Briefing.com on B2B
(btw, Malcolm, I hope you are better at timing than I am! and remember, I didn't hint about ICGE's valuation, I just asked!<GGG>)
B2B - The Deals
[BRIEFING.COM - Gregory A. Jones] Our last look at the business-to-business (B2B) sector identified
the different subsectors within B2B and mentioned some of the key players in the groups. With the recent
flurry of deals in the B2B world, it's time to get more focussed. Today, we look at those deals and their
implications for the future of B2B.
Commerce One + General Motors
Announced on Tuesday, this is the first of two important deals involving the auto sector. Commerce One
(CMRC) will develop GM MarketSite, which will be an online marketplace linking General Motors (GM)
and its 30,000 suppliers. This is bigger than just a market where GM will purchase from suppliers --
suppliers can also complete transactions with each other in this marketplace. This deal has several
important implications.
There were concerns that Fortune 500 companies might be slow to adopt B2B, but when stodgy
GM dives in head-first, you have to believe that these concerns were unwarranted. GM VP Harold
Kutner referred to his company as "e-GM" in the press release -- if ever there was an indication
that corporate America believes in ecommerce, that was it.
Another threat to B2B companies was that industries dominated by a handful of firms would see
those leading companies attempt to set up their own online markets, bypassing the B2Bs. Yet the
auto industry is the perfect example of an industry in which the leaders had the power to set up
their own markets, and in the two deals announced yesterday, two of the Big 3 went to B2B
companies for help. That's great news for the B2B sector.
Oracle + Ford
The second of the auto deals was interesting for the same and different reasons. Oracle (ORCL) and
Ford (F) announced a venture whose goal was the same as the CMRC/GM deal -- to link the automaker
and its suppliers in an online marketplace. For the same reasons mentioned above, the ORCL/F deal is
positive for the B2B companies. But the fact that Oracle is the partner in this deal yields new
observations.
B2B pure plays face stiff competition from existing enterprice resource planning (ERP) software
providers such as Oracle (ORCL), Peoplesoft (PSFT), and SAP (SAP). B2B pure play
companies such as ARBA and CMRC no doubt hoped that just as Amazon.com zoomed past
Barnes & Noble, they could bypass the existing ERP companies if the ERPs suffered from
perceptions that they were not sufficiently nimble to reposition themselves for the challenge of B2B
ecommerce.
With its high profile Ford venture, Oracle has just made it clear that the ERP companies are a
threat. PSFT and SAP look to be laggards in this area, but Oracle is being very aggressive and will
be a formidable competitor for ARBA and CMRC. The pie is probably big enough for the leading
companies to all come out ahead, but B2B pure plays will share, not own, this market. For Oracle,
the possibility of breaking into B2B marketplaces represents a tremendous opportunity which its
stock price does not fully reflect.
PurchasePro.com + VerticalNet
First, we would note that we consider both PPRO and VERT to be second tier B2B companies. PPRO
is a direct competitor of ARBA and CMRC in creating online markets, but its partnerships are not of the
same blue chip variety as ARBA and CMRC, and it has thus far not extended far beyond its roots in the
gaming/hotel industry. VERT, on the other hand, has extended its reach across 51 industries, but has an
advertising model that does not offer the same upside potential as a transactional slice model (taking a cut
of transactions which occur in an online marketplace).
On Wednesday, PPRO and VERT announced a deal that makes a great deal of sense -- VERT will
license PPRO software to develop markets to complement its industry-specific content and community.
VERT gets the marketplace it needed, and PPRO gets the expanded industry-reach that it needed. That's
the good news, but it leads us to a broader observation.
VERT and PPRO represent the threat from below -- they are playing catch-up. In the
business-to-consumer (B2C) sector, we saw that the followers never caught the leaders.
VERT/PPRO, even with this deal, are likely to be followers, with ARBA, CMRC, and ORCL
leading. This deal does give them a chance to move into the top tier of B2B players, and certainly a
much better chance than either had prior to this deal. But as was the case in B2C, first-mover
advantage and the partnerships that it brings will be critical. You don't see PPRO doing deals with
the Big 3 automakers.
pcOrder.com + E-Commerce Industries
This is the oldest of our deals -- pcOrder (PCOR) announced back on October 11 that it had teamed
with E-Commerce Industries to develop an ecommerce platform for the office supplies industry. Prior to
that announcement, PCOR had focussed quite successfully on the computer industry. Their expansion into
office products prompts our final observation.
Everyone wants a piece of the horizontal pie, but there are different ways of approaching it. ARBA
and CMRC are trying to get it all at once -- verticals such as PCOR are attacking it one piece at a
time. PCOR proved its business model in the computer industry and is now taking it to office
supplies. Leading horizontal players could find that verticals which promise expertise in a given
sector will attract much of the business within that sector, leaving less for the horizontals.
Tying It Together
The auto deals indicate that the business for B2B companies from corporate America will come
faster than expected and from all industries.
The Oracle deal highlights the fact that ERP companies will be competing aggressively with B2Bs
for these deals.
The PPRO/VERT deal, while positive for those companies, highlights the first mover advantage
enjoyed by ARBA, CMRC, and even ORCL.
The PCOR deal indicates that vertical players with industry expertise have longer term horizontal
potential.
The bottom line? If you want to invest for the long term in this sector, there are a few rules. First and
foremost, you must be willing to tolerate one-day declines of 20-30%. These stocks will be volatile and
there will be bad days. Very bad days.
Second, follow a rule that has always worked with the Internet -- go with the leading companies in the
leading B2B sectors. In this case, the leaders in the horizontal space are ARBA, CMRC, and ORCL, and
the current leader in the vertical space is PCOR.
We would take these over the lagging companies, and we would also take them over the leaders of less
compelling B2B sectors such as the many procurement sites. These include Intraware (ITRA), Imagex
(IMGX), and Loislaw.com (LOIS) -- these are all companies that sell goods and services to businesses
via the Net -- they do not create online marketplaces.
Some will be successful, but they are susceptible to the afflictions hitting the B2C sector -- rabid price
competition and falling profit margins. Companies creating horizontal and vertical marketplaces will have
high and defensible profit margins if they gain critical mass. B2B horizontals and verticals are to
procurement sites what eBay (EBAY) is to Buy.com (private).
The former has gained the critical mass in the consumer auction market and can therefore sustain very high
profit margins. The latter is forced through the lack of consumer loyalty and intense competition to accept
negative profit margins. Which would you rather own?
Extreme, but...
The valuations of the horizontals and verticals are extreme. But the B2B market has the potential to be
incredibly lucrative, particularly for companies that can take a slice of transactions from their online
marketplaces. For the winners, there is a multi-billion pot of gold at the end of the rainbow, one that will
ultimately justify their valuations.
Greg Jones - gjones@briefing.com
P.S. Another B2B leader is coming to market soon -- FreeMarkets, a provider of B2B auctions, is slated
to go public in the week of November 8. This is another blue chip horizontal, with Goldman Sachs as the
lead underwriter and Kleiner Perkins' John Doerr on the board. More on this one later...
P.P.S. We did not include software providers such as BroadVision (BVSN), Calico Commerce (CLIC),
and Sterling Commerce (SE) in this piece as these companies only offer software to facilitate online
transactions, but have not attempted to create online marketplaces.
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