April 6, 1999
Battle of the E-Commerce Mercenaries
By Tiernan Ray
PLAYING THE mercenary is a difficult game. The Greeks did it well around
600 B.C. They served the Babylonians and the Egyptians in their various
wars, making themselves rich even as their "customers" collapsed in on
themselves. It's a strategy that works in business, too. Cisco Systems
(CSCO), as an arms merchant to phone companies of the world, is destined
to keep getting richer and richer no matter who wins the battle of the Web
portals. Likewise, Open Market (OMKT) and SmartMoney pick
BroadVision (BVSN), two software firms that sell wares to Web-based
merchants, are e-commerce's hired guns, selling software so that the
Amazon.coms (AMZN) and eBays (EBAY) of the world can try to topple
one another.
As might be expected, though, what has actually come to pass is a sort of
battle between the mercenaries. Every quarter some research firm or Wall
Street analyst puts out a report showing why either BroadVision or Open
Market is the better mercenary. Dataquest gave Open Market 30% of the
commerce software market back in 1997, when Open Market had $61
million in revenue. Open Market is still ahead, but with 1998 revenue of $62
million, it didn't grow at all last year, while BroadVision increased its annual
sales to $50 million from $27 million. That caused Jackson Speares,
BroadVision's follower at ABN Amro, to crown the company the top arms
dealer in March, stating that, apples to apples, its license revenue of $36
million in 1998 was more than Open Market's. Dataquest fired back,
emphasizing Open Market's 13,000 customers.
This debate is pointless, and it's been going on for too long now. Few
who've looked at this software match up close think these companies are
even competitors in any real sense. BroadVision handles the way a site is
presented to a customer and how their actions are tracked, while Open
Market is really about transactions necessary to complete a purchase.
There's a big problem facing both companies, but it isn't each other. The
challenge for both of them is staying relevant in the wild and wacky world of
e-commerce, which seems to be changing its stripes from month to month.
It boils down to this. Imagine the world of Internet commerce as less a
battle between one or two rich superpowers, and more a clash between
hundreds of tiny city-states, all in the infant stages of their development.
Each one is trying to occupy shaky ground, and each has an uncertain
claim to the land. E-commerce may well be grossing $250 billion or more
these days. That's a figure MIT researcher Nicholas Negroponte likes to
toss around. But even Negroponte realizes this is still a tiny market. As
Gary Eichorn, the CEO of Open Market, puts it, "We're still in the first hour
of the cricket match." Indeed, Amazon had just $610 million in revenues
last year, while Yahoo! (YHOO) had only $19 million in the last quarter that
can be attributed to selling and other "merchant services."
For Open Market, this may be the one instance where, ironically, getting in
on the Internet really early was a bad thing. Open Market has by most
accounts some very strong technology, but it has made several mistakes.
First was building a big proprietary piece of software for conducting
transactions way back in 1996, before it was clear what anyone wanted or
needed. Next was misjudging the market. Open Market proudly claims 11
of the top 14 telecom firms as customers, but much of its early business
was with publishing outfits like Time Warner's Pathfinder and PointCast.
Many publishing ventures have fizzled as the online advertising market has
grown more cutthroat and competitive, and as a result Open Market had to
dump some of the publishers in favor of selling its products to Internet
service providers.
Correcting for those mistakes has been costly. Open Market's software has
been re-engineered a couple of times to fit with other vendors' products and
to make it more flexible. And Open Market has spent money to acquire
other firms to boost its product line even as licensing revenue has slumped.
As a result, unlike BroadVision, it has never been profitable. The company
lost $30 million last year and recently cut 14% of its work force. Its chief
financial officer quit at the beginning of March, not usually a good sign.
BroadVision, which has been at this as long as Open Market, has a
different problem. The company is lucky because from the start it focused
on rather sophisticated technology that has given it a unique market niche.
And it seems to have built a pretty promising indirect distribution channel in
which to sell the stuff.
But it's not clear how far that will go. Right now, BroadVision is a one-trick
pony. Its One-to-One software is used by merchants to store information
about Web surfers in order to personalize Web sites, and personalization is
an idea that is coming into its own. Rather than simply slashing margins
and making it up on volume, as some companies suggest, most Web
merchants realize they have to sell more high-margin goods to really classy
customers. Take Cyberian Outpost (COOL), which sells computers over
the Web. To complement almost nonexistent margins on hardware, the
company wants to upsell visitors to peripherals, software and other
high-margin goods, thereby grabbing a greater share of their total spending.
