September 1999: The B-To-B Boom



THE B-TO-B BOOM

Tradex: The Enabler

Building the platforms for online B-to-B.

By Susan Moran

Horse feed. Plastics. Computer chips. Name any market up for grabs in the rapidly expanding realm of online business-to-business, and Tradex Technologies aims to build the digital engines to bring them up to speed.

Every one of these complex new electronic marketplaces, from plastics to paper, demands a set of sophisticated tools that can cater to the needs of thousands of buyers and sellers who converge in one meeting place at one time to do their business. The tools of the online B-to-B trade today generally include a sophisticated transaction engine with a user interface, an electronic catalog of some kind, software that enables both the purchasing and selling of goods, configuration tools, and the like. Some vendors have lined up on the sales side of the commerce equation, while others offer tools just for buyers. Tradex serves as a puppeteer of sorts, offering technology that controls and streamlines the trading exchange itself.

The Tampa, Fla.-based company doesn't mind taking a behind-the-scenes role, and hardly a sexy one at that, as long as it helps generate a critical mass of customers who themselves create digital marketplaces and exchanges. Since mid-1995, it has been selling key ecommerce tools that can power many of the new B-to-B enterprises, ranging from restaurant supplies marketplaces to metal trading hubs. And the economic potential is huge. Tradex would be happy to settle with a fraction of the burgeoning business-to-business Internet commerce market, which Forrester Research estimates will mushroom to more than $1.3 trillion by 2003 (see p109 for more market data).

"[Tradex] would be sipping off the firehose of transactions taking place in the market, and that's not bad at all," says Bob Chatham, an analyst at Forrester in Cambridge, Mass. "It's definitely a viable niche they're in.... The question is how are they going to get there?"

Another enthusiast is Albert Pang, an analyst at International Data Corp., a research firm based in Framingham, Mass. "I'm very bullish on markets developing for these trading communities on the Internet," he says. "There are going to be many of these communities being formed using the different applications and services that Tradex can offer.... Once [companies] realize they can get savings out of buying and selling production goods, even feed for horse racing, Tradex will be in a good position to stake their claim to the market." He cautions, however, that the market for such electronic hubs is still small and immature.

Daniel S. Aegerter, Tradex's CEO, is applying his native Swiss penchant for efficiency and focus to the company, aiming to succeed in the nascent market by homing in on the exchange model and not trying to be all things to all players. "Our sustainable competitive advantage is that we're focused on marketplaces, on the external connections for buyers and sellers. I've preached this since 1995."

The company is targeting ebusiness portals and vertical marketplaces. The ebusiness portals are for existing businesses whose customers want to ".com" themselves and at the same time prevent their customer relationships from being eroded, Aegerter explains. Vertical markets are typically created by startups, companies without an existing customer base but with a deep level of expertise about trading among buyers and sellers. "These guys want to be the next Amazon," he adds. So what does Tradex want to be? "We want to be the engine behind leading marketplaces in every space," he beams.

In 1996, Tradex was spun off the U.S. subsidiary of Swiss company Dynabit, an importer and distributor of high-end computer peripherals for digital publishing. In 1995, the parent company introduced an Internet-based system to automate purchasing processes for its customers and suppliers. Aegerter, anticipating the huge growth potential in playing an intermediary role, initiated the creation of the marketplace and exchange technology that now serves as Tradex's core.

Tradex was ahead of its time in 1996, and in fact fumbled to find a foothold as the market evolved first from selling-related software, then to procurement software, before finally expanding to support out-of-the-box digital exchanges.

Digital exchanges are the more advanced — and hence unproven — B-to-B model, as outlined in "Let's Get Vertical" (p84). The first method to emerge for mediating transactions between buyers and sellers is the catalog model, which works best for small-ticket items and in markets where prices don't fluctuate too frequently. Companies such as Ariba, of Sunnyvale, Calif., and Commerce One, of Walnut Creek, Calif., dominate the space as vendors. Ariba's software automates the purchasing decisions of many Fortune 500 companies; Commerce One's software products automate supply-chain management of nonproduction goods and services.

Then came the auction model, which appears to work best for hard-to-find, used, or otherwise unsaleable products. One need only peek at the buzzing trading activity on eBay, Amazon.com, Onsale, and many others to see how popular this model already is in the consumer market. Tradex wants to dominate the third mechanism, the exchange model, by creating the digital engines that enable real-time matching of bid and ask processes for commodity goods. The stock and commodities exchanges are obvious precedents. Among those creating electronic exchange hubs are e-Steel in steel, and Tradex customer PlasticsNet.com in plastic materials.

