker,” Lowe said. “And we made more money.”

Internet exchanges are essentially online intermediaries that bring buyers and sellers together. Online auctions are one of the most popular forms of Internet exchanges, but there are a number of permutations, including buyer aggregation sites, barter sites and vertical trading communities targeting specific industries like steel or plastics.

San Francisco-based e-commerce analyst Vernon Keenan estimates that nearly 15% of the estimated $81 billion in online commerce tallied last year was conducted through these electronic exchanges. He expects that to grow to 40% by 2004, when the Internet economy is projected to grow to nearly $1.4 trillion.

The reason is obvious, Keenan says, particularly for small-business owners who have yet to realize much benefit from the online revolution. Many a small player has built a Web site hoping to attract customers, only to be disappointed when little traffic came its way. Internet exchanges aim to aggregate all those isolated buyers and sellers to everyone’s advantage, a process that often results in lower transaction costs and dynamic pricing.

Consider Cellina Fafard and Desmond Armstrong.

Though the two have never met, the Southland businesspeople are doing business together thanks to local Internet trading exchange BizBuyer.com. The company essentially operates as an online request-for-proposal service that lets small-business buyers get competitive bids on goods and services from more than 18,000 vendors.

Buyers fill out an online request form for whatever they want to purchase. BizBuyer.com matches that request with the appropriate sellers, who respond with quotes. The company returns that information to the buyer via the Internet in a side-by-side format for easy comparison. The buyer is then free to contact any or all bidders and close the deal offline. Buyers pay nothing for the service. Sellers pay $1 to $5 for each bid they submit, and commissions ranging from 1% to 30% of the purchase price if a deal is completed.

Fafard, who is busy opening Cellina, her Redondo Beach women’s clothing boutique and art gallery, used the service to obtain six bids on business insurance. She chose Armstrong’s company, Long Beach-based Armstrong Insurance Group, and saved more than half off the annual premium quoted by her existing agent.

“Let’s face it. If I had relied on the Yellow Pages, I would have stopped at three quotes and paid through the nose,” Fafard said.

Armstrong, too, is sold on Internet exchanges. A former technophobe, the 60-year-old insurance broker understood enough about the Internet to grasp that the medium is challenging traditional intermediaries like him with new ones such as RightQuote.com, Quotesmith.com and BestQuote.com.

Armstrong says his 30-person firm already has made 700 quotes through BizBuyer.com, closing 2% to 5% of those deals, numbers he calls “outstanding.” He has invested more than $500,000 to upgrade his company’s computers and is partnering with other online players such as eMedQuote.com. This year, Armstrong expects to generate as much as 25% of his revenue online.

The Internet also is updating the practice of bartering, in which businesses swap goods and services instead of cash. The concept is as old as commerce itself, and dozens of traditional exchanges already are operating in Southern California. But online barter exchanges such as LassoBucks.com are winning converts such as Scott Floman, a restaurateur and caterer with locations in Santa Monica, Reseda and Calabasas.

Like many small firms, Floman’s Big Screen Cuisine and the Edge Catering businesses are seasonal. Floman had long thought about bartering that excess capacity, but never found time to wade through the print catalogs of traditional exchanges. LassoBucks.com did the searching for him, and he recently completed his first transaction. Using credit provided him through the LassoBucks system, Floman “purchased” $420 worth of legal advice through an attorney registered with the exchange. He now stands ready to work off those credits by providing another LassoBucks member with catering service.

“That’s a truck payment,” said Floman of the $420 he was able to keep in his pocket.

The Internet also is allowing small businesses to flex their purchasing muscle through buyer aggregation sites like Shop2gether.com, which negotiates discounts for pools of buyers on a slew of business products and services. Like bartering, collective purchasing is nothing new.

What’s different, analysts say, is that the Internet has made it so cheap and easy to bring these pools together.

Sarah Chapman, as assistant manager with Krausz Co., which manages the Puente Hills Mall, used Shop2gether.com to save more than $1,500 on chairs for the company conference room.

Price isn’t the only factor motivating small-business owners to join Internet exchanges. CV Therapeutics, a small Palo Alto biotech drug development company, belongs to Chemdex, a vertical Internet marketplace that links research customers like CV Therapeutics with more than 2,000 suppliers of laboratory products.

Unlike some vertical marketplaces, Mountain View-based Chemdex has no auction site where customers can flock to bid on discount microscopes or enzymes. Rather, Chemdex functions more like an online catalog. If that sounds like a snooze, consider that this streamlined procurement is driving the cost of a purchase order for a big customer such as Bristol Meyers Squibb from more than $100 a pop to around $10 to $20, according to Martha Greer, vice president of marketing for Chemdex.

Even tiny CV Therapeutics, with 75 employees, figures it reduces its ordering costs by about two-thirds every time it uses the service.

“Our goal is to be as lean as possible,” says Steve Grana, senior director of finance for CV Therapeutics. “Sitting right in the middle of Silicon Valley, we want to take advantage of any technical advantage that comes our way.”

Which isn’t to say that Internet exchanges are working for everyone.

Donovan Norton, chief executive of La Verne-based Durston Manufacturing, says his tool manufacturing company hasn’t received so much as a nibble for a centrifuge he listed for auction on TradeOut.com.

“If someone is looking for a piece of equipment, I’m not sure this is the site they’d go to,” Norton said. Indeed, while business-to-business Internet exchanges are popping up at furious pace, building traffic quickly remains the biggest challenge. Few are making money yet. And while some industry watchers have predicted many thousands of exchanges will crop up in the next few years, analyst Keenan predicts that no more than one or two will survive in any given industry, thanks to what he calls “the EBay effect.”

“People are naturally attracted to the place with the most buyers, sellers and products,” he said. “There will be a pullback.”

But not for small-business users like those at Oriental Products Inc., who are just beginning to see the possibilities of online exchanges.

“We’re planning to list more items, and maybe beef up our descriptions and pictures,” Lowe said. “This thing has a future.”

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Online Trading Posts

Places on the Internet where small businesses are coming together: Auctions:

* TradeOut.com (https://www.tradeout.com)

* InventoryBuySell.com (https://www.inventorybuysell.com)

* USBid.com (https://www.usbid.com)

Request for Quote Services:

* BizBuyer.com (https://www.bizbuyer.com)

* Onvia.com (https://www.onvia.com)