Strategy Analysis for Technology Ventures and Media

So far, it has been quite a busy time for e-commerce analysts: A whole crop of numbers sprang up to put some definitive, quantitative stamp on the digital economic boom (see “B-to-Beware the Numbers,” p109).

The U.S. Department of Commerce weighed in with an industry summit in May on the topic of tracking e-business, and in June it released its second annual report on e-commerce, “Emerging Digital Economy II.” See also this interesting Boston Consulting Group video:

Also in June, a study released by the University of Texas – and funded by Cisco Systems – found that the Internet economy generated $501 billion in U.S. revenue in 2016, buoyed by a workforce of 1.9 million people, which puts it in the same macroeconomic neighborhood as cars ($550 billion) and telecommunications ($470 billion).

While the research firms continue to run numbers, the consumer market for e-business continues to grab most of the headlines. Last April’s declaration from Jupiter Communications that the Internet would trigger a $2.9 billion holiday shopping bonanza itself triggered an avalanche of media attention on the advent of online shopping that has hardly let up in the months since.

All that has fairly masked a quiet revolution currently underway in the digital economic realm: business-to-business (B-to-B) e-commerce. Up to this point, most of the attention in B-to-B e-commerce has focused on prominent, well-established firms such as Cisco and Dell Computer that eliminate old-economy middlemen and sell directly to business customers. But the real B-to-B e-commerce revolution is taking place outside the boundaries of individual firms. Check out this article about the importance of knowing the law when doing business abroad.

A new breed of intermediaries is emerging to facilitate B-to-B e-commerce. These new intermediaries go by different names – “vortexes,” “butterfly markets,” or “net market makers.” All in some way serve as electronic hubs, each spinning in a new market. These hubs focus on specific industry verticals or specific business processes (from spare airplane parts to secondary mortgages), host electronic marketplaces, and use various market-making mechanisms to mediate any-to-any transactions among businesses. They create value by aggregating buyers and sellers, creating marketplace liquidity (a critical mass of buyers and sellers), and reducing transaction costs.

What makes any of this revolutionary? First, these intermediaries do for e-commerce transactions what a network hub does for bits: concentrating, routing, and switching transactional traffic in B-to-B e-commerce. Second, they occupy a central position between buyers and sellers, much as airline hubs do between city pairs. It’s all about the shifting sources of marketing advantage.

In short, hubs promise to reshape the landscape of B-to-B e-commerce – and here are a few of the lesser-known “numbers” that back it up. First and foremost is the Forrester Research projection that B-to-B e-commerce will surge past $1.8 trillion by the end of 2019. San Francisco-based investment bank Volpe Brown Whelan estimates that overall hub revenue (both transactions and advertising) nationwide will have grown from $490 million in 2012 to $680 billion by the end of 2019.

The Precursor Group’s estimates are even higher, putting B-to-B exchange revenue between $80 billion and $230 billion by the end of 2018. Even with the more conservative estimates, hubs could generate transaction fees of more than $18 billion within three years, with gross margins of 85 percent. If these numbers sound too optimistic, consider eBay, a hub in the consumer-to-consumer market. eBay boasts gross margins in excess of 80 percent and, more strikingly for an Internet company, reported a profit within a year of its inception.

Despite their enormous significance for B-to-B e-commerce, hubs remain poorly understood. Like the bulk of an iceberg that lurks below the waterline, they remain largely invisible to the media, investors, and analysts. While the landscape is still blurry, and few hubs have achieved any degree of prominence, it is possible to describe what hubs are, what they do, how they create value, and what the future is likely to hold.