Online Exchanges Open Door Wider for Tech Firms

While most of the frenzy over e-commerce has focused on Internet shops selling books and toys to consumers, a small group of largely unheralded companies has begun rushing for the real gold mine of the future--business-to-business e-commerce.

In recent months, once-obscure companies such as Mountain View-based Ariba Inc. and WebMethods Inc. of Fairfax, Va., have seen their stock shoot to stratospheric levels as investors have awakened to the multitrillion-dollar migration of commerce from the real world to “B2B” e-commerce.

Recent projects--such as the creation of an online marketplace by General Motors, Ford and DaimlerChrysler for the procurement of $250 billion worth of automobile parts annually--have pushed online business exchanges into the vanguard of Internet companies.

Most industries in the coming years will shift their buying of supplies, materials and services from the old system of phone, salespeople and fax onto virtual marketplaces, along the way hoping to save 10% to 15% of purchasing costs by doing it online. “We’ve just seen the tip of the iceberg,” said Bruce Temkin, e-commerce research director for Cambridge, Mass.-based Forrester Research.

Just as it took years to build the technology that opened the way for online consumer stores such as bookseller Amazon.com and auction site EBay, the first bricks of the e-commerce era are gradually being put into place. For the companies involved in this online construction program, the rewards could be substantial. Forrester Research estimates that business-to-business e-commerce will grow from $406 billion this year to $2.7 trillion in 2004, or about 10 times the size of retail e-commerce.

Online marketplaces allow buyers and sellers to conduct electronic transactions, hold online auctions to dispose of surplus goods and stage “reverse auctions” for buying supplies with nothing more than a computer and an Internet connection.

One example of how the process can save money is a recent online reverse auction held by General Motors, which wanted to buy several million dollars worth of window sealers. Previously, GM had to find potential suppliers, mail out specifications and then negotiate deals over the phone and fax. This time, more than 20 bidders simply gathered online and submitted their bids at one time. What once took weeks was accomplished in less than two hours.

The most fundamental technology piece in building these online marketplaces are the computer databases that store and keep track of all the information on products, services and sales. Oracle Corp. and Microsoft Corp. are already the major players in this field, providing database programs that power intracompany computer systems and Web sites. And their programs are natural platforms for new e-commerce exchanges.

But there are still pieces left for smaller and more nimble technology companies to grab some of these new online exchanges. Once selected, companies can reap a continuing flow of money in building out the project, providing services to keep it running and collecting fees and commissions from each transaction.

And one of the key areas of online commerce is security. Plano, Texas-based Entrust Technologies Inc., which was spun off from Nortel Networks in 1996, has jumped into this market using a technology called public-key encryption to encrypt transmissions and confirm the identities of online users.

Entrust is a partner with some of the major companies that produce e-commerce software, such as Oracle and Ariba. The company’s technology is used by Federal Express, the People’s Bank of China and the U.S. Patent and Trademark Office.

Public-key encryption provides each user with two coded “keys,” which are a string of symbols that can be used by the company’s software to encrypt and decrypt a message. One of the keys is private; the other is public. The public key is used to encrypt a message, which is later decrypted by the recipient using the matching private key.

The two-key method can also be used to establish the identity of a person using the unique public and private keys. This “digital signature” is critical for e-commerce to ensure that deals have been struck between the right people.

There are many companies with encryption products, but Entrust has focused on the business commerce market and its stock has rocketed from about $16 last year to $110 Friday on Nasdaq. The company makes its money by selling encryption systems and managing public-key systems for customers; in the last 12 months Entrust did $85.2 million in sales and posted income of $5.9 million.

The online B2B marketplaces are booming because they are open to any company that can access the Internet through a Web browser. But the coding language of the Web--known as HTML--has limitations in handling business information. HTML was designed as a simple computer language to describe the format and appearance of a document, such as a Web page. In HTML, the word “Porsche” or the figure “$1,000” are just words that carry no particular meaning.

But corporate databases need to know when a number stands for an amount or a quantity, or when a word represents a name, an address or a brand. So the emerging language of e-commerce is called XML, or extensible markup language. XML has the ability to describe the meaning of individual words, allowing users to specify that “Porsche” is a company and “$1,000” is a price.

“Think of XML as the mother of all translation languages,” said Kristin Weller, vice president of product development for WebMethods, one of the leading XML companies. “It’s the lingua franca of e-commerce.”

WebMethods, whose software is now used by Barnesandnoble.com, Dell Computer and Hewlett-Packard, is essentially a maker of software “adapters” that translate XML information so it can be used by various database programs.

WebMethods went public in February, and its stock quickly jumped into the ranks of the five biggest first-day gainers in stock market history, growing 508%.

Another key area is the companies that make the programs for online auctions and transactions of the virtual marketplaces. Among them: Walnut Creek-based Commerce One Inc., Ariba, Ventro Corp. of Mountain View and Redwood Shores-based Oracle. And General Electric Co. recently announced its plans to create two new units, GE Global Exchange Services and GE Systems Services, to tap the burgeoning worldwide market for Internet-based business-to-business commerce.

Ariba was created six years ago to make software to help companies automate their internal procurement systems. Last year, Ariba began expanding its procurement system so companies could create open virtual marketplaces.

The stocks of online marketplace companies began to take off last fall. One boost came with the announcement in November by Ford and GM that they were starting their own online exchanges for the procurement of automobile parts. Later Ford, GM and DaimlerChrysler decided to join forces, creating a joint marketplace after realizing it was easier for their suppliers to deal with a single exchange. The exchange will use technology supplied by Oracle and Commerce One.

The three auto makers hope to eventually open their exchange to a variety of other industries, such as aerospace, chemicals and office supplies. But in these formative days of online exchanges, the trend has been to create so-called vertical marketplaces--online exchanges that focus tightly on single industries.

Ventro got its start creating online exchanges for medical products and chemicals, and later branched out to create marketplaces for other industries, such as fluid processing and hospital supplies. While VerticalNet Inc., of Harsham, Pa., has set up online marketplaces for nearly 60 industries, including food services, electric power, pollution control and machine tools.

And out of the hundreds of focused online marketplaces that have popped up in the last few months, only a few are public companies. But several that have gone public have seen their stock soar because these companies have the potential for steady revenue from the fees and commissions they charge on every transaction.

One such concern is Research Triangle Park, N.C.-based SciQuest, which runs a business-to-business marketplace that specializes in scientific and laboratory products. SciQuest went public in November and its stock has already tripled.

Gavin Mlinar, an e-commerce analyst with Sands Bros. in New York, said that 2000 will likely bring dozens of initial public stock offerings from vertical marketplace companies, possibly including those from such early ventures as E-Steel Inc., PlasticsNet.com and CheMatch.com.

“This is going to be the B2B IPO year,” Mlinar said. “Everyone is going to be coming out.”