Business to Business Exchanges

Jim Dabler & Scot Wallace

2

Outline:

What is a Business to Business Exchange?

What types of B2B Exchanges are there?

Promises and Methods of Profit

Case Studies

3

Outline:

What is a Business to Business Exchange?

What types of B2B Exchanges are there?

Promises and Methods of Profit

Case Studies

4

What is B2B?

B2B (business-to-business) is the exchange of products, services, or information between businesses

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E-commerce Matrix

Source: http://www.economist.com/editorial/freeforall/20000226/index_survey.html

Business Consumer

BusinessB2B

TradeSparkB2C

Amazon.com

Consumer C2B

Priceline.comC2C

eBay.com

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Worldwide B2B Revenues(in Billions and % of total eCommerce)

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Outline:

What is a Business to Business Exchange?

What types of B2B Exchanges are there?

Promises and Methods of Profit

Case Studies

8

Horizontal & Vertical Exchanges

Horizontal: specific services across many industries

Ex: Ariba (spend solutions)

Vertical: all services needed by one particular industry.

Ex: Covisent (car makers)

http://techupdate.zdnet.com/techupdate/stories/main/0,14179,2870608-2,00.html

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Horizontal & Vertical Exchanges

Vert

ical

Mar

ketp

lace

s

Aer

ospa

ce &

Def

ense

Agr

icul

ture

Aut

omot

ive

Che

mic

als

Com

pute

rs &

Ele

ctro

nics

Con

stru

ctio

n &

Rea

l Est

ate

Con

sum

er G

oods

Ener

gy

Food

, Bev

erag

e &

Tob

acco

Indu

stria

l Equ

ipm

ent

Met

als

& M

inin

g

Pape

r Pro

duct

s

Phar

mac

eutic

al &

Med

ical

Tran

spor

tatio

n &

Fre

ight

Tele

com

mun

icat

ions

& U

tiliti

es

Horizontal Marketplaces

Office ProductsBusiness Travel

Computers &Electronics

Commercial RealEstate

Shipping &LogisticsAdvertising

& Media

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Two Common Models

http://www.communityb2b.com/library/fundamentals.cfm

Centric: Buy: few big buyers to fragmented sellers

Ex: (Covisint)

Sell: few big sellers to fragmented buyers

Ex: (Grainger.com)

Neutral: A third party neutral exchange, performs the transactions through a bid/ask system.

Ex: (eSpeed)

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Outline:

What is a Business to Business Exchange?

What types of B2B Exchanges are there?

Promises and Methods of Profit

Case Studies

12

Promises of B2B

Greater market intelligence (eSpeed)

Decreased inventory levels(Dell)

Match supply and demand (eSpeed)

Purchase centralization and costs reduction (Dell)

Guarantee suppliers an access to new markets, marketing and sales costs reduction

Better relations with their partners in business

(www.fool.com/research/2000/features000316.htm 16 March 2000)

http://www.marketplanet.pl/en/index.asp?szablon=14, 2001

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Gains/Risks

Michelle Radeke, www.workz.com

Buyer Seller

Gain

One-stop ShoppingComparison ShoppingVolume Discounts24/7 OrderingAccess New Suppliers

Online ChannelWay to Reach New CustomersOutlet for Surplus Inventory

Risk

Replacing Trusted Vendors With Unreliable New SourcesLoss in Customer Service Quality

Loss of Direct Customer RelationshipsPrice WarsCompetition for Value-added ServicesImposition of Transaction FeesLoss of Customers

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How do B2B’s make money?

Licensing their software to participants

Charging transaction fee (1%-10%) of purchase price

Hosting targeted advertising on the exchange

Selling data: purchase patterns of exchange participants

Charging subscription fees for exchange use

Michelle Radeke, www.workz.com

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Why have many failed?

Initial participants:

"It was a chicken-and-egg thing, because you couldn't attract sellers without buyers, but buyers weren't attracted if there weren't enough sellers.”

