The B2B Analyst - U.S. Bancorp Piper Jaffray's Weekly B2B Newsletter, Volume 1, Number 37 -.

Business Editors

MINNEAPOLIS--(BUSINESS WIRE)--Oct. 6, 2000

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Jon M. Ekoniak, 650-233-2278, [e-mail] Timothy M. Klein, 612-303-5544, [e-mail]

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October 6, 2000

In This Week's B2B Analyst: I. INDEX - U.S. Bancorp Piper Jaffray B2BEC Index II. Market Insight - What Has Happened To The Verticals? III. B2K - e-Business Software Spending IV. Weekly News V. Filings & Pricings

I. INDEX - U.S. Bancorp Piper Jaffray B2BEC Index

Close: 125.35 Past week: -29.67 (-19.1%) Past month: -39.90 (-24.1%) Since inception (7/1/99): +25.35 (+25.4%)

It was a tough week for the Index as interest rate concerns, disappointing technology earnings prereleases, and the like drove the Index down nearly 20%. Worst hit were SciQuest.com (a), PSDI (a), Internet Capital Group (a), and Click Commerce (a), dropping 40%, 35%, 34%, and 33%, respectively.

II. MARKET INSIGHT - What Has Happened To The Verticals?

Among the B2B world's disappointments this year has been the lack of traction gained by vertical, or industry-specific marketplaces, in terms of adoption, revenue, and valuation. In late 1999, many industry analysts predicted that vertical marketplaces would by now be well on their way toward dominating entire industries; that has not turned out to be the case. Even some of the early marketplace leaders that went public in 1999, such as SciQuest.com and Chemdex (owned by Ventro [#]), have had significant problems in generating traction within their businesses.

Looking back with hindsight's 20/20 vision, is it fair to say that these analysts were punch-drunk with B2B euphoria? Or were they visionaries who will be proven correct with the simple passage of time? We believe that the safest answer is that time will tell. Yet despite the remaining uncertainty and disappointment to date, we believe that within certain industries the vertical marketplaces will eventually shine, be they dot-com marketplaces, CoBAMs (Consortia of Brick-And-Mortar players), or private marketplaces.

So what has gone wrong during the past year? We believe that two of the primary reasons for the vertical marketplaces' lack of traction have been timing and competition. However, our research also indicates that the main obstacle has been incomplete marketplace business models, particularly the inability of a marketplace to enable full systems integration.

Regardless of the potential benefits that vertical marketplaces have to offer, the fact is that their emergence represents tremendous change. If we surveyed Fortune 100 executives three years ago and asked them to estimate the probability of their companies buying and/or selling products in marketplace settings, we believe we would have received lots of low numbers, if not simply blank stares. Never mind asking them if they would be willing to set up such marketplaces with their competitors! Moreover, even after winning the buy-in of a corporate executive, marketplace operators also must convince everyday employees to utilize their products on a regular basis. Simply put, despite the recent increase in awareness of e-commerce's benefits, true adoption requires radical strategic and behavioral changes that require time--much more time than was previously assumed. That being said, it now appears that the timing issue is much smaller than it was one year ago. In fact, many corporations now seem ready to test the marketplace waters, if they have not already begun to navigate them by joining dot-com marketplaces, or founding CoBAM and/or private marketplaces.

Competition undoubtedly slowed marketplace traction this year. It was hard enough for corporations to get their arms around marketplace concepts, without in some cases having to evaluate hundreds of potential marketplaces with which to work. For example, while today it appears that Cephren, Buzzsaw, and Bidcom have emerged as the big three within the construction industry, by some counts there were once more than 150 VC-funded marketplace operators within this vertical alone! On top of that, the launching of multiple CoBAMs across all industries, some with founding members that had also worked with and/or invested in dot-com marketplaces, did nothing but cloud the picture further, at least in the short term. But again, that being said, it now appears that the smoke is beginning to clear, with the true competitors ready for battle.

With the issues of timing and competition now appearing smaller than they once were, in our opinion, the major hurdle standing in the way of marketplace traction is a complete marketplace business model, and particularly the ability of a marketplace to enable full systems integration. While this is a topic we have written on frequently, we believe that it bears repeating. The fact is that for many companies it does not make economic sense to completely join a marketplace today, because beyond price transparency and the potential to reach additional customers, there is little tangible value. Undoubtedly, marketplace operators are working 24-7 to right this situation, and in fact, many have made significant strides in developing valuable functionality and true integration. Examples include e-STEEL, Collabria, and Cephren, to name but a few. However, there are many more that have a long way to go, particularly the CoBAMs, many of which have just recently launched their offerings.

In order to gain meaningful traction, marketplaces will need to provide all of the ease and functionality that corporations are accustomed to in the offline world, as well as the additional promised benefits of e-commerce. According to AMR Research, some of the top customer demands for marketplaces include back-end integration, real-time inventory and demand data, logistics and order tracking, and the potential for M2M (marketplace to marketplace) connectivity. While some marketplaces and their systems integration consulting partners can facilitate integration, complex and time-consuming work is involved, which limits the ability of the marketplace to rapidly scale its business. For example, a marketplace customer may want all of its internal systems hooked into those of the marketplace as soon as possible. But that same customer may have spent the past two years trying to integrate all the various components of its own ERP system! And when we consider that vertical marketplaces such as Chemdex and SciQuest.com have hundreds of enterprise buyers and suppliers to integrate, the task at hand seems nearly insurmountable in the near term. In fact, we believe that this issue has played the largest role in both companies' slowdown in growth.

