With lots of help from the team, I've covered some basic B2B terms, updated my breakdown of the industry, and offered up Buster's Golden Rule for B2B Software Companies.
Since last time, I have also added some thoughts regarding the risks of Rule Breaker investments in the B2B arena. These latest, risk-oriented thoughts are not intended to be water on anybody's B2B flame. I'm just mindful of people who may be playing along at home, and my obligation to present to them the complete picture, which in the case of B2B may be even riskier than in more "run of the mill" Rule Breaker investing.
Now it's time to start running the B2B sub-industries through the Rule Breaker criteria. Today we start with criterion #1 -- top dog and first mover in an important and emerging industry.
Criterion #1: What are the important, emerging industries?
B2B is important. It's huge. Let's get this out of the way at the top. Regardless of what we buy or don't buy for this portfolio or how the enablers of the revolution fare, on the whole, the world of business is changing in a substantive way. It's not all hype.
I find it helpful to think of a "Holy Grail" for B2B, and in my mind, this is the concept of build-to-order automobiles. Imagine logging on to Ford's website, picking a model, and then designing your own version of the vehicle, based on a greater variety of options than is currently available. Upon receiving your order, Ford begins the manufacturing process, delivering the finished car in a few weeks. The result, if it comes to pass, will be a demand-driven car market, as opposed to the current supply-driven auto retailing rituals, which include the annual autumn fire-sale on this year's unloved models.
As result of this transformation, imagine Ford Motors as a Cisco-like company -- 100% brand, knowledge and customer relationship, with a slick Net interface to consumers. Tack on eye-popping returns on investor capital driven by oodles of cheap working capital which is, in-turn, driven by outsourced manufacturing and inventory and the supply chain management expertise that makes it all possible.
Sound far-fetched? Good. Where there is a wild-eyed dream, there is often a Rule Breaker investment. This build-to-order vision is not garden-variety important. It is nothing less than the guts of what this whole "new economy" thing is all about.
OK, if you are still with me, we have important. But what about emerging? Here we run into some trouble.
B2B is very broad and parts of it are far from new. So it's extremely important that we identify exactly what is really new here and what isn't. Once the emerging sub-sectors are identified, we will move quickly downhill, since top-dogs by sub-sectors, in many cases, are obvious. Any of these top dogs with a sustainable competitive advantage (Criterion 2) and smart leadership (Criterion 4) will end up on our very short list. Then we deal with the two toughest nuts to crack -- consumer brand (Criterion 5) and recent trends in stock market value (criteria 3 and 6). These last two steps will make or break the few remaining picks.
So, what's emerging in B2B? I'll lay out my current thoughts below, and then invite you to pick them apart on the boards. Based on my current level of understanding, I've ranked the seven definitely emerging B2B sub-industries, in order of relative importance, and suggested a top-dog for all but three of them.
- Market Makers (commissions, listing fees) -- Not much revenue yet, but could be the biggest slice of the pie in the long run. Top dogs will be industry specific. We should be looking for large, highly fragmented (on both the buy and sell sides) business-to-business markets, preferably with lots of not-too-valuable, not-too-powerful middlemen. We are also on the lookout for small groups of large buyers and/or sellers with the power to wrench market control (and associated commissions) away from the market makers. These will be a strike against a particular industry market.
- Marketplace Builders (software licensing and support) -- Companies that master this complex software and sell it effectively will be integrated into the heart of corporate IT structures, with the potential to create enormous switching costs. Horizontal markets offer the greatest breadth in corporate entrenchment and the greatest potential for large market ownership stakes (they tend to have fewer dominant buyers and sellers than verticals). Top dog, at this point, is Ariba (Nasdaq: ARBA). It's a close race between Ariba and the other three big players -- CommerceOne (Nasdaq: CMRC), Oracle (Nasdaq: ORCL), and i2 Technologies (Nasdaq: ITWO) -- but Ariba earns top-dog status by virtue of their strength in horizontal markets.
- Supplier Catalog Conversion -- Somebody's gotta do it, and there will be lots to do. CommerceOne was the first-mover here and maintains a strong position in the field.
- End-to-end, Internet-based software provider -- The biggest enterprise software companies are rapidly working towards this "one-stop shopping" goal, through partnership, acquisition and internal development. Oracle jumped off these starter's blocks over five years ago, first by a long-shot. They also have a strong ASP presence. Could Larry Ellison finally realize his dream by building the Microsoft (Nasdaq: MSFT) of the Net? The IBM (NYSE: IBM) / Ariba / i2 Technologies alliance may be Oracle's top competitor here. Although not a B2B "pure-play," IBM is often under-rated in terms of it's contributions to the overall B2B vision and cannot be over-rated as a source of new business for the other two alliance members.
- Supply chain software that enables demand-pull economy -- The brains of the whole movement. Proven cost-savings technology is a true rarity. i2 Technologies is the top-dog and first-mover. A no-brainer.
- Application Service Providers (ASPs) -- Outsourced IT fits the "new economy" paradigm. In combination with ownership of vertical marketplaces/portals, ASPs could gain "operating system-like" competitive power. USInternetworking (Nasdaq: USIX) is an early star, although the potential reach of Oracle's Business Online ASP service should not be overlooked.
- Corporate data security -- With greater collaboration between companies and the potential for outsourced IT comes greater risk to increasingly valuable corporate knowledge assets. I'm still looking for the top dog here.
- Technologies for streamlining product development, including collaboration with suppliers -- Seems like this will be key in fulfilling the promise. Who is doing this?
So, there you have it. My short list is i2 Technologies, Ariba, Oracle, CommerceOne, and USInternetworking, plus three to be named later (a market maker, a data security provider and, potentially, an e-product development powerhouse). None of this is cut in stone. I'm still learning. Please feel free to argue with my industry selections, their ordering and the top dogs -- all of it. Thanks, and see you next time.