"These guys have as good a chance as anyone for becoming the platform of choice for vertical market exchanges," says Tom Kippola, managing partner of The Chasm Group, a high-tech market strategy consulting firm in San Mateo, Calif. "The whole idea of vertical market exchanges is emerging but hot, and it'll get hotter. Companies are going to need a platform to run their business." Kippola has consulted for Tradex and is mulling an offer to join its board of directors.

Several companies already call upon Tradex to run their ecommerce hubs. The largest customer is Nippon Telephone & Telegraph, which has built an internal marketplace to aggregate its companywide expenditures for maintenance, repair, and operations (MRO), goods and related products. The solution allows NTT's myriad business units and subsidiaries to create a central catalog of approved products, suppliers, and contracts. Other customers include PlasticsNet, MetalSite, and the ecommerce site Hospitality Online Trading System (HOTS ecommerce), an Australian food-service marketplace.

A more recent customer is VerticalNet, which builds communities for corporate buyers and sellers (see "Industrial-Strength Portal," p118). The company is piloting Tradex's technology for a few months to help manage 1,000 customers and potential customers, who together run thousands of storefronts. C.H. Low, chief technology officer of VerticalNet, says Tradex's software lets it manage the B-to-B partner relationships in a scalable fashion, and its dynamic user interfaced (a JavaBeans-based product) makes it easy for customers to customize their own processes.

Tradex product Commerce Center 6.0 helps customers handle registration for large marketplaces and manage contracts, pricing, and work flow. Forrester's Chatham gives it a thumbs up. "Their architecture is superb. It gives the right level of customization and it's a great platform to build on, with a strong set of components," he says.

To date, Tradex makes money from licensing its software (60 percent of revenues), from support services (30 percent) and from charging transaction fees (10 percent), according to Aegerter. He expects the company will rely increasingly on transaction fees for income down the road. That will give Tradex a larger interest in customers' luring more participants to their trading communities. "We'll grow on a revenue-sharing basis far more than on up-front fees," he says. Aegerter is coy when discussing the privately-held company's financials. In its June quarter Tradex boasted a 70 percent sequential hike. He would not project when the company's bottom line will shift from red to black. "Wait for our S-1," he says.

Its piggy bank of $20 million — from venture firms Draper Fisher Jurvetson, Internet Capital Group, and Sigma Partners — should keep it afloat for months even if the window for Internet initial public offerings closes.

If the recent dizzying IPOs by Ariba and Commerce One are a reliable barometer, Tradex could ride their coattails. "Ariba's IPO is great for us," Aegerter says. "It establishes a great comparable." Then again, Tradex could be at a disadvantage since Ariba and Commerce One beat them to the punch, as Mohanbir Sawhney believes ("Let's Get Vertical," p84). Ariba's stock was priced at $23 on June 22, started trading at $61 the following day, and had doubled that by mid-July. Commerce One's debut has been a bit more modest; it was priced at $21, started trading on July 1 at $66 and was idling right around there in mid-July.

Challenges loom
Aegerter acknowledges he's got a long way to establish Tradex as a high-profile, successful player. Toward that end, he says the company must partner with other companies to provide more functions for vertical hubs, including auction capabilities, despite the company's commitment to focus most on the digital exchange space.

Meanwhile, larger players in the general B-to-B marketplace-enabler arena, including Ariba, Commerce One, and to some degree the smaller EC Cubed, are expanding their offerings, making them both potential partners and rivals to Tradex. "Tradex will also want to expand its offerings, and to that end it's likely to look for partners or possibly even acquisitions," predicts Sawhney.

C.J. Glynn, manager of corporate marketing at Ariba, is zip-lipped about Ariba's acquisition plans, but he did say "we're open to partnering with people who could provide pivotal end-to-end ecommerce solutions." As for Ariba's interest in expanding into the exchange model, "I wouldn't rule it out for Ariba," he says.

Lauren Whitehouse, vice president of marketing at EC Cubed of Wilton, Conn., refers to Tradex as "somewhat of a competitor. Though we have a very different solution, we compete for the same IT dollars." EC Cubed's product, ecWorks, is a suite of Java components designed to identify common functions required for purchasing goods, digital marketplaces, supply chain management, and customer service. Aegerter appears unfazed by such potential rivals. "The ones on our radar really are people who decide to build [platforms] by themselves," he says.

So continues his mission to convince high-volume brokers of commodities ranging from cow feed to cowhide to derivatives that their future lies in creating vertical marketplaces on the Internet.

Susan Moran (smoran@business2.com) is a senior editor at Business 2.0.

 

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