Business to Business Exchanges

1. Business to Business Exchanges Jim Dabler & Scot Wallace

2. Outline: • What is a Business to Business Exchange? • What types of B2B Exchanges are there? • Promises and Methods of Profit • Case Studies

3. Outline: • What is a Business to Business Exchange? • What types of B2B Exchanges are there? • Promises and Methods of Profit • Case Studies

4. Whatis B2B? • B2B (business-to-business) is the exchange of products, services, or information between businesses

5. E-commerce Matrix Source: http://www.economist.com/editorial/freeforall/20000226/index_survey.html

6. Worldwide B2B Revenues(in Billions and % of total eCommerce)

7. Outline: • What is a Business to Business Exchange? • What types of B2B Exchanges are there? • Promises and Methods of Profit • Case Studies

8. Horizontal & Vertical Exchanges http://techupdate.zdnet.com/techupdate/stories/main/0,14179,2870608-2,00.html

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

10. Two CommonModels http://www.communityb2b.com/library/fundamentals.cfm

11. Outline: • What is a Business to Business Exchange? • Whattypes of B2B Exchanges are there? • Promises and Methods of Profit • Case Studies

12. Promises of B2B • Greater market intelligence (eSpeed) • Decreased inventory levels (Dell) • Match supply and demand (eSpeed) • 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/features000316.htm 16 March 2000)

13. Gains/Risks Michelle Radeke, www.workz.com

14. How do B2B’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

15. 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

16. 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

17. Outline: • What is a Business to Business Exchange? • Whattypes of B2B Exchanges are there? • Promises and Methods of Profit • Case Studies

18. Case Study: eSpeed Inc. eSpeed, Inc. operates global interactive electronic marketplaces. Marketplaces that enable thetrading of financial instruments and other products instantaneously, more effectively and at lower cost than traditional trading methods 11/07/2002 finance.yahoo.com

19. eSpeed Inc. Business Vertical 85% Horizontal 15% 06/13/2002 www.thestreet.com

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

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

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

23. Vertical: eSpeed 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 The Bond Market Association, 30 June 2002

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

25. Characteristic of Customers • eSpeed 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

26. Customer Interview • “eSpeed 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

27. Promised Value • eSpeed’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 • eSpeed can transact a trade in 300 milliseconds www.business2.com Loren Fox, Aug 2000

28. Competitors "The difference between eSpeed and other bond-trading exchanges is that they have liquidity."-Justin Hughes, Robertson Stephens analyst

29. eSpeed’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

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

31. Recent Performance Second quarter 2002 • eSpeed reported net income of $19.7 million or $0.36 per share • Fully electronic revenue was up 2% to $21.2 million • eSpeed's total electronic volume for the second quarter 2002 was $8.1 trillion

32. Sept.11 shock Sept. 11, 2001 – C-F, eSpeed and TradeSpark lose almost 700 people in the attack on the WTC – nearly one quarter of the total casualties eSpeed Stock Price 29nov00 - 11sep01 finance.yahoo.com 10/28/2002

33. 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.

34. eSpeed’s Future

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

36. TradeSpark 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

37. TradeSpark Founders • eSpeed, Inc. • Cantor Fitzgerald • Six of the largest US energy producers/distributors.

38. Tradespark’s Advantage "The move to more online trading is [motivated] primarily by [the desire for] speed. eSpeed 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

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

40. Tradespark’s Future 06/13/2002 Kristen French, www.thestreet.com

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

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

43. eSpeed Licensing! “On Tuesday, eSpeed announced it had agreed to license its electronic trading software to TradeSpark rival IntercontinentalExchange. In the fourth quarter, software sales accounted for 15% of the company's revenue.” www.business2.com Loren Fox, Aug 2000