The Napsterization of B2B

In the prevailing model of business-to-business commerce on the Internet, transactions flow through large, centralized exchanges. These exchanges play two valuable roles: aggregation and facilitation. As aggregators, they bring a group of dispersed trading partners together into a virtual marketplace. As facilitators, they provide software tools and protocols that enable the traders to do business electronically, exchanging information, processing offers and bids, coming to terms on deals, and following through on them. The exchange-based B2B model has been a compelling one. It has attracted vast investments, intense corporate interest, and reams of press coverage. But, unfortunately for the exchanges and fortunately for pretty much everyone else, its days may be numbered. A new and better B2B model—peer-to-peer networking—is emerging. It will enable all companies everywhere to locate trading partners on the fly and complete transactions swiftly, securely, and efficiently, without the need for any central aggregator or facilitator. The basic technology for peer-to-peer (P2P) networking is already available—it’s the same technology that Napster, Gnutella, and other file-trading systems use. Participants in a peer-to-peer network, whether individuals or companies, exchange information directly with one another, bypassing central exchanges. In some P2P networks, like Napster’s, information about the location of files is stored in a central directory, but the files themselves remain on users’s hard drives. In others, like Gnutella’s, there’s no center at all. Even the directory is disbursed among the users. In techie terms, the distinction between “client” and “server” evaporates; each computer on the network plays both roles simultaneously. Peer-to-peer networks offer important advantages over the exchange-based model. First, and most obvious, they allow companies to avoid the fees charged by exchanges. Second, they reduce the complexity and expense of networking. It’s much easier for a company to integrate its internal information systems with a single P2P program, or “peering portal,” than with a bunch of different exchanges. Finally, while membership in exchanges is limited, often determined along industry lines, P2P networks have no bounds. A company can search as widely as it wants for new partners and products or for lower prices or better terms. More of the power of the open, ubiquitous Internet is harnessed in a business-to-peer (B2P) model than in an exchange-based one. Peer-to-peer networks allow companies to avoid the fees charged by exchanges and reduce the complexity and expense of networking. If the underlying technology is available and if the benefits are compelling, why haven’t businesses started moving to B2P already? The answer is straightforward: P2P software hasn’t yet progressed to the point where it can handle complex business transactions. The data required to describe a music file are few and simple: title, artist, album, length. Those required to describe product specifications and business concepts are many and complicated. Similarly, the processes facilitated by current P2P software—search and download—are rudimentary. More work is required before B2P partners will be able to agree on how to merge their complex business processes and embed them in software so they can be automated. But the technical gaps will be filled quickly. As a start, it’s not a difficult engineering feat to create Napster- or Gnutella-like programs that let companies share their lists of goods and services with one another. These “peering portals” will link with companies’s internal inventory and production systems to ensure that listings are always accurate and up-to-date. Together, the peering portals of all the companies on the network will create a universal catalog of product and service offerings. In addition, new Internet technologies like XML and RDF are now enabling complex products and processes to be defined and searched. XML, or extensible markup language, allows a group of partners to agree on how any resource—a product, a production plan, a purchase order, a contract—will be described electronically. RDF, or Resource Definition Format, is a highly flexible way to index collections of resources, just as card catalogs index the contents of a library. These two advances make it feasible, for the first time, for companies to search for and exchange all types of information, to reach agreements, and to coordinate payments, shipments, and other processes without involving a lot of human, or digital, middlemen. Does this mean the end of digital intermediaries in B2B markets? Of course not. Third parties will still be needed to provide services that companies don’t want to do themselves or don’t trust one another to do. Running an auction is a great example of a function requiring an unbiased provider. Internet auctioneers like FreeMarkets should continue to thrive in a B2P world, even as the auctions become more efficient. The auctioneer’s system will tie in to the B2P networks, automatically collecting data from companies’s peering portals and hosting auctions in which both people and machines place bids. All the technical requirements to shift B2B onto peer-to-peer networks are in place or will be shortly. The only real question now is timing. How quickly will companies come to realize the advantages that unbounded direct connections hold over centrally controlled exchanges? Judging by the speed of previous Internet advances, it probably won’t take long. All the technical requirements to shift B2B onto peer-to-peer networks are in place or will be shortly.

The Napsterization of B2B

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