Moving Beyond B2C To B2B

The naked man is gone from the billboard off Highway 101 in Silicon Valley. The tearing down of the much talked-about Beyond.com ad is one of the casualties of the company's January decision to forsake the business-to-consumer market in favor of business-to-business. Beyond will continue to sell software downloads to consumers at its Web site, but it will no longer expend most of its resources trying to lure consumers to its site.

But Beyond is not the only Net company changing its focus from consumers to business customers. Ask Jeeves, ClickRewards and Fatbrain.com are some of the other notable Web companies that are switching to a business-to-business focus or adding B2B programs to their current product offerings.

"All of the B2Cs are looking for elements of their business that are B2B," says Mark Rowen, a senior analyst for the Internet retail sector at Prudential Securities in New York.

Why the sudden focus on B2B? It's simply a matter of economics.

Internet companies are making the switch to cut costs, observers say. "B2B has the potential for lower marketing costs per dollar of revenue because the average order sizes are bigger," says Perry Boyle, an analyst at the New York merchant bank Thomas Weisel. "It's also cheaper to send 1,000 widgets to one customer than to ship one widget to 1,000 customers. On the flip side, businesses tend to be tougher on price negotiations than consumers."

Rick Neely, interim chief executive of Beyond, says the company's decision to refocus on B2B has allowed it to cut its advertising expense in half while increasing revenue dramatically, although he is not providing numbers. For 1999, the company reported a loss of $124.8 million on revenue of $117.3 million, and it spent $81 million on sales and marketing. The company ended the fourth quarter with $66.3 million in cash, cash equivalents and short-term investments.

"In B2C our current cash would last one year, but we will have this thing turned around in three months now," he says. "You have to have a path to profitability." Neely also notes that Wall Street is no longer funding start-ups that cannot show progress toward profitability. Funding plays a major role in the trend.

David Cooperstein, director of online retail research at Forrester Research in Cambridge, Mass., confirms that the well has dried up for consumer-oriented "dot coms."

"B2C is out of favor," he says. "B2B is where all the venture money is flowing these days - along with the public markets. The weakness of start-ups with no assets other than a business plan is what has soured interest in the B2C market."

Funding for B2B Web companies is available because vulture capitalists are drooling over the size of the B2B market.

Estimates of total B2B online revenues within five years vary from $1.5 trillion (The Goldman Sachs Group) to $2.8 trillion (The Boston Consulting Group). Other researchers are somewhere in between. At the start of 1999, only two or three B2B firms were publicly traded, according to Eric B. Upin, B2B analyst at Robertson Stephens in San Francisco. By the end of the year, 10 to 12 had gone public, and their market capitalization had risen dramatically - from $25 billion in September to $90 billion at the end of 1999. The combined market capitalization of B2C companies at the same time was $700 billion, Upin says. He expects the number of publicly held B2B companies to rise to 25 to 75 by the end of this year.

While start-up and development money is still pouring into B2C businesses, most venture capitalists say the big money will be invested in B2B companies in the next year or two.

The success of early B2C com-panies attracted too many entrepreneurs. "Me-too ideas and crowded categories are driving interest into newer opportunities," Forrester's Cooperstein says.

Beyond realized that the only way to succeed in B2C was to grow very quickly like Amazon.com to critical mass, or to have a highly specialized niche, Neely says. "The cost of building a unique brand on the Internet was higher than people thought - $300 million to $400 million - and you need a lot of volume to build the brand," he says. Referral fees paid to portals that direct consumers to a buying destination also dramatically increase the cost of doing business on the Web, particularly when the visitors look but don't buy. By focusing on B2B, Beyond has been able to renegotiate its portal fee agreements with sites that direct consumers to its own site. These click-through fees amounted to about half of Beyond's marketing expense.

Beyond says revenue is rising as it now generates its own portal fees by directing consumers to the sites of its business partners and from margins on business sales at its own site. It also earns revenue and transaction fees from building and operating software stores for its business partners, including Compaq Computer, Symantec and Hewlett-Packard's Shopping Village.

Most B2Cs making the switch are using their experience in B2C or technology to help other companies sell to consumers and earn revenue from the business, not the consumer. This business model is called business-to-business-to-consumer, or B2B2C.

Experience and technology from the B2Cs entering the B2B2C market is also changing the ways their business partners do business. Using Beyond's software download services allows independent software vendors to sell directly to users, something some of them couldn't do before because of their agreements with software distributors and retailers.

The availability of advice and technology from the former B2Cs also may make 2000 the year of "the revenge of the bricks and mortar when they figure out what works online for them," according to Cooperstein.

"This is the big year of clicks-and-mortar integration," says Rob Wrubel, president and CEO of Ask Jeeves, which provides a natural language search engine and database technology to businesses building Web sites. Ask Jeeves first entered the consumer market to build a brand with 5.5 million users, and now has expanded to providing its technology to other businesses for their Web sites. "We have a bigger market wiring Wal-Mart, Chrysler and other companies," he says. "They will start looking more like start-ups and 'dot coms.' "