Break Down August charges on! So far, Akamai Technologies (Nasdaq: AKAM), USinternetworking (Nasdaq: USIX), and Millennium Pharmaceuticals (Nasdaq: MLNM) are buzzing on our radar screen. Tonight we add a fourth blip -- business-to-business (B2B) marketplace builder Ariba (Nasdaq: ARBA).
If you've been following our survey of business-to-business e-commerce, tonight's selection is no surprise. We've said many positive things about Ariba recently, most of them unoriginal and echoed fully on Wall Street.
Right off the top, however, I have to admit that this has not been an easy selection for me. As bullish as I am on Ariba's business model and as impressed as I am by their early strategy, alliances, and revenue growth, two fundamental concerns continue to temper my enthusiasm.
First, despite the media buzz, Fools have to keep in mind that the B2B marketplace phenomenon is still brand new. As the first markets get past funding and the pioneers start to settle a few transactions, the business structure of the industry continues to emerge.
The key power brokers are the software suppliers (like Ariba), independent 'Net market makers (like VerticalNet), large buyers (like auto makers), and large sellers (like auto parts suppliers). The first three are duking it out for the biggest piece of the huge corporate savings of these more efficient B2B markets. The fourth group -- suppliers -- have the least to gain and are mostly interested in protecting their already thin margins.
Also, the specter of antitrust watchdogs hangs over some of the largest marketplaces. While government intervention appears unlikely in these early stages, exchanges controlled by dominant buyers are under scrutiny and won't have free reign to gouge captive suppliers via price collusion or hefty trading fees.
Basically, there are macro forces at work that may largely determine the ultimate winners. To be sure, the leading players have staked their claim to a well-defined strategy. It's just that forces bigger than the individual companies have not yet ordained the winning strategy.
"Buster!" you say. "I thought you were going to sell us Ariba, and now we're hiding the sharp objects. Enough already!"
OK, I'll get on with the Break Down. Here's a two-word summary: high risk. We can't say this too often in Rule Breaker land. Tonight, though, it seems doubly important. Hot off its blowout Q2 results, Ariba has taken on an almost invincible air among some investors. All the flawless execution in the world, however, won't deliver returns on Ariba's current market cap if its immature industry makes an unexpected shift.
BUT! (You knew there had to be a big BUT, right?)
The top dog and first mover in an important and emerging industry
Among all the early players in all four power groups, Ariba appears to have the best shot of emerging as top dog. The best way to explain why is to explain how they arrived in their current leadership positions:
- Neutrality has bred momentum
- Be first and be useful
- Relationships, relationships, relationships
Ariba has key partnerships with IBM (NYSE: IBM) and i2 Technologies (Nasdaq: ITWO). Commerce One has partnered with General Electric (NYSE: GE) and SAP (NYSE: SAP). To save some space and a lot of hate mail, I'm going to take the easy route and call IBM vs. GE a draw. Both deals will open up broad, global sales channels.
By not limiting itself to one market (focusing instead on software licensing and support), Ariba is marketplace-neutral. This strategy has powered an early end run, avoiding awkward marketplace-building events -- like gaining consensus among powerful buyers and satisfying curious antitrust regulators.
Some argue that this is a shortsighted, front-loaded strategy, since marketplace ownership is the surest path to future revenue. There can be no doubt, however, that it has catapulted Ariba to an early lead. Regardless of whether Ariba merits three times the stock market value of Commerce One (Nasdaq: CMRC), it has these extra stock bucks at its disposal and Commerce One doesn't.
With these dollars in hand, Ariba is already enjoying competitive advantages like cheap publicity and ease in retaining top talent. Moreover, if industry consolidation is the next wave, Ariba will be holding the fattest wallet.
When large, complicated organizations are running around waving money, trying to catch a "must-do" trend that many don't understand yet, it's nice to be first in line and to start with a good, basic product. Ariba enjoys these advantages.
Before they started building 'Net marketplaces, Ariba was supplying the best corporate procurement software in the business, according to many experts. Customers such as Cisco Systems (Nasdaq: CSCO) raved about the savings Ariba's Buyer software enabled.
Why is this so important? First, consider that most dominant 'Net marketplace platform providers (including Ariba) are stressing an open architecture. This is natural for both competitive (market growth and liquidity) and legal (antitrust) reasons. Eventually, then, any buyer should be able to plug into any 'Net marketplace. This means that early decisions about which marketplace to plug into won't be as important as the quality of the buyer software that a corporation installs.
Second, consider that large buyers drive markets. Put these together, and you have an early market being driven by large buyers who want the best marketplace buyer software available -- Ariba.
In the second case, though, Ariba has the superior relationship. Commerce One appears to be getting bogged down with a broader and deeper relationship, one that will require integration of its software with SAP's notoriously hard-to-implement back-office systems.
Ariba, on the other hand, simply offers the industry-leading intelligence of i2's supply chain planning software on an as-needed, get-it-today basis. In some cases, a customer will jump at the opportunity to integrate i2 into their total solution. In other cases, it won't make much sense to do so.
What do you think? Is Ariba the top dog in the industry? Post your thoughts on the Rule Breaker Companies discussion board.