Price is sole differentiator

Suppliers couldn't adequately differentiate themselves by quality or added services.

Business Plan called for high volumes

"Some tried to start off with higher margins but they realized they had to make them low, or even negative, to get the volume they needed."

- Dan Garretson, Forrester senior analyst, Business Week Onlline, May 28, 2002

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Keys to Profit

Must know the business!

Advertising won’t pay the bills!

Need multiple revenue streams, transaction fees not enough.

Need high volume, plan on flat fees, not % of transaction

Simple, traders must know the entire situation at a glance

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Outline:

What is a Business to Business Exchange?

What types of B2B Exchanges are there?

Promises and Methods of Profit

Case Studies

18

Case Study: eSpeed Inc.

11/07/2002 finance.yahoo.com

eSpeed, Inc. operates global interactive electronic marketplaces.

Marketplaces that enable the trading of financial instruments and other products instantaneously, more effectively and at lower cost than traditional trading methods

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eSpeed Inc. Business

Security Exchange Enabling: TradeSpark

robust government bond-trading business

energy trading platform:

Dominion, TXU, Williams,Dynegy, El Paso, Reliant

06/13/2002 www.thestreet.com

Vertical85%

Horizontal15%

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eSpeed History

1945 – John Fitzgerald and Bernie Cantor team up to create Cantor Fitzgerald (C-F), a bond brokerage

1972 – C-F introduces the world’s first electronic marketplace for US government securities

1996 – C-F begins using the eSpeed system internally to conduct electronic trading

1998 – Cantor Exchange, the world’s first full time electronic exchange for trading US Treasury futures, begins operation

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1999 – eSpeed spun off from C-F in a $220M IPO.

2000 – All C-F’s 40 marketplaces are running eSpeed.

2001 – 180 of its 486 employees including its president died in the World Trade Center

eSpeed History (continued)

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Vertical: eSpeed Security Exchange

“eSpeed is the electronic bond exchange of the world”

“Cantor is more focused on equities now. eSpeed does more volume than the Nasdaq, the NYSE and Amex, all combined.”

- Howard Lutnick, CEO, Cantor and eSpeed

Interview by Ratigan of Bloomberg, 11 Oct 2002

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Vertical: eSpeed Securities Exchange

Average daily trading volume in U.S. Treasury securities $346.9 Billion.

The treasury bond market alone is triple the size of

the U.S. stock market.

The Bond Market Association, 30 June 2002

Corporate Bonds Emerging Market Bonds Eurobonds/Eurocredits Foreign Exchange Government Bonds Derivatives Mortgage Bonds Municipal Bonds

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US Securities Market

http://invest-faq.com/articles/bonds-treas.html

The US Treasury Department periodically borrows money and issues IOUs in the form of bills, notes, or bonds ("Treasuries"). The differences are in their maturities and denominations:

Bill Note Bond

Maturity up to 1 year 1--10 years 10--30/40 years

Denomination $1,000 $1,000 $1,000

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Characteristic of Customers

eSpeed is an Interdealer: Electronic transactions Fully anonymous services of brokers’ brokers.

650 institutions globally

Primary Customers:professional securities dealers including the 25 largest bond trading firms in the world

Bank of America, Barclays Bank, Credit Lyonnais, Deutsche Bank, JP Morgan Chase & Co. , Lehman Brothers, Morgan Stanley Dean Witter, Royal Bank of Scotland, Nikko Securities, Nomura, UBS/Paine Webber

http://www.treasuryconnect.com/markets/financial.htm

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Customer Interview

“eSpeed is really great!

… The screen is customizable, very easy to use…

… their customer support is super….

… I do not want a single thing for security trading than what is on this screen…”

- Sue Lowe, Supervisor A.G.Edwards Securities Trading

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Promised Value

eSpeed’s advantage is speed

Wholesale Bond trading: "open outcry" system people in trading pits yell out orders. two minutes to complete trade, price change slightly trades of $1 million and more, tiny price changes

matter.

