Leading up to this latest buy, a large number of community Fools helped me comb two business computing markets for Rule Breakers -- business-to-business (B2B) Internet marketplaces and application service providers (ASP). I want to sincerely thank these folks for their help, and let them know that the effort won't be wasted. Even though we picked HGS, a biotech company, Ariba made the very short list for our latest pick, as TMFTardior revealed last night.
It wasn't so much a case of Ariba lacking something as it was HGS having something. Sharp cost-cutting across the entire corporate landscape is certainly a Rule Breaking vision. It's just tough to outdo the fundamental new era in medicine that HGSI is promising. Ariba remains on our radar scope.
Now, on to today's topic...
When I wrote my first August Break Down column on USInternetworking (Nasdaq: USIX), I listed a host of disruptive forces that are changing business computing. At the time, I argued that Enterprise ASP providers were best positioned to exploit these Rule Breaking changes. These companies host not only corporate data but also corporate software on their servers.
Exactly what does this mean? Well, let's take ...
...A short trip down memory lane
Consider the good ol' days when corporate minions sat behind computer terminals, exchanging commands with the company mainframe. It was easy to forget, back then, that the actual computer was in another building, housed in a blessed little beehive of climate-controlled digital activity known as the computer center.
When mainframe demand was high, however, the reality of remote processing hit home hard. I can remember exam week in college, when the whole campus was trying to enter term papers into one mainframe. You could type in your first couple paragraphs, head out for coffee, come back and still have to wait for the words to appear on your screen. The bottom line was that the mainframe and, hence, the computer center, controlled the end-user experience.
Along comes the PC and, suddenly, end-users are in control. With increased flexibility, however, came increased complexity. While creative types hugged their new Macs and research engineers showed off their Sun workstations, the lives of enterprise computer center administrators became much more complicated. Seamless integration at home isn't such a big deal, but in a corporate computing environment, it defines success for the information technology (IT) crew. Slowly, these guys steered us all around to the Microsoft Windows to obtain some semblance of sanity. Eventually, Microsoft (Nasdaq: MSFT) came to control the corporate end-user experience, for the most part.
With the movement of business software to the Internet and the promise of high-speed broadband connections, corporate IT departments suddenly have another opportunity to wrest back further control. Instead of trying to administrate the whims of thousands of individual computer users and their multiple software applications, they can start moving processing and data storage back to a network data center. Heck, if they really want to cut costs and focus more directly on their in-house applications, why not move the rest to somebody else's network data center?
What does this have to do with USi?
At the core, what motivated my interest in the ASP market was a new opportunity for a public company to gain control over the end-user experience. In the same way that virtually every end-user and every software developer in the corporate world today has to go through Microsoft to get anything done, a dominant ASP could masterfully direct gobs of high-margin value-added services towards its income statement. USi, the leader in the emerging third party ASP market for branded, best-in-class corporate software, drew my attention.
I saw a fundamental distinction between the enterprise ASP model and the piecemeal outsourcing typified by Web storage businesses like Exodus (Nasdaq: EXDS) and tech consulting outfits like Andersen Consulting and EDS (NYSE: EDS). I was looking for the software brain -- the applications that define and control the end-user experience -- to migrate from corporate computer centers to the control room of ASPs, where integration and customization talent could be better leveraged, with a lot more stability in personnel and a lot less travel.
Ultimately, the ASP adds value through integration. That's the source of power that will lead them to control of the corporate end-user experience. Without it, how do they build a moat around the add-on, high-margin services that will represent their long-term profit?
After all, leading enterprise software companies like Siebel Systems (Nasdaq: SEBL), SAP (NYSE: SAP), and Broadvision (Nasdaq: BVSN), can serve their own darn software for a monthly fee. Right? In fact, enterprise software king Oracle (Nasdaq: ORCL) is already doing exactly that, through their Business OnLine ASP. How can a third-party ASP possibly beat them at this game? They have to do it with integration, tying together best-in-class applications and serving a totally integrated package.
The more I study USi, the less I'm convinced that their vision is consistent with this dream. I don't want to issue sweeping indictments, because I honestly don't know enough about USi yet to do so. Feel free to tell me that my dream for USi misses the point. If you do, though, please give me an idea of how USi puts the sustainable in sustainable competitive advantage.
Let's take a look at USi press releases since second-quarter earnings were announced and see if we see progress towards the vision I've outlined. They announced six new customers in August and September: Coventry Health Care, Branders.com, Broadband e2e, The College Board, Edwards Lifesciences and Wood MacKenzie. Each of these customers signed up for a single application. Just one. Moreover, none of them appears, to me, to be the type of business that might eagerly integrate multiple USi offerings. And it's hard to imagine a more supply-soaked, dog-eat-dog industry than pre-integrated, Web store offerings, USi's latest product offering.
Finally, according to press releases, USi still has just one customer for B2B software platform Ariba (Nasdaq: ARBA) -- chemical manufacturer Rohm and Haas. Given the startling growth of Ariba this summer, it strikes me as odd to see no progress on this front. It's especially troubling because I see B2B as the application that should be driving companies towards my ASP vision. It's complex and central, in the sense that it has to be integrated into essentially all other corporate applications.
USi endured a series of Wall Street downgrades this week. On the heels of a rapid, two-month stock price decline, these downgrades hit like a swift kick in the face. Can we argue that this is just another failure of conservative, short-term-focused Wall Street to see the future of business computing? Or, is there a fatal flaw in the USi model? The fact that all of USi's competitors in the ASP sector are also getting pounded suggests the former. A review of recent USi customer acquisitions argues the latter.
Let me know what you think on the Rule Breaker Companies discussion board. Till next time,
Buster
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