Ariba vs. Commerce One
The Ariba Argument
By
Paul Commins (TMF Buster)
Don't be swayed by today's much-ballyhooed, big-dollar, marketplace-building deals or near-term, multitrillion-dollar, business-to-business (B2B) online spending estimates. As investors -- and as consumers -- we don't care a whit about how much is spent in B2B Internet marketplaces. We care about how much is saved!
B2B savings will generate profits for B2B marketplace participants that, in turn, will create wealth for companies that make B2B possible. Regardless of the new economy hype, bottom-line rules still apply. The business demand for B2B networks will be directly proportional to the amount of savings they deliver. So, when we look at the B2B land-grab, it's important not to focus on who gets the most land, but who gets the best soil.
This distinction -- between spending and saving -- is at the heart of the Ariba <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARBA)") else Response.Write("(Nasdaq: ARBA)") end if %> advantage over Commerce One <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMRC)") else Response.Write("(Nasdaq: CMRC)") end if %>.
Software sales
Ariba and Commerce One -- as well as chief competitors Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> and i2 Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITWO)") else Response.Write("(Nasdaq: ITWO)") end if %> -- are essentially software companies. In business terms, software is one of the richest hunks of soil out there. Once this business gets rolling, it doesn't take much additional effort to deliver the ongoing services that drive a steady stream of high-margin sales. Thus, any company with the chance to corner a key software market should really focus, first and foremost, on this element of the plan.
Ariba's strength is in its procurement application, which is used by large, multinational corporations to organize their buying across multiple business units and locations, nowadays spread over literally the whole globe.
Think about what it takes to turn high-priced retail shopping into bargain-basement wholesale buying. Volume, volume, volume! This is where Ariba's software shines, providing a slick, uniform, corporate interface that eliminates costly rogue spending and enables the awesome power of organized, high-volume buying.
On the other hand, Commerce One's featured software -- at least until recently -- has been its Net marketplace application. Indeed, Commerce One has the inside track on creating the largest B2B marketplaces in the widest range of international economies. In fact, the crown jewel of the Commerce One game plan is its Global Trading Web, through which it plans to connect all of its worldwide e-marketplaces into one colossal, worldwide trading platform.
Both sound pretty cool, eh? Let's take a more careful look...
Ariba's signature buyer application is the top-of-the-line on-ramp to digital marketplaces. Every corporation must first put its own purchasing house in order before turning outward to B2B marketplaces. Every corporation, then, is a potential Ariba customer.
Commerce One, on the other hand, features a software technology that only Net market makers will buy. Even in today's wacky pre-consolidation building boom, there are many fewer marketplaces than marketplace participants. Moreover, many of today's marketplaces will eventually disappear when the B2B consolidation phase begins in earnest.
So, who has the larger, more open-ended market?
Perhaps the most powerful proof of this discrepancy comes from Commerce One itself. Losing badly to Ariba in the software sales game, Commerce One recently joined forces with the firmly entrenched leader in back-end corporate software for finance and production planning -- SAP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAP)") else Response.Write("(NYSE: SAP)") end if %>. This move has been widely seen as a cooperative effort to compensate for weakness, getting SAP into an Internet marketplace game that was quickly getting away from it, while providing Commerce One with a competitive procurement application.
It's true, the alliance will certainly give Commerce One first dibs on SAP's huge installed client base, but is it too late? And at what cost? For one thing, Commerce One will have to split revenues from the jointly developed procurement application. That's gotta sting a little.
In short, procurement software is the B2B cash crop when it comes to saving more clients more money. On this front, Ariba, at a minimum, matches the competition from Commerce One and SAP, if not soundly beating it. And, Ariba gets to pocket 100% of the profit.
Commerce network revenues
OK. We've covered streamlined corporate procurement. Where else will B2B-enabled savings come from? At this early stage, I'm not exactly sure, but I'm pretty confident that I know where it won't come from -- the simple matching of buyers and sellers online.
In this year's dot-com shakeout, we've been reminded that retail is a tough, low-margin business. Scale alone doesn't cut it. This is precisely what makes me nervous about Commerce One's business model. So much of it is dependent on future transaction-based revenues, yet the company doesn't seem to be in a strong position to levy such fees on participating businesses, most of which are already struggling to maintain razor-thin margins.
Soon the Internet, combined with standards like XML, will provide the buyer-to-seller matching all by itself, without the need for a formal marketplace. Large suppliers will bolt from exchanges dominated by large, powerful buyers if these buyers try to build profitability into their joint marketplace by building in large transaction fees. Again, the best way to build demand is to cut costs -- and online marketplaces, in and of themselves, don't offer much in the way of cost savings.
So, where will the savings come from? Digitally networked services like complex auctions, secure payment systems, efficient shipping, and cooperative supply chain planning. And, as luck would have it, this is exactly where Ariba shines.
While Commerce One has been bogged down in building its individual mega-exchanges, Ariba has focused on its unifying Commerce Services Network, through which it offers, to everyone, the money-saving services listed above. Once joined in anybody's marketplace of buyers and sellers -- including one built on the Commerce One platform -- commerce partners can turn to Ariba's marketplace of services to begin truly driving down cost. Best of all, they'll be more likely to dole out a little chump change in exchange for these more-complex services.
Just as we saw on the software front, recent events appear to confirm Ariba's early focus as "on the money." The cleanest contrast between the two companies has been Commerce One's focus on marketplace ownership versus Ariba's marketplace-neutral primary drive to beef up its Commerce Services Network.
In this context, let's look at Ventro <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VNTR)") else Response.Write("(Nasdaq: VNTR)") end if %>, once the poster child for public Net market makers -- start-up companies devoted almost exclusively to marketplace ownership.
Ventro is a struggling company, hard-pressed to turn a profit from the barren plots to which it staked an early claim. In fact, Ventro appears to have given up entirely on the distant dream of endless transaction revenues. It recently announced -- for all in the B2B community to hear -- a change in focus. Instead of marketplace ownership, Ventro will now focus on supplying marketplace technology. I can only wonder if Commerce One found a message for itself in this recent change of heart.
Of course it's early in the game and nobody really knows what plan will turn out to be the B2B winner over the long run. Most of the time, however, early leaders take the cake in emerging markets. Not even brilliant execution can save the smart, hard-working team with the wrong game plan.
The Commerce One Argument »
