Business to Business Exchanges Jim Dabler Scot

Business to Business Exchanges Jim Dabler & Scot Wallace

Outline: ¨What is a Business to Business Exchange? ¨What types of B 2 B Exchanges are there? ¨Promises and Methods of Profit ¨Case Studies 2

Outline: ¨What is a Business to Business Exchange? ¨What types of B 2 B Exchanges are there? ¨Promises and Methods of Profit ¨Case Studies 3

What is B 2 B? ¨B 2 B (business-to-business) is the exchange of products, services, or information between businesses 4

E-commerce Matrix Business Consumer Business B 2 B Trade. Spark B 2 C Amazon. com Consumer C 2 B Priceline. com C 2 C e. Bay. com Source: http: //www. economist. com/editorial/freeforall/20000226/index_survey. html 5

Worldwide B 2 B Revenues (in Billions and % of total e. Commerce) 6

Outline: ¨What is a Business to Business Exchange? ¨What types of B 2 B Exchanges are there? ¨Promises and Methods of Profit ¨Case Studies 7

Horizontal & Vertical Exchanges Horizontal: specific services across many industries Vertical: all services needed by one particular industry. Ex: Ariba (spend solutions) Ex: Covisent (car makers) http: //techupdate. zdnet. com/techupdate/stories/main/0, 14179, 2870608 -2, 00. html 8

Advertising & Media Computers & Electronics Business Travel Shipping & Logistics Office Products Telecommunications & Utilities Transportation & Freight Pharmaceutical & Medical Paper Products Metals & Mining Industrial Equipment Food, Beverage & Tobacco Energy Consumer Goods Construction & Real Estate Computers & Electronics Chemicals Automotive Agriculture Aerospace & Defense Vertical Marketplaces Horizontal & Vertical Exchanges Commercial Real Estate Horizontal Marketplaces 9

Two Common Models 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: (e. Speed) http: //www. communityb 2 b. com/library/fundamentals. cfm 10

Outline: ¨What is a Business to Business Exchange? ¨What types of B 2 B Exchanges are there? ¨Promises and Methods of Profit ¨Case Studies 11

Promises of B 2 B ¨Greater market intelligence (e. Speed) ¨Decreased inventory levels (Dell) ¨Match supply and demand (e. Speed) ¨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 http: //www. marketplanet. pl/en/index. asp? szablon=14, 2001 (www. fool. com/research/2000/features 000316. htm 16 March 2000) 12

Gains/Risks Buyer ¨One-stop Shopping ¨Comparison Shopping Gain ¨Volume Discounts ¨ 24/7 Ordering ¨Access New Suppliers Seller ¨Online Channel ¨Way to Reach New Customers ¨Outlet for Surplus Inventory ¨Loss of Direct ¨Replacing Trusted Customer Relationships Vendors With Unreliable ¨Price Wars New Sources ¨Competition for Value. Risk ¨Loss in Customer added Services Service Quality ¨Imposition of Transaction Fees ¨Loss of Customers Michelle Radeke, www. workz. com 13

How do B 2 B’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 14

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 15

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 16

Outline: ¨What is a Business to Business Exchange? ¨What types of B 2 B Exchanges are there? ¨Promises and Methods of Profit ¨Case Studies 17

Case Study: e. Speed Inc. e. Speed, 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 11/07/2002 finance. yahoo. com 18

e. Speed Inc. Business Vertical 85% Horizontal 15% Security Exchange Enabling: Trade. Spark robust government bond- energy trading platform: trading business Dominion, TXU, Williams, Dynegy, El Paso, Reliant 06/13/2002 www. thestreet. com 19

e. Speed 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 e. Speed system internally to conduct electronic trading ¨ 1998 – Cantor Exchange, the world’s first full time electronic exchange for trading US Treasury futures, begins operation 20

e. Speed History (continued) ¨ 1999 – e. Speed spun off from C-F in a $220 M IPO. ¨ 2000 – All C-F’s 40 marketplaces are running e. Speed. ¨ 2001 – 180 of its 486 employees including its president died in the World Trade Center 21