Electronic System eSpeed can transact a trade in 300 milliseconds

www.business2.com Loren Fox, Aug 2000

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Competitors

"The difference between eSpeed and other bond-trading exchanges is that they have liquidity."-Justin Hughes, Robertson Stephens analyst

BrokerTec Global Treasury & Agency fully electronic inter-dealer trading system founded by

12 leading bond houses based in New Jersey. second quarter 2002 transaction volume: $8.9 trillion

EuroMTS InterdealerEurolaunched in 1999 as a pan-European electronic trading

system for euro-denominated government bonds.

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eSpeed’s Liquidity

Breadth + Depth = Liquidity

Breadth: The number of tradable entities

Depth: Number of participants taking a position on a trade.

For fast moving markets = very important.

www.investorwords.com

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Business Plan

Revenue from

Charge a set unit price (unit = transaction) Licensing their software to participants

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Recent Performance

Second quarter 2002

eSpeed reported net income of $19.7 million or $0.36 per share

Fully electronic revenue was up 2% to $21.2 million eSpeed's total electronic volume for the second

quarter 2002 was $8.1 trillion

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Sept.11 shock

finance.yahoo.com 10/28/2002

Sept. 11, 2001 – C-F, eSpeed and TradeSpark lose almost 700 people in the attack on the WTC – nearly one quarter of the total casualties

eSpeed Stock Price29nov00 - 11sep01

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Sept.11 comeback

Backup systems allowed brokering again on Sept. 13. First profit ever in fourth quarter 2001 Employees working two to four different jobs, sleeping

on cots or under their desks.

eSpeed Financials

-25.00-20.00-15.00-10.00

-5.000.005.00

10.0015.0020.0025.00

Date

$ (

bill

ion

s)

net incomeoperating cash flow

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eSpeed’s Future

Average Daily Trading Volume of U.S. Treasury Securities

100

150

200

250

300

350

400

1994 1996 1998 2000 2002 2004

Year

($ B

illio

ns)

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Horizontal: eSpeed Platform used in Energy Trading

market-neutral electronic marketplace created Sept.2000

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TradeSpark Business

What?energy trading for natural gas, electricity, coal, weather derivatives, nitrogen dioxide and sulfur dioxide emission allowances

How?Provides customers with 3 points of access: private network, voice brokers and the Internet

“Online energy trading will total $3.6 trillion by 2005.”

Forrester Research in @marketsmag.com K. Bruderle Oct.2002

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TradeSpark Founders

•eSpeed, Inc. • Cantor Fitzgerald • Six of the largest US energy producers/distributors.

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Tradespark’s Advantage

"The move to more online trading is [motivated] primarily by [the desire for] speed. eSpeed has the ability to create a neutral marketplace, and that’s where the benefit really is.”-- Dynegy spokesperson Aaron Woods.

liquidityincreased price transparencyincreased market transparencyquicker execution timesreduced back-office errorslowered transaction costsneutralityfast, reliable and efficient technology

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Tradespark’s Customers

Primarily the partners!

Large Trading Floors in Energy Companies

Utilities

4006/13/2002 Kristen French, www.thestreet.com

Tradespark’s Future

"We understand that the market is having short-term difficulties, but we're very positive about the long-term participation in the market."

- Tradespark's COO, Robert Hayes

"I don't see why these markets would have a reason to rebound in the very, very near future, absent some sort of dramatic change."

-Dan Gordon, president Allegheny Energy Global Markets

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Leading Companies Recent Stock PerformanceDuke (NYSE: DUK)Dominion (NYSE: D)

TXU (NYSE: TXU) El Paso (NYSE: EP)

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Williams (NYSE: WMB)Dynegy (NYSE: DYN)

Leading Companies Recent Stock Performance

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eSpeed Licensing!

“On Tuesday, eSpeed announced it had agreed to license its electronic trading software to TradeSpark rival IntercontinentalExchange. In the fourth quarter, software sales accounted for 15% of the company's revenue.”

www.business2.com Loren Fox, Aug 2000