A Little Guy's Marketplace

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While both small-business buyers and sellers seem to be profiting, it's not yet clear that the auction sites will stay in the black. For some products and services, like computer equipment and brochure printing, the margins are small, leaving little room for exchanges to profit. And then there's always the possibility that, like the big automakers, small businesses in the same field could band together and establish their own exchanges, relying less on the dotcoms. It's unlikely this will happen anytime soon, according to Melissa Shore, a senior analyst at Jupiter Research. "The reason proprietary exchanges work with the big automakers is that they dominate the marketplace and suppliers have to come to play," she says. "Small businesses still don't have enough power or money to make that happen."

There's no question the opportunities are there. Today there are more than 7.4 million small businesses in the U.S., and roughly 62% have a presence online. Most small businesses use the Internet only for e-mail, and a mere fraction have discovered online auctions. Business is expected to boom. Small businesses will account for approximately $118 billion in e-commerce in 2002, up from roughly $25 billion in 1999, according to AMI-Partners, a New York City-based Internet research firm specializing in small businesses.

Given that potential market and the fact that major business-procurement companies like Ariba and Commerce One have largely shunned the small-business market, it's no wonder that dozens of companies are vying for small-business dollars. Among these companies are EqualFooting, which helps small businesses get good deals on manufacturing supplies and equipment; SmallBusinessDepot, which specializes in matching small businesses with government contracts; and ebDirect, where small businesses can procure a variety of insurance plans, including health, dental, life and vision coverage.

That kind of niche strategy probably won't last long. There are simply too many me-too small-business B2B exchanges, and a shakeout is almost a foregone conclusion. Shore expects that, before long, a few megasites will probably emerge, each offering a soup-to-nuts array of services and products, including office pens and paper and 401(k) planning. Traditional financial players that work with small businesses, like Intuit or Merrill Lynch, are likely to swoop in and buy or partner with these megasites, adding their expertise and long-established relationships to the equation. "You want to be the one place small-business owners go, because once you have them you want to suck them dry," says Shore. BizBuyer CEO Louvat believes that only exchanges offering a range of services will thrive. "Like Wal-Mart, the one-stop shop is the wave of the future for exchanges," he says. Others disagree. When Demandline CEO Patrick Burns founded his company this year, he made a calculated decision to offer only services. "Telephone carriers pay just one penny for a call and charge 10[cents]," he says. "There are definitely higher margins in the service business."