Vertical: e. Speed Security Exchange “e. Speed is the electronic bond exchange of the world” “Cantor is more focused on equities now. e. Speed does more volume than the Nasdaq, the NYSE and Amex, all combined. ” - Howard Lutnick, CEO, Cantor and e. Speed Interview by Ratigan of Bloomberg, 11 Oct 2002 22

Vertical: e. Speed 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. ¨ Corporate Bonds ¨ Emerging Market Bonds ¨ Eurobonds/Eurocredits ¨ Foreign Exchange ¨ Government Bonds ¨ Derivatives ¨ Mortgage Bonds ¨ Municipal Bonds 23 The Bond Market Association, 30 June 2002

US Securities Market 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 http: //invest-faq. com/articles/bonds-treas. html 24

Characteristic of Customers ¨ e. Speed 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 25

Customer Interview ¨ “e. Speed 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 26

Promised Value e. Speed’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 ¨ e. Speed can transact a trade in 300 milliseconds www. business 2. com Loren Fox, Aug 2000 27

Competitors Broker. Tec 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 Euro. MTS ¨Interdealer ¨Euro ¨launched in 1999 as a pan-European electronic trading system for euro-denominated government bonds. "The difference between e. Speed and other bond-trading exchanges is that they have liquidity. "-Justin Hughes, Robertson Stephens analyst 28

e. Speed’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 29

Business Plan Revenue from ¨ Charge a set unit price (unit = transaction) ¨ Licensing their software to participants 30

Recent Performance Second quarter 2002 ¨ e. Speed reported net income of $19. 7 million or $0. 36 per share ¨ Fully electronic revenue was up 2% to $21. 2 million ¨ e. Speed's total electronic volume for the second quarter 2002 was $8. 1 trillion 31

Sept. 11 shock Sept. 11, 2001 – C-F, e. Speed and Trade. Spark lose almost 700 people in the attack on the WTC – nearly one quarter of the total casualties e. Speed Stock Price 29 nov 00 - 11 sep 01 finance. yahoo. com 10/28/2002 32

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. 33

e. Speed’s Future 34

Horizontal: e. Speed Platform used in Energy Trading market-neutral electronic marketplace created Sept. 2000 35

Trade. Spark Business “Online energy trading will total $3. 6 trillion by 2005. ” 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 Forrester Research in @marketsmag. com K. Bruderle Oct. 2002 36

Trade. Spark Founders • e. Speed, Inc. • Cantor Fitzgerald • Six of the largest US energy producers/distributors. 37

Tradespark’s Advantage "The move to more online trading is [motivated] primarily by [the desire for] speed. e. Speed has the ability to create a neutral marketplace, and that’s where the benefit really is. ” -- Dynegy spokesperson Aaron Woods. ¨liquidity ¨increased price transparency ¨increased market transparency ¨quicker execution times ¨reduced back-office errors ¨lowered transaction costs ¨neutrality ¨fast, reliable and efficient technology 38

Tradespark’s Customers ¨Primarily the partners! ¨Large Trading Floors in Energy Companies ¨Utilities 39

Tradespark’s Future "We understand that the market is having shortterm difficulties, but we're very positive about the long-term participation in the market. " "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. " - Tradespark's -Dan Gordon, president Allegheny Energy Global Markets COO, Robert Hayes 06/13/2002 Kristen French, www. thestreet. com 40

Leading Companies Recent Stock Performance Dominion (NYSE: D) TXU (NYSE: TXU) Duke (NYSE: DUK) El Paso (NYSE: EP) 41

Leading Companies Recent Stock Performance Dynegy (NYSE: DYN) Williams (NYSE: WMB) 42

e. Speed Licensing! “On Tuesday, e. Speed announced it had agreed to license its electronic trading software to Trade. Spark rival Intercontinental. Exchange. In the fourth quarter, software sales accounted for 15% of the company's revenue. ” www. business 2. com Loren Fox, Aug 2000 43