The E-Trade Stampede

By Janice Maloney

Like his daddy before him, Ben Zaitz knew he was going to grow up to be a cowman. And until four years ago, he was--moving 2,000 to 3,000 head of cattle a year between his farm in North Carolina and his farm in Minnesota. But in 1995, Zaitz, then 40, got dissatisfied. His customers were disappearing as hard times hammered the dairy business, especially in the Southeast. And his "profit margins were going to nothing," he says. "I just couldn't see much future in what I was doing." But Zaitz could see a future on the Internet, to which he'd been introduced a few months earlier. He had a vision of creating "a complete marketplace for all participants in agriculture," he says, "where crop producers and livestock farmers could come together and do business without having to step a foot off their farms."

Zaitz traded in his farm boots for a laptop and developed COW, the Cattle Offerings Worldwide website. In its first incarnation, COW was basically online classified ads for cattle. "There were not very many farmers on the Internet back then," says Zaitz. "In fact, it was mildly embarrassing. I'd be at cattle sales, conferences and dairy shows, and people would come up to me and say, 'Hey, Ben, how's that Internet thing going?' and they'd slap me on the back with a smirk."

Eventually the farmers caught up with Zaitz's vision, helped along by new technology. In just the few years since Zaitz bought his first modem, analysts estimate that close to 35% of the nation's 3 million farmers have gone online. COW has evolved into Farms.com one of the first e-business sites to support real-time farm auctions. Farmers who visit the site can buy and sell entire lots of cattle via digital video feeds and still images. They can also get chemicals, grain and feed commodities online. On average, says Zaitz, Farms.com has more than 40,000 unique visitors a month. During the past year, the site has held in excess of $2 million worth of auctions of livestock and commodities. Zaitz, who has invested more than $1 million of his own money in his venture, expects revenues to increase tenfold this year.

Zaitz's story is not unique. From farming to food to microprocessors; from solid-waste control to plastics to such traditional Rust Belt goods as steel, virtually every American industry is represented online by at least one entrepreneur who has set up shop to cement business-to-business commerce. Meanwhile, large corporations are using the Internet to build bridges between themselves and their strategic partners. Each member of the online biz-to-biz (B2B) brigade is hoping to use the Net's instantaneous global reach to build digital marketplaces where buyers and sellers who may never have met in the off-line world can gather daily to move huge and growing amounts of the nation's basic goods.

Experts who follow this emerging business-to-business electronic-commerce market call it frictionless, because no faxes, phone calls or paper trails snake back and forth to clog the communications channel between buyer and seller. That is just one aspect of these new wholesale channels that has analysts salivating. B2B companies "are going to reshape the entire economy," says Charles Finnie of Volpe Brown Whelan & Co., an investment-banking firm based in San Francisco. "It's not unlikely that Mr. Greenspan will be sitting in front of Congress in the next couple of years saying one of the main reasons inflation is dead is the B2B Internet companies."

Forrester Research of Cambridge, Mass., a leading Internet analyst, agrees. Its report, Resizing Online Business Trade, predicts that B2B e-commerce will hit a total of $1.3 trillion by 2003, accounting for 9.4% of total U.S. business sales. Varda Lief (see the box, following), a senior analyst at Forrester specializing in e-commerce, says business-to-business transactions will far surpass business-to- consumer deals and dwarf giants like eBay and Amazon.com in revenue and sales. "Business-to-business is the stuff that makes everything run," says Lief.

If B2B is so basic, how come most of us are about as familiar with it as we are with life on Mars? Steve Jurvetson, a partner in Silicon Valley venture-capital firm Draper Fisher Jurvetson who has invested in FastParts, an electronics trading exchange, and Sonnet Financial, an online foreign exchange, calls B2B "the iceberg waiting to emerge." "Most people," Jurvetson says, "understand the business-to-consumer market because they are consumers themselves. It's kind of like the Beardstown Ladies' investment protocol: use a product, come to understand it and then invest in it. With business-to-business, though, unless you are entrenched in that industry and really understand that market segment, you are not going to appreciate how it's revolutionizing that business."

But sometimes numbers alone can paint a pretty clear picture. Take Chemdex.com a vertical e-market based in Palo Alto, Calif., developed for the pharmaceutical and biotech industry in 1997. Chemdex is reducing sales and distribution costs industrywide by 20%--more than $4 billion of the total $20 billion global life-sciences research-products market, according to Volpe Brown analyst Finnie. "In effect," he says, "Chemdex is turning around to the chemical producers, and it is saying, 'Congratulations! This is your lucky day. You just won the lottery. Here's a check for $4 billion.' These guys have not seen their costs structure improved like this ever. It's a tectonic shift."

