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November 15, 1999

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Commerce One

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Subject:  Re: GM TradeXchange
Author:  jeffwoods

Hi Kevin:

There doesn't seem to be too much handholding in this board yet, so let me try and help...

I have to confess up front that I'm not familiar at all with the Worldcom deal history. However, I believe that it is incorrect to draw the conclusion that CMRC and ARBA alliances are not long-term in nature.

Firstly, let me give you my understanding of what CMRC does. They

1. Create the marketplace for buyers and sellers to conduct business according to XML-based interaction protocols � like the NASDAQ, they serve as the facilitating mechanism for buyers and sellers to transact business. They typically label these marketplaces by one of their trademarked names "MarketSite"

2. They sell HTML-standardized eProcurement software for installation inside the corporate firewall (there are other options here, but this is the main one from CMRC) that automates and decentralizes the procurement function. This eProcurement software is typically marketed as "BuySite"

3. They work with suppliers to encode their product and pricing lists into the standard MarketSite format

Up to this point, CMRC has focussed on companies with high levels of MRO (maintenance, repair and operations) spending. Not only is this probably the largest category of corporate spending, but it cuts across all vertical markets because it is the generic "base" spending that all industries incur. To date, the corporate alliance targets have included a disproportionate number of national telecom companies. I suspect that they have driven alliances with national telecom providers across the world because of:

a. the high level of MRO spending (most national telecoms companies are fairly large),

b. the relatively high level of technological sophistication of a telecom company in any market, and

c. the breadth of a large firms spending across a national supplier base (read: buyer power).

CMRCs growth strategy would seem to be to lock in (partner with) the very, very large procurers across the world and then use the partner's market power to brow-beat all of their suppliers into the CMRC MarketSite. The beauty of CMRCs business is that first-mover advantage is key due to the network effects of signing-up the biggest companies first. Let me expand�

First mover advantage � FMA comes from the fact that a large corporate buyer will likely use one, and only one, eProcurement package to automate their procurement function. There are lock-in implications for the buyer because of the ties to the ERP and G/L systems (fyi, PeopleSoft decided to own-label CMRC's eProcurement "BuySite" rather than grow their own because CMRC's was so kick-ass). Another lock-in implication is that suppliers will want to tailor their product and pricing databases to, at most, one e-marketplace. I am taking a bit of a stretch there, but my assumption is that most of these suppliers are fairly unsophisticated. They will need the added-value help of CMRC to automate and maintain their pricing lists (CMRC does this for free the first time, and then charges a fee if the supplier can't handle the ongoing maintenance).

Network effects � Lets take the GM deal as an example. The first order effect is that GM moves its ~$90m procurement onto the GM MarketSite (they call it something else now). GM now has an incentive to persuade all of their suppliers to move into their Internet marketplace because:

1. The automation of the procurement function takes off about 80% of the cost of a procurement transaction for GM

2. GM has a $1b equity stake in CMRC, who receives a slice of every transaction that takes place in the marketplace

The second order effect is when the suppliers start to realize the incremental benefits of participating in the marketplace. Those incremental benefits are:

1. Automation of the customer relationship and sale transaction cycle

2. The ability to sell to all other buyers in the marketplace. In the GM marketplace, GM will hopefully not be the only buyer, but intends to have the marketplace open to other buyers, who will then have access to all the suppliers on the network. Then those buyers automate all their procurement�and so on and so on.

So what? � If I've been clear about the benefits of FMA and network effects, then one can see why ARBA and CMRC, as two of the first Internet B2B market-makers, stand to gain an awful lot. If they can convince credible players (GM, British Telecom, NTT, Ford, Worldcom, Office Depot, CompUSA) to sign-up with them they will be a long way towards locking-up the top of the procurement value chain. The challenge is the land rush to the big names which is going on right now. ARBA had a 1 to 2 year advantage, but, as happens with technology leap-frogging, CMRC's more recent platform is much simpler for even a multinational company to implement.

Because ARBA is based on proprietary technology, their eProcurement software requires the CTO to sign-off on yet another app to be delivered throughout the procurement organisations' desktops, along with the requisite LAN, WAN and server implications. CMRC's software is an HTML application that can be used with the standard Internet browser � no special deployment required, just start Internet Explorer, sign-in and start buying.

What is the end game? As with most of the Internet plays, nobody really knows. If they did, either ARBA or CMRC's market cap would crash and burn. It seems as though CMRC has the momentum at this point due to their alliance with top global players, including the blockbuster GM deal. But, other players have jumped quickly into the fray � Oracle (the AutoXchange deal with Ford), SAP (MySAP) and others in niche markets including VerticalNet, Chemdex, Freemarkets Online, etc., etc., etc. Everybody is trying to get a piece of the action.

I do think that the B2B players that drive early alliances at the top of the corporate B2B value chain have the strongest hand in the race to an endgame that captures the largest web of buyers and sellers. CMRC currently has buying webs in the US, Europe, Asia and Australia. CMRC also has technology in place to connect their global buying webs so that multinational companies can globalize the eProcurement solution.

I hope this helps and I do hope that other people will join the fray to drive the analysis of this space. Having been out of Fooldom for a while due to job, travel and marriage, I am now trying to work my favorite hobby back into my life and am anxious to get back into the Fool community. I am particularly surprised that the Rule Breaker portfolio hasn't made any investments in the b2b space. It would seem to be an incredible oversight or blindspot.

Btw, I hold a position in CMRC � in at 60, rode them down to their nadir (wanted to buy more, but couldn't liquidate any of my other positions and didn't have any spare cash), and am now pleasantly surprised that the market is rewarding CMRC for their momentum.

Jeff