In summary, the tasks of creating a complete marketplace business model and enabling systems integration are huge, yet so are the spoils that could go to the marketplace that meets them. In our opinion, longer term there will be marketplaces that succeed in completing these tasks, gain meaningful traction, and provide their investors with phenomenal returns. While some of the industry analysts may indeed have been punch-drunk last year, we believe that some of them will also be proven to have been insightful visionaries.

III. B2K - Despite Early Halloween Tricks, We See e-Business

Software Spending As A Treat

With the rash of technology earnings warnings over the last two weeks, the tech sector has been under severe selling pressure, falling 7.4% since Intel's (a) profit warning on September 22. Fueled by the e-services sector implosion, there is also speculation of whether or not we are in the midst of a fundamental slowdown in corporate IT spending worldwide. While this question broadly covers many sectors, we are most focused on e-business software. Our industry checks lead us to believe that demand in this sector remains strong with very good growth prospects.

We believe that IT spending will continue to increase at a healthy rate over the next several years but the spending patterns will differ from that of the last 12-18 months. Corporations have been under intense pressure from the revolutionary specter of the Internet and emerging dot-coms to implement (or at least appear to implement) an e-business strategy, if for nothing other than self-preservation. We believe this FUD (Fear, Uncertainty, and Doubt) environment resulted in less focused, more experimental corporate spending on e-business initiatives as the market has been flooded with less proven solutions.

Going forward, we believe spending will be more concentrated, deliberate, and focused on areas with the greatest near-term ROI and long-term leverage. As such, we believe that the demand for enterprise solutions will be concentrated in e-enabled solutions for areas such as commerce (buy, sell, and exchange), CRM, and supply-chain management (SCM) applications. In fact, our conversations with systems integrators such as Andersen and IBM lead us to believe that demand is robust with penetration levels currently very low, suggesting a large market today with a lot of room for growth.

AMR Research's recent survey of 900 companies suggests that IT/software spending continues to increase, growing 5% per year from 1999 to 2001. The study also indicates that more than 50% of the application budget will go to e-business in 2001, in particular e-commerce (23%-27%), SCM (10%-13%), and CRM (13%-18%), versus 42% in 2000. Each of these e-business areas will likely represent a greater share of the application budget in 2001, primarily taking share away from ERP. In addition, SCM deployment is currently at 30% of companies while and e-commerce is at 18%, suggesting relatively low penetration levels today.

Given the pressure to increase time to market, turn inventory faster, lower inventory costs, and mass-customize, we are bullish on the e-supply-chain applications market. At the simplest level, the e-business craze is all about giving consumers exactly what they want, when they want it, and at the price they want it. Meeting the needs of this more dynamic demand environment is inherently a supply-chain requirement in which achieving the required service levels means that companies must collaborate more closely with supply-chain partners and vendors across all processes, including sourcing, product design, manufacturing, logistics, and fulfillment. AMR projects this market to grow at a 5-year, 40% compounded annual growth rate, to $20.3 billion in 2004.

Beyond the market projections, we believe the more compelling arguments come from the experience of early adopters. For example, General Mills increased productivity by 9% over the last nine years. The Company attributes the gains to 20% cost cutting and 80% supply-chain innovations, of which 40%-45% resulted from increased collaboration with suppliers and 30%-35% from manufacturing process optimization. Similarly, Best Buy estimates that supply chain inefficiencies represent 10% - 30% of a retailer's total costs. With the Internet making such capabilities quicker to implement, less costly, more robust, and more open to all partners, it is counter- intuitive to think that eSCM spending is slowing just when the e-business initiatives are getting started.

Given this evidence, we remain bullish on IT spending and e-business application software in general. If the economy does slow down it will certainly put pressure on budgets, but we also believe that many of the leading e-business solutions provide compelling ROIs that will offer at least bottom line relief with a slowing top line. Also, a more difficult economy could accelerate use of ASP models that require much lower upfront capital commitments. Investors and emerging companies alike must focus on strong ROIs and flexible delivery models, as the leading solutions providers in a less stable economic environment. These models will attract the leading brand-name customers and generate the strongest fundamentals. The current environment is consistent with history in that leading companies will find value in leading solutions, use them to change the competitive dynamics in their industries and drive continued adoption of new technologies. We believe that the coming quarters will bear out the overall health of e-business software spending reflected in the data above.

IV. WEEKLY NEWS

-- BP Amoco, Cargill, Royal Dutch/Shell Group, and eVolution Global Partners
chose Idapta to build a new marketplace targeting the ocean freight industry.
LevelSeas.com is expected to provide freight management tools and services, as
well as manage wet and dry commodity shipping processes.

-- Mitsubishi Corp. and Commerce One (a,c) announced a plan to establish an
e-marketplace for B2B e-commerce among Japanese companies in the gas, chemical,
and utilities industries.

-- eOutdoors, Inc. has chosen Clarus (a,c) to power and provide global payment
settlement capabilities for its marketplace. eOutdoors operates a global B2B
e-marketplace for outdoor products and services.

-- EDS announced an agreement with Retek (a,c), through which EDS will provide
clients with real-time, online order management systems and Web-enabled product
fulfillment tools.

V. FILINGS & PRICINGS

Filings

IPO

-- eRoom Technology Inc. (ERMT) is a provider of e-business

collaboration software products.

-- CheMatch, an operator of a marketplace for chemicals, withdrew

its S-1 filing

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