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Online Exchanges Open Door Wider for Tech Firms

E-commerce: As business-to-business marketplaces spring up, the companies involved stand to reap big rewards.


While most of the frenzy over e-commerce has focused on Internet shops selling books and toys to consumers, a small group of largely unheralded companies has begun rushing for the real gold mine of the future--business-to-business e-commerce.

In recent months, once-obscure companies such as Mountain View-based Ariba Inc. and WebMethods Inc. of Fairfax, Va., have seen their stock shoot to stratospheric levels as investors have awakened to the multitrillion-dollar migration of commerce from the real world to "B2B" e-commerce.

Recent projects--such as the creation of an online marketplace by General Motors, Ford and DaimlerChrysler for the procurement of $250 billion worth of automobile parts annually--have pushed online business exchanges into the vanguard of Internet companies.

Most industries in the coming years will shift their buying of supplies, materials and services from the old system of phone, salespeople and fax onto virtual marketplaces, along the way hoping to save 10% to 15% of purchasing costs by doing it online. "We've just seen the tip of the iceberg," said Bruce Temkin, e-commerce research director for Cambridge, Mass.-based Forrester Research.

Just as it took years to build the technology that opened the way for online consumer stores such as bookseller and auction site EBay, the first bricks of the e-commerce era are gradually being put into place. For the companies involved in this online construction program, the rewards could be substantial. Forrester Research estimates that business-to-business e-commerce will grow from $406 billion this year to $2.7 trillion in 2004, or about 10 times the size of retail e-commerce.

Online marketplaces allow buyers and sellers to conduct electronic transactions, hold online auctions to dispose of surplus goods and stage "reverse auctions" for buying supplies with nothing more than a computer and an Internet connection.

One example of how the process can save money is a recent online reverse auction held by General Motors, which wanted to buy several million dollars worth of window sealers. Previously, GM had to find potential suppliers, mail out specifications and then negotiate deals over the phone and fax. This time, more than 20 bidders simply gathered online and submitted their bids at one time. What once took weeks was accomplished in less than two hours.

The most fundamental technology piece in building these online marketplaces are the computer databases that store and keep track of all the information on products, services and sales. Oracle Corp. and Microsoft Corp. are already the major players in this field, providing database programs that power intracompany computer systems and Web sites. And their programs are natural platforms for new e-commerce exchanges.

But there are still pieces left for smaller and more nimble technology companies to grab some of these new online exchanges. Once selected, companies can reap a continuing flow of money in building out the project, providing services to keep it running and collecting fees and commissions from each transaction.

And one of the key areas of online commerce is security. Plano, Texas-based Entrust Technologies Inc., which was spun off from Nortel Networks in 1996, has jumped into this market using a technology called public-key encryption to encrypt transmissions and confirm the identities of online users.

Entrust is a partner with some of the major companies that produce e-commerce software, such as Oracle and Ariba. The company's technology is used by Federal Express, the People's Bank of China and the U.S. Patent and Trademark Office.

Public-key encryption provides each user with two coded "keys," which are a string of symbols that can be used by the company's software to encrypt and decrypt a message. One of the keys is private; the other is public. The public key is used to encrypt a message, which is later decrypted by the recipient using the matching private key.

The two-key method can also be used to establish the identity of a person using the unique public and private keys. This "digital signature" is critical for e-commerce to ensure that deals have been struck between the right people.

There are many companies with encryption products, but Entrust has focused on the business commerce market and its stock has rocketed from about $16 last year to $110 Friday on Nasdaq. The company makes its money by selling encryption systems and managing public-key systems for customers; in the last 12 months Entrust did $85.2 million in sales and posted income of $5.9 million.

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