David ended last night's Ode to Games with a promise: "Tomorrow, back to Rule Breaking."
It sounds like David was banking on a less whimsical effort tonight, one focused less on the meaning of life and more on the specifics of our portfolio. Indeed, this is in line with what we hear, increasingly, from certain corners of our Breaker community -- enough of the navel gazing, let's buy some stocks!
Our gut reaction to such feedback is predictably contrarian. Part of our fundamental mission, as Fools, is to show that even navel-gazers -- and other folks who don't feel compelled to make frequent decisions -- can make money in the stock market. In fact, we think navel-gazing is a vastly underrated investment skill.
On the other hand, we suspect that most Fools prefer a steady diet of Rule Breaker business evaluations balanced by occasional flights of philosophical fancy, as opposed to vice-versa.
In the spirit of balance, then, I've pulled my planned philosophical tract and will offer my still-developing ideas on a more practical subject -- the search for a Rule Breaker home in the business-to-business Internet storm.
Why are no obvious Rule Breakers emerging from the B2B revolution? This is a question I ask myself a lot these days, particularly after reading the excellent industry review penned by Paul Larson in our March Internet Report. Other-Paul also kicked off the Rule Breaker-specific B2B discussion, in this column, a few months ago.
My corporate experience tells me that B2B will deliver as promised. Good cost-cutting ideas are just so hard to come by. Why do you think so many genius turnaround-CEOs resort to the oldest budget trimmer in the book -- firing people? And B2B has the potential to be so much more than just a good cost-cutting idea. "Important and emerging industry" is a no-brainer. The hard part is finding a "top dog and first-mover."
There are two clouds hanging over my B2B Breaker search. First, the field is remarkably crowded. Second, while it's clear that B2B will cut costs, benefiting both businesses and consumers, it's not clear how much of these savings will end up in the coffers of the B2B providers -- or even exactly how the money will get there.
As a first step in attacking these two hurdles, I'll list six B2B sub-industries. I think these clarify the picture by breaking it into more manageable chunks. For each sub-industry, I'm also addressing hurdle number two by taking a stab at likely revenue streams.
- Application Software for Back-Office Functions - Like purchasing, sales, inventory and production planning, customer relationship management, human resources, and travel. Rule Breaker entrants provide systems that exploit feedback from outside the company, the new inputs in this not-so-new software industry. Primary revenues are from software licenses and maintenance contracts. Examples of companies working here include Oracle (Nasdaq: ORCL) and PeopleSoft (Nasdaq: PSFT).
- Enterprise Application Integration - Software solutions that facilitate communication among software systems within a company, usually done via an Intranet hub behind the corporate firewall. Breakers will build hubs that can turn a simple, standard interface to outside business connections. Primary revenues are from software licenses and maintenance contracts. Active Software (Nasdaq: ASWX), CommerceOne (Nasdaq: CMRC) and Ariba (Nasdaq: ARBA) are a few companies in this space.
- Auction Marketplace Builders - Software systems that can tie any business into an eBay-like, Internet auction market for business supplies, ranging all the way from paper, pens, and airline tickets to auto parts and raw materials for manufacturing. Revenues are from software licensing and maintenance contracts and also from commissions charged for transactions. eBay (Nasdaq: EBAY), Ariba and CommerceOne serve as examples.
- Vertical Community Builders - Builders of Web communities that cater to a particular industry. As such, they are more media-focused than software-focused. Revenues are primarily from advertising, job listings, subscriptions, and referrals to partner sites, although some may also facilitate business transactions and add commissions. VerticalNet (Nasdaq: VERT), SciQuest (Nasdaq: SQST), General Electric (NYSE: GE) and many others are opening such sites.
- Internet Payment Systems - A true B2B system will automate everything, including payment for transactions, and businesses want access to all the payment options that Internet consumers have. This category includes e-payment facilitators that link bank accounts, credit and smart card providers, and the relatively new e-cash entrants. Revenues are generally from transaction fees. American Express (NYSE: AXP) is one example.
- Internet Security - If B2B is to fulfill its promise, no hurdle is more critical. Competitive advantage is what distinguishes eventual business winners from the rest of the pack, so you can't blame some corporations for treating almost every job, idea, part, and drawing as a potential secret. And safe and reliable financial transactions needs no comment. Revenue streams are from software and digital certificate licenses and ongoing transaction charges. Some emerging models transfer management of digital certificates to the businesses, rather than acting as a neutral third party. In these cases, the security company may generate additional revenue via software maintenance contracts. Companies here include Verisign (Nasdaq: VRSN), Baltimore Tech (Nasdaq: BALT), Entrust (Nasdaq: ENTU) and others.
Now, here's the part where I ask you for help.
Step 1. Which of these B2B sub-industries do you think is the most important and emergent? Please vote in this poll. Note that poll limitations have forced me to combine choices 5 and 6, the two that are most closely related. Please support your decision with a follow-up post, if you want to, but let's limit this poll thread to industries, not specific companies. Of course, alternate industry breakdowns or additional categories suggestions are welcome in this thread.
Step 2. Now you get to talk about your favorite B2B breaker candidate. I've started this thread for just this purpose. However, please limit your contribution to one company from the sub-industry for which you voted (no cheating!). If you feel like it, tell us a) exactly how you think the company will generate revenues, and b) something compelling about competitive advantages enjoyed by the company, and c) anything you know about company plans for broadband and/or wireless connections.
I'm looking forward to your feedback. Thanks!