You buy a laptop, Cyberian offers you a portable printer.
The problem, says Michael Starkenburg, Cyberian's chief technology officer,
is that there's only so much screen real estate. Using the personalization
features of BroadVision, Cyberian can display products by patron's
proclivities, and later analyze the traffic data in detail to create better sales
programs. That's a nice annuity revenue stream for BroadVision, which gets
paid for each new shopper.
But how far does this go? Personalization has been a hot fad for a while. No
one knows if retailers will stick with it over time. It could be temporary, just
like a focus group: You run a few tests, then you pull the plug when you've
gathered the information you were looking for. BroadVision's probably at the
beginning of the curve for this kind of software. Sales could grow very nicely
this year as more companies catch on to what Cyberian is trying to do. But
if BroadVision is going to go on selling software at $200,000 per installation
and up, it must move beyond simple personalization.
It's a young market for both companies. BroadVision has had some
questionable accounting deals in the past year, barter arrangements that
boosted revenue in the quarter. It's hardly a sin, more like the kind of thing
you do when you're a young company and sales are still small and highly
volatile. Both BroadVision and Open Market seem to have the same
exclusive partnership with Cisco -- you know, the one Cisco cuts with
everyone. Open Market has an exclusive partnering arrangement with a
newly public company called Vignette (VGNT), which has technology that's
similar to BroadVision's. But Vignette seems to have made the same
partnership deal with a privately held Austin, Texas-based company called
ClearCommerce, which does what Open Market does. With a quarter of
Open Market's revenues, but four times its market cap thanks to an
Internet-style IPO in February, Vignette could actually contemplate buying
Open Market.
And they're still figuring out the market. Both Open Market and BroadVision
think this market is like what SAP (SAP) and PeopleSoft (PSFT) have
been doing for years with business enterprise software. But the category of
Internet commerce software, which Albert Pang of research firm
International Data tells me will be $1.7 billion this year, is about selling to
the masses. For sites selling to consumers, software is rapidly coalescing
around very cheap stuff and massively expensive custom-built stuff. That
leaves BroadVision and Open Market smack in the middle. At the very high
end, these companies can't possibly compete with home-brewed efforts.
And the really big e-commerce companies all build their own software.
Cisco tried BroadVision's products, but soon found out that it was better off
building its own e-commerce operation.
At the low end, there's always Microsoft (MSFT), though Redmond has
some catching up to do. Netscape (now a unit of America Online (AOL))
has similar technology, but it seems to be lost in limbo, at least until next
year. In general, these companies can't touch Open Market and
BroadVision on technical merits, but they can steal some of the low
hanging fruit -- the only question being how much. BroadVision's software is
big and complicated. The failure rate of client projects is in the high teens
as a percentage of BroadVision's total customers, according to CEO
Pehong Chen. There's probably a market for a simpler alternative. Even
Cyberian's Starkenburg admits he'll sit through the Microsoft pitch, when it
comes.
There's breathing room for BroadVision and Open Market to address these
issues, but not much. Open Market has rather ingeniously packaged its
software at a low-ball price and arranged to have it sold by ISPs to individual
shop owners. Those sales have a much smaller dollar value, so Open
Market is now in the game of trying to make it up on volume. Someday,
perhaps, those customers will become big e-commerce companies, and
they'll buy more expensive software from Open Market. BroadVision
recently formed a venture capital fund, obviously hoping to grow the next
generation of features to roll into its software.
But mostly, it's about deals, deals, deals. Open Market just signed a
contract with Lycos (LCOS) that is rather open ended, and Microsoft seems
interested in perhaps acquiring BroadVision. Most observers acknowledge
that the enterprise software companies, including Oracle (ORCL), aren't
really in the game yet -- that's the other shoe. Any one of these companies
could end up swallowing BroadVision or Open Market.
Don't get me wrong: These are both important companies with a lot to offer.
I feel better about BroadVision now than I did six months ago, when we
picked it. But given the challenges each one faces, they'd be a lot better off
talking less about clobbering one another and worrying more about their
own issues. Sometimes they sound less like mercenaries and more like the
nomadic tribes of the Eurasian steppe some 2,000 years ago, fighting one
another to win the favor of the Chinese emperor. The emperor, it is said,
was pleased to see barbarians fighting barbarians.
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