April/May , 2000

From the Editor

Web's Future Hard To Predict

Business-to-business e-commerce – B2B in Internet lingo – is all the rage now, and few fields seem more likely to be revolutionized by the possibilities inherent in using the Internet to conduct business internationally.

Anyone who thinks business won’t change with the advent of the Internet is kidding himself or herself. Yet, the interesting question is probably not whether things will change, but how they will change. Great consequences will flow from the answer.

The stock market and venture capitalists have been funding a series of dedicated B2B e-commerce sites, betting that specialized e-commerce operators will control the flow of trade in the future. Perhaps, but far from certain.

The Internet is a tool, a technology. How that tool is used will make all the difference. When facsimile machines were just beginning to have some widespread impact, Federal Express, the U.S.-based express delivery service, feared that widespread growth of facsimile machines would reduce the need for overnight shipping services. To deal with this possibility and to capture the profit from this emerging technology, Federal Express launched a service called Zapmail.

The gist of this service was that every Federal Express office would have a facsimile machine, and one could go to a local FedEx office and drop off documents to be faxed or pick up the document to be faxed on one end and deliver the faxed product on the other end. The system cost a fortune to develop and promote and was soon abandoned as fax machines became so inexpensive that almost every office in the developed world could afford its own.

So it may go with e-commerce. Perhaps today’s expensively developed proprietary e-commerce systems will be sold anywhere for a few hundred dollars in a few years. In any case, all of the e-commerce companies face substantial obstacles.

The auction sites are either unworkable or they put the e-commerce site in the role of principal. After all, one can’t sell to people without knowing their credit history, their reputation, etc., and, for that matter, few would want to buy without having credible assurances of food safety, authenticity of product, etc. But one can’t get any of these things without the name of the buyer and seller being revealed. Yet, if the name is revealed, then these sites will have to charge infinitesimal transaction fees to prevent people from going around the sites to avoid the fees.

Of course, the sites could guarantee credit, guarantee delivery, etc., but, in effect, this would transform the site into an exporting or importing principal, taking all the risk of being an exporter or importer. Sites couldn’t survive on a small transaction fee.

Other sites are looking at facilitating each company’s own e-commerce efforts using the website to process transactions. These sites argue that web-based transaction processing is cheaper than conventional processing and so they can justify a transaction fee. Perhaps, but under this model, the e-commerce site is providing only technological assistance. It doesn’t independently bring buyers or sellers to the table. As such, its value is limited to what an IT (Information Technology) department would cost to duplicate the valuable parts of the system. This is inherently limiting and, to the big players, worth virtually nothing.

Indeed, the role of the big players quickly reveals the Catch-22 inherent in the e-commerce B2B sites. If this business turns out to be fantastically successful and profitable, then the big players – the Wal-Mart’s, the Mitsubishi’s, the Marks & Spencer’s of the world – will do it themselves to capture the value. If the sites don’t make much money, the big players may let them be. This is not exactly the kind of scenario that will continue to attract investment capital.

The e-commerce companies have boomed not because they have proven their value, but because the limitless potential of the Internet has attracted substantial amounts of investment capital on favorable terms. Recent tribulations in the stock market, though, have raised the possibility that e-commerce companies may have to “earn their keep” long before many had expected to do so.

It is an understatement to say that the business model that will allow third party e-commerce companies to profit from web-based trading in the food industry is still under development.  EXP