The next big Internet shakeout will occur among vendors of business-to-business (B2B) electronic commerce products and services, according to 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 last week during a presentation at the 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 turn of B2B to come under pressure, he said.
Most B2B suppliers are acting as simple intermediaries between buyers and sellers, which is not a sustainable business model, Daniell said.
"The Internet is there to get the middlemen out. 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 pointed out that the New York Stock Exchange made a profit in 1999 of $US75.2 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 customised 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 said.
"The next wave of capital market evolution is B2B, but the economics there may be even tougher," he said. "I would raise a great flag of caution about exchanges."The market downturn in April also created new imperatives for Internet businesses, Daniell said. In particular, the emphasis on attracting customers, the first-to-market and new-to-world concepts had inevitably given way to old-economy values like building long-term strategic value.
"The idea that revenues are irrelevant and profits a distraction is pre-April thinking," he said. "There is now a drive towards sustainable profitability.