Yesterday, we started our Ariba Break Down, making an extended stop at step 1, the important, top dog criterion. Tonight we'll finish the task. On to step two...

Sustainable advantage gained through business momentum, patents, visionary leadership, and/or inept competition...
In business relationships, sustainable advantages are all about power -- the power to walk away from the table and await better terms. Who has this kind of power in the world of B2B 'Net marketplaces? For me, this question boils down to two key distinctions:

Distinction #1
B2B power comes most surely through horizontal marketplaces for indirect goods or commodity-class direct goods. In contrast, B2B enablers that focus on vertical marketplaces for specialized direct goods -- custom-made raw materials designed for specific finished consumer products -- are less likely to reach positions of power.

Marketplaces for indirect and commodity supplies are much more fragmented by nature. Therefore, the market maker that brings buyers and sellers together adds a lot more value. The more value you offer to customers, the harder you are to replace.

When you do business with dominant vertical buyers, however, you cede the power to them. These Fortune 500 producers of finished consumer goods demand tight control over the inputs to their manufacturing processes. They are very likely to restrict the number of both suppliers and partners on the buy side, reducing market liquidity and the power of the market maker.

Ultimately, these buyers are the power brokers in private markets. They decide how to divide the increased-efficiency booty. Their allegiances will be to their shareholders first, their suppliers second, and the marketplace enablers third. If they don't like the split enablers demand, they can walk away and find another trading platform. This may not be easy -- far from it -- but if it comes down to a power struggle, the B2B market makers need the buyers more than the buyers need them.

Distinction #2
Market makers do something much more important than just bringing together buyers and sellers. They begin to add value when they can offer higher-level services, like secure payment systems; speedy, low-cost shipping; and supply chain planning.

Once a buyer finds a seller, there is nothing to stop them from establishing a commercial relationship outside of the marketplace, avoiding commissions and membership fees. Offer them the more complex, hard-to-duplicate, money-saving services, however, and they are much more likely to stick around your marketplace.

Both high-power branches lead to Ariba
The two distinctions represent my opinion -- the thoughts of a fellow ordinary investor. They are wide open to challenge. If your own research efforts support them, however, there is little doubt that both point directly to Ariba as the most likely power broker among marketplace enablers.

Ariba has focused on horizontal marketplaces, the natural path for a company that started out as a leading software vendor for maintenance, repair, and operations (MRO) procurement. Commerce One (Nasdaq: CMRC), on the other hand, has gotten bogged down in vertical marketplaces controlled by powerful buyers.

More important, perhaps, is that Ariba's focus on easier-to-build horizontal marketplaces has allowed it to focus earlier on adding commerce services, the second power distinction. Probably the best example of this advantage is the successful integration of Ariba's marketplace platform with the payment systems of American Express and security services of Verisign.

Revenue sharing from this relationship contributed importantly to Ariba's $17 million in second-quarter commerce-services revenue, and the relationship appears to be growing stronger. Leading Net market maker Ventro (Nasdaq: VNTR) recently announced a joint deal with American Express to create marketplaces on the Ariba platform.

Traditional advantages of software vendors
In addition to these high-power distinctions, we have to consider the typical competitive advantages of software vendors. Due to high switching costs, software vendors enjoy consistent license and service revenues and high margins.

In contrast to Commerce One's totally open markets, buyers can only plug into Ariba's marketplaces through Ariba's high-priced buyer software. To make this significant investment pay off, corporations must link Ariba's applications deep into their existing finance and supply chain systems. Given this arduous scenario, the rapid sales growth in Ariba software is even more impressive. Obviously, corporations enjoy the benefits, and switching costs will be high.

Steps 3 through 6...

Excellent past share appreciation, measured by a relative strength of 90 or higher...
Easy. One year relative strength: 99. To be sure there has been no recent slip in strength, let's check the three-month relative strength: umm, it's 100:

Good management and smart backing...
Benchmark Venture Capital, one of Going Public's top two venture capital firms for 1998, coached, funded, and brought Ariba public. In 1999, Benchmark showed that Ariba was no fluke by bringing public such powerhouses as Juniper Networks (Nasdaq: JNPR).

Ariba's largest current investor is top-pedigree investment bank Morgan Stanley Dean Witter, which owns more than $3 billion in Ariba stock, according to the latest figures. In contrast, Morgan Stanley has just $74 million invested in Commerce One.

The best testament to Ariba's current management quality is its most recently reported quarter. The startling revenue growth and clean balance sheet argue strongly for stellar, focused execution in a dynamic, challenging environment.

The greater the consumer brand, the better...
Ariba's first demerit. It provides software to corporations.

A significant constituent of the financial media is recently on record for calling it overvalued...
Ariba's second demerit. Thanks to an alert reader (thank you, Bill), I was able to locate one prognosticator who finds the entire B2B market too pricey. And, Ariba is by far the priciest of this bunch. It would be a stretch, however, to attribute this view to a broad segment of Wall Street.

So, there you have it. In my view we have two thumbs way up (sustainable advantage and relative strength), two more thumbs up, and two thumbs down (consumer brand and overvalued). These two thumbs down are shared by the whole industry, so if there is a Breaker in B2B, we argue that it's Ariba. The Rule Breaker Companies discussion board is the best place for Commerce One believers to tell me that I haven't been listening to them carefully enough.


Related Links:
  • Break Down: Ariba (Part 1), Rule Breaker Portfolio, 8/16/00
  • Ariba discussion board
  • Ariba website
  • Break Down: Beyond B2B, Rule Breaker Portfolio, 8/9/00
  • Three B2B Breaker Candidates, Rule Breaker Portfolio, 7/18/00
  • B2B Primer, Rule Breaker Portfolio, 7/6/00
  • Internet Report: B2B E-Commerce