Deconstructing Buzzsaw.com

May 22 2000

April's stock market crumple threw many Internet business models into question. Here at the top of the second inning, it's more important than ever for a Net business strategist to figure out which Internet business models will fly and which will plunge into the ocean. The business model of Buzzsaw.com offers a useful case study.

To break down Buzzsaw's business model, you must first define it, then apply the four tests from my previous article ["Valuing the Net,"Feb. 7]:

Buzzsaw aims to change the way the construction industry manages projects and purchases materials. More specifically, the site provides tools and resources for design collaboration, an exchange for goods and services, and assistance with construction administration in an industry infamous for projects that go over budget and past schedule. CEO Carl Bass estimates that Buzzsaw serves 7,000 active building projects, exceeding any other online marketplace for the construction industry.

The Industry Buzzsaw.com hopes to grab a piece of the $3.2 trillion in worldwide construction industry revenues. Of this amount, 50 percent of the market is materials - $1.6 trillion - and the balance is labor. Bass estimates that 20 percent of the $1.6 trillion is not likely to go online, leaving an available market of about $1.3 trillion.

Naturally, the gross value of an available market is not the amount that will actually flow to the revenue line of firms like Buzzsaw. Assuming companies split an average transaction fee of 2 percent, the available revenue for procurement services for the construction industry is about $26 billion.

About 170 competitors are going after this market backed by about $1 billion in venture capital. However, three to five significant competitors are likely to emerge as dominant players over the next several years, and the need to fill these players' exchanges with orders will likely force down transaction fees.

In addition to the market for transaction services, about 250,000 building projects per year could potentially use services that help team members collaborate. Bass says that the per-month charge for collaboration software users ranges from $200 to $1,000 per month. Assuming that the average project would pay about $500 per month for the use of such services, the total available market is about $1.5 billion. While revenues from collaboration services should be lower than transactions, their profit margins are likely to be higher because the cost of offering the services can be low.

Will these revenues generate profit? My best guess is that there will be some room for profitability in transaction fees. Weighing the pros and cons, the economic bargaining power of construction procurement exchange service providers is likely to be moderate, producing good profit margins. Buzzsaw may earn a significant share of these profits.

The Strategy

Buzzsaw plans to offer other services to generate profitable revenue streams, including revenue sharing with third-party providers of construction-related products and services. It will also sell advertising space on the site.

Customers say they are saving time and money by using Buzzsaw's services. Doug Cochran, a CAD director at LPA, an architectural firm in Irvine, Calif., estimates that LPA reduced the time spent updating its staff in the field by 30 percent to 40 percent and saved a similar amount on the cost of couriers, overnight delivery, and Jaz or Zip drives.

Buzzsaw also faces a competitive threat from building-supply retailers that provide online stores and order systems for their goods. These retailers have warehousing capabilities, supply-chain connections and customer relationships - significant sources of value for people in any industry.

The company is working to integrate suppliers into its network of information services and its marketplace exchange. The construction drawings and specifications that architects and engineers prepare are in effect the "shopping list" that contractors use to procure materials. Buzzsaw hopes to entice suppliers to participate in its marketplace exchange with its link among contractors, architects and engineers, and building-supply retailers.

While Buzzsaw faces competition from Bidcom, Cephren and retailers, its biggest competitor may be major industry incumbents that aren't willing to try the service.

The Management Team Buzzsaw.com's management team has done a good job of adapting its business to changing market needs. However, it remains to be seen how well it can scale to compete with larger competitors.

The management team -- including Bass and Anne Bonaparte, cofounder and senior VP - left Autodesk to build a separate company to attract a number of well-connected investors and partners, at the same time gaining access to Autodesk customers in the architectural field and some of its capital. When the market for Buzzsaw's services grows larger and competition becomes more intense, the full strength of its management team is likely to be tested.

The Brand Family The company has attracted well-known investors, partners and customers. Buzzsaw has raised $90 million from Bank of America, Impact Ventures, Morgan Stanley Dean Witter's Private Equity and Real Estate Private Equity groups , Autodesk and Crosspoint Venture Partners. Bank of America , Morgan Stanley and Autodesk bring both money and extensive industry contacts.

Buzzsaw.com has formed a host of partnerships to build a true closed-loop solution. For example, Buzzsaw partnered with WebEx, which offers Web collaboration software to run online meetings; Meridian, which provides hosting applications; and Inet Technologies , which supplies Internet-based visual communication via Web cameras.

In March, Buzzsaw announced an intent to buy PageMasters, a Phoenix-based provider of software for printing, scanning and managing documents for the construction industry. Buzzsaw also partnered with Ariba to create a global marketplace for building materials and equipment. Using Ariba's software, Buzzsaw expects to save the U.S. construction industry $20 billion.

Finally, Buzzsaw has attracted a mix of large and small construction-industry participants as clients. Big clients include Bank of America, an investor and one of the largest construction lenders in the country, and Walt Disney. Smaller clients include Degenkolb Engineers, DPR Construction , Ellerbe Becket , GHT, Hellmuth, Obata & Kassabaum, LPA, the Stichler Design Group and Wimberly Allison Tong & Goo.

Buzzsaw clearly passes three of the four tests required of a valuable Internet business: Its industry has economic leverage; it offers customers a closed-loop solution; and its brand family is compelling. Its management team has demonstrated its adaptability, but its ability to scale the organization and respond to intense competitive pressure so far has not been fully tested.

Nevertheless, Buzzsaw has all the makings of a winner in the emerging online construction industry marketplace.

Peter S. Cohan is a management consultant, angel investor and author of The Technology Leaders and Net Profit. His new book, e-Profit, was published April 15. He is not invested in the firms mentioned.