Moses Ma, founder of BusinessBots, based in San Francisco, which is developing smart software for e-markets, says B2B resembles the California Gold Rush. During the Gold Rush, the only ones assured of making money were the obscure shopkeepers who sold the prospectors their shovels, clothes, pots and pans. In the case of B2B, it's companies like Tradex Technologies, Extricity Software Inc. and BusinessBots. They sell the glue (in the form of hardware, software and services) that links individual businesses to their suppliers, customers, partners and distributors. "The true value in B2B is when it is i-to-i, that is, industry to industry," Ma says. "So in the case of the chemicals manufacturers, it will be when they can effectively begin selling their products over the Internet, not just to other chemical companies but to building-supply companies, automotive companies and agricultural companies. When those business webs are formed, B2B on the Net will have come of age."

"In effect, we create virtual corporations," says Ken Ross, president and CEO of Extricity Software, which has raised $25 million in funding from companies, including Intel and SAP, since it was founded in 1996. "We enable large corporations to work closely together by linking their different business processes--their enterprise applications and their systems--so they can deliver product by the quickest means." Adaptec, a $1 billion global semiconductor company based in Milpitas, Calif., which uses Extricity technology to connect with its business partners worldwide, offers a textbook example--literally. The company's B2B strategy is a case study at Stanford University's Graduate School of Business.

Like many semiconductor companies, Adaptec contracted out fabrication of the product and concentrated on design. Fear motivated Adaptec's initial investigation of B2B software, according to Dolores Marciel, a 16-year veteran of Adaptec and its vice president of corporate procurement. The company believed that a competitor planned to build a semiconductor-manufacturing plant (also known as a fabrication plant) on its premises, thereby reducing product-development time by half. "We needed to compete or we would get killed," says Marciel. Adaptec couldn't invest the time or money in building its own plant (which on average costs $1.3 billion and requires more than a year to complete), so the company focused on cutting the fat from the communications and ordering processes used with its overseas strategic partners. The system, says Marciel, was built on a complicated and arcane paper trail. Within a year of integrating B2B technology into that process, Adaptec reduced its operations by $2 million, saw a 40% reduction in its product-development time and trimmed its inventory levels by 25%.

Adaptec is small fry compared with some of the big guys jumping into B2B. Cisco Systems, makers of the routers and other technology that keep the bits and bytes flowing over the Internet, has stated that 64% of its $8.5 billion in 1997 revenues came from Net-originated e-transactions.

Exciting, even revolutionary as B2B promises to be, it will come at a price--one that will be paid largely by the relatively anonymous groups of backroom sales-and-operations personnel who have kept the wheels of commerce humming. If you don't believe it, imagine trying to convince the legions of purchasing-order and sales executives--those who, as part of their current jobs, are wined, dined and bequeathed free tickets to every sporting event imaginable--that the Web is a better way to do business. Efficiency may not sound all that attractive to them. On the flip side, B2B companies are businesses like any other. Many will go under in the postboom shakeout that will inevitably take place. Says Mark Walsh, CEO and president of VerticalNet, a creator of 43 online industry-specific trading communities (commonly referred to as verticals): "What you see today are a lot of technology companies or single-focused verticals that are declaring war on the old way of doing business," he says. "Each of these companies claims that it is going to change forever how purchases occur. From my point of view, that's like asking to be shot with the arrows--before they pour the hot oil on you."

The primary hurdles to widespread adoption of B2B strategies are not technological but organizational and all too human, in the view of Stanford University professor Hau Lee, who has spent his career studying supply-chain management. "Large corporations," he says, "are slower to let go of old business practices. They believe maintaining the status quo will help them preserve their commanding position as a market leader."

Still, profits are profits, and a better way of doing business will win out. Says Draper Fisher venture partner Jurvetson: "No business today can doubt that over the next five to 10 years they are going to be massively moving their business processes and their business communications over to the Internet."

The FUD (fear, uncertainty, doubt) factor that is sure to slow the pace of change at some big corporations never seemed to affect ex-farmer Zaitz, who says radical change suits him just fine. "I grew up on a dairy farm, where everything that happened in your life revolved around the cows," he says. Feeling trapped by the job, Zaitz often wondered, "'Boy, wouldn't it be great if you could go fishing anytime you wanted?' With Farms.com I wanted to create a lifestyle out of this business--and I did." B2B enterprises like his seem certain to keep cropping up until...well, the cows come home.