business to business exchanges jim dabler & scot wallace
TRANSCRIPT
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Business to Business Exchanges
Jim Dabler & Scot Wallace
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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
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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
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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
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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
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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
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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
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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