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Keeping Air Force satellites on course is Mike Kowalsky's job. An engineer with Virginia company Zeta Associates, he designs and calibrates uplink and downlink stations needed to direct the tin birds in their heavenly passages. But tweaking their flight paths requires more than a compass and a pair of binoculars. Kowalsky relies on complex testing devices to ensure the accuracy of transmitted guidance signals.
Last January, Kowalsky suddenly found himself in need of a Hewlett-Packard HP58503 Global Positioning System (GPS) timing receiver. No longer in production, the piece can be a bear to find. So Kowalsky turned to the Internet, trolling the databases of test-equipment marketplace Testmart.com. There, he found an HP58503 for $5,000. Happy with the deal, Kowalsky later returned to spend $40,000 on two other pieces of guidance equipment. "The price has been a little better than the others," explains Kowalsky.
TESTING BOOM. The engineer isn't alone. Suddenly, the market for high-tech measuring systems is exploding. Consider TestMart, which started secure e-commerce operations in February. It now clocks $1 million worth of business each month selling used and new equipment from industry leaders, such as HP spin-off Agilent, as well as smaller players like Geotest, says TestMart President Peter Ostrow. And sources close to the company say total sales could eclipse $100 million next year. Ostrow, a former New York Times Co. sales and marketing executive, predicts bottom-line profitability by the second quarter of 2001.
Driving the test-equipment sector's boom is the explosive growth of digitalization and the Internet. From calibration kits that fix satellite GPS systems to devices that tweak semiconductor-lithography gear to microscopic precision, such devices keep high-tech factories and the gadgets they produce running smoothly. In key manufacturing fields like telecom switches and cell-phone components, annual growth now averages 20%. Even traditionally low-tech items such as children's toys and toasters now sport semi-intelligent networks and silicon chips that require accuracy during the production process.
Investors are taking note. Witness the 20% runup of Agilent's stock on Aug. 18, when the company announced that third-quarter net revenues from test-equipment sales and leases exceeded expectations. The figure had jumped 51%, to $1.5 billion, compared with the same period in 1999. TestMart's Ostrow and Agilent Vice-President Bill Mortimer estimate that annual worldwide sales of such gear could be about $100 billion.
MADE FOR THE NET. But this market is fragmented, with reams of data often required to match parts to needs, and buyers and sellers sometimes can't find each other. The business also features fat margins -- well over 100% -- in the used- and rental-equipment area. All in all, this looks like a market ripe for the efficiencies of the Internet.
Apart from TestMart, several other companies are trying to cash in on this niche. Other online startups include Pennsylvania-based Web storefront builder ecalibration.com and Planettest.com, an auction and e-commerce site that's a subsidiary of Texas-based dealer and distributor Tucker Electronics.
The only publicly traded rental- and used-equipment dealer is Electrorent, which will soon launch an e-commerce offering. Two of the fifty-seven channels on VerticalNet's cluster of business-to-business marketplaces sell precision-testing equipment: Testandmeasurement.com and Metrology.com. Even the measuring industry's biggest fish, Agilent, plans to jump into the Web soon with an online watering hole where engineers can swap advice and solve each other's problems.
PROPRIETARY DATA. TestMart has galloped ahead of its rivals with the valuable content it has amassed. Drawing from Test & Measurement World Magazine and Evaluation Engineering among others, Ostrow has built a free library that he believes will draw buyers. But the company's strongest asset may be massive proprietary databases offering customers comparison charts, maintenance schedules, and other specifications provided by hundreds of manufacturers. Ostrow, who purchased these databases from old-line industry players such as C.A. Motzko & Associates, says no one else has anything like it. "We have them locked up, and we have taken them much further than they were," says Ostrow, who is careful to maintain the site's vendor-neutral stance.
To cinch the deal, TestMart handles delivery logistics. That means coordinating deliveries from hundreds of vendors to buyers sometimes located in far-out locales. No surprise, then, that Ostrow hired Michael Comstock, former DHL e-commerce vice-president, to handle fullfillment and operations.
Thus far, TestMart has impressed analysts and its VC backers. The company recently closed a $30 million funding round from blue-chip VCs such as Crosspoint Ventures and New Enterprise Associates. The business also won the backing of Telogy, one of the industry's biggest equipment dealers -- no small feat in the current poisonous environment for business-to-business commerce plays. "The key...is to stay out of the way of the elephants of the big industry exchanges. TestMart in our mind didn't have that risk. We did not see Agilent and Textronics coming together to form an exchange," says John Mumford, founding partner of Crosspoint, which has sunk $6 million into TestMart and holds a 20% stake.
POTENTIAL PROBLEMS. Still, TestMart will need every bit of its running start in the coming year. The company has yet to make any inroads into international markets, where more than 50% of test-and-measurement sales occur, says Aroop Zutshi, senior partner at industry analyst Frost & Sullivan, which has partnered with TestMart. Some customers have complained that TestMart's prices on some items can be dear.
Analysts also worry that manufacturers might hold back their latest gear to drive business to their own sites. Furthermore, TestMart doesn't have its own direct-sales force and can sell only on the Internet. "Higher-end instruments that cost hundreds of thousands or millions typically require direct sales," says Paul Knight of merchant bank Thomas Weisel Partners.
Rivals aren't sitting on their hands, either. Electrorent, which has already posted much of its specifications information on the Web, will launch its e-commerce features in the next few months, according to Gary Phillips, senior vice-president for marketing. The company grossed $241.8 million in fiscal 2000, with profits of $24.9 million. "We want to tell people what [are] the products they have on rent, how long they have them, how much they pay for them. We want to get to the point where our customers can have access to that information online and manipulate it," says the executive.
LOYAL BUNCH. That sounds a lot like TestMart's current offerings, as well as Agilent's plans. Then, there are neighboring exchanges, such as the massive E2Open, backed by IBM and other electronics giants, which will inevitably poach some business from TestMart. "They need to stay ahead of the curve and offer value-added services, things like calibration schedules," says Robert Parker, e-commerce research director for marketing consultancy AMR.
But so far, TestMart's fans have proven to be a loyal bunch. Like Kowalsky, 30% to 50% are repeat customers. "We are showing some classic patterns of successful scaling businesses. Their second order is more than their first order," says Ostrow. And his content kitty could prove tempting for other exchanges in search of partners. If TestMart can continue to hook the Mike Kowalsky's out there, many of them at Fortune 500 companies, the outfit might just make a go of it.
By Alex Salkever in New York Edited by Douglas Harbrecht
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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