March 13, 2000
Technology vendors are trying to position themselves as the operators of the infrastructure for E-business
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Net marketplaces will handle $2.71 trillion in E-commerce transactions by 2004, or 37% of the overall business-to-business market, predicts Gartner Group. The reason for such optimistic forecasts is that E-markets, or exchanges, offer companies an opportunity to transform their supply chains. "Brick-and-mortar companies are thinking of managing their entire supply chains differently, which can lead to dramatic reductions in inventory and improvements in build-to-order cycles," says Charles Phillips, an analyst at Morgan Stanley Dean Witter.
Because marketplace technology is still relatively new, vendors are scrambling to provide all the applications companies need to achieve these benefits. Last week, Ariba, IBM, and i2 Technologies formed an alliance aimed at the burgeoning market. IBM will invest $400 million in Ariba and $200 million in i2. Ariba and i2 will still compete for other E-marketplace deals, but they'll work together when IBM is involved. "What's going on in the world of E-commerce and B-to-B marketplaces is much bigger than any one company," Ariba chairman and CEO Keith Krach said at a New York news conference announcing the partnership.
Right now, major vendors offer much of the same basic functionality--catalog and auction purchases, purchase-order management, and supply-chain management, for example. Some software companies are building and running exchanges and charging sellers, and sometimes buyers, a transaction fee, a small percentage of every online sale. Others are simply licensing the software to companies that want to build and operate marketplaces themselves.
If software vendors emerge as operators of the infrastructure for E-business, they'll become key partners for many companies. A hint of what could come: General Motors Corp. has the option to buy as much as 20% of Commerce One if enough transactions are handled by the GM TradeXchange supplier marketplace. GM TradeXchange will merge with Ford Motor Co.'s AutoXchange and will add DaimlerChrysler to create an auto-industry megamarketplace in the next few months ("E-Markets Are Expanding," InformationWeek, 2/28/00).
Such equity arrangements are not without risk. "If you're not happy with the software, you're kind of locked in," says Tim Clark, VP of advisory services for Net Market Makers, a research and consulting firm. "If you jump to another vendor, that could make the value of the stock you own go down."
Changes in the vendor-customer relationship are being driven, in part, by businesses' demands that suppliers of marketplace technology do more than just develop software, says Doug Maulbetsch, CIO of GM TradeXchange. Software vendors should also manage supply chains, develop sales and marketing plans, and bring new suppliers into the system. "We're looking for someone who can not only provide the software, but also the know-how for running business-to-business exchanges," Maulbetsch says.
Oracle chairman and CEO Larry Ellison says that's the perfect opportunity for his company. Ellison says Oracle's strength in database, supply-chain, and procurement applications gives it an edge. With typical bravado, Ellison predicts Oracle will become the No. 1 provider of Net marketplace technology by the time its fiscal quarter ends May 31. "Exchanges are very complex, with managing customer relationships and inventory levels and automating the supply chain," he says. "Nobody else really has all the pieces."
Oracle's strategy is to partner with one or two powerful companies in key vertical industries, with the principals charging and sharing transaction fees. Last week, Oracle said it will work with Chevron Corp. and Wal-Mart Stores Inc.'s distribution subsidiary McLane Co. to create a marketplace for the $200 billion convenience-store industry. The companies will be business partners in the exchange and offer equity stakes to other participants--with an eye toward an eventual public stock offering.
Oracle, Chevron, and McLane are aiming for a summer launch of RetailersMarketXchange.com, which will let convenience-store operators buy goods online. It will use Oracle's Exchange Suite platform and infrastructure software, including Oracle's database, application server, E-business applications (procurement, supply-chain planning, logistics planning, and distribution), and business-intelligence tools for analyzing supply patterns and conducting demand forecasting.
"I always associate Oracle with database management and their strengths there," says Chevron CEO Dave O'Reilly. "But they truly have added a lot of dimensions to their company's portfolio of technologies. In addition to jumping on the Internet, I look at the work Oracle has done on customer-relationship management, on transactions and procurement--this whole suite of technologies is well-suited to this particular opportunity."
In recent weeks, Oracle has landed Ford, Sears Roebuck, French retail giant Carrefour, and now Chevron and the Wal-Mart unit as marketplace-building customers. "The company is very well-positioned," says Lara Abrams, a senior analyst at the Aberdeen Group. "Oracle is the database behind most of the business-to-business market makers, and it has a tremendous amount of supply-chain expertise. And it understands the need to integrate E-business demands with supply-chain requirements."
IBM and its partners argue that no single vendor--not even Oracle--can provide all the pieces needed to build marketplaces. The companies say they will combine technologies and services, including IBM's hardware, middleware, and E-commerce software; Ariba's network services and ORMS suite of procurement applications; and i2's TradeMatrix and business-to-business software, which are built on its supply-chain planning and collaboration technology.
Software from Ariba and i2 will become the foundation of IBM's internal procurement and supply-chain system, which handles $45 billion annually. The IBM system will become a test bed for Ariba and i2 to experiment with enhancements to their software. "IBM is able to walk into a big customer now with an Internet exchange solution in its hip pocket," says Vern Keenan, an analyst at research firm Keenan Vision.
Ariba charges transaction fees for exchanges it hosts, but IBM says it has no plans to do so. "We're going to make revenue the old-fashioned way, on hardware, middleware, and integration services," says Bill Etherington, senior VP and group executive for IBM sales and distribution.
Commerce One may be the leader in powering marketplaces; it claims to have 35 customers running or building marketplaces, including major companies such as BT, Citigroup, Shell, and Toronto Dominion Bank. Commerce One characterizes the approach of Oracle, SAP, and even Ariba as "application-driven," as opposed to its "portal-driven" approach, in which all of its marketplaces are linked via its Global Trading Hub.
"I don't fault SAP and Oracle for doing it their way, but it doesn't necessarily translate to the Web world," says Chuck Donchess, Commerce One's executive VP and chief strategy officer. "You need a trading community that can talk to the whole market."
Oracle is days away from launching a "horizontal" marketplace called Oracle Exchange, where it plans to emulate the trading community approach.
Commerce One and Ariba started out selling Web-procurement applications. Both still do. But Commerce One has moved further away from the software business to be an operator of marketplaces. It's not selling many applications without a marketplace-building deal to go with them. "We just don't think the center of the universe is our application," Donchess says. "The center is a portal that can bring many diverse companies together, regardless of what commerce application or database they use."
The leading marketplace providers may face competition from independent companies building E-markets using technology from second-tier vendors. They'll also have to grapple with two software giants that have joined the fray late: SAP and Microsoft.
SAP is moving, albeit slowly, into the role of online trading exchange partner. During the past few months, it has disclosed deals with Norway's Statoil for an oil-and-gas marketplace, and BASF and Bayer for a chemical exchange. But only its mySAP.com Marketplace, a general business-to-business exchange, is in operation.
Analysts and partners say mySAP .com Marketplace's features and functions are rudimentary. It's still missing key commerce features such as auction and bidding capabilities, which SAP promises by June. Further out is the ability to collaborate with trading partners on product development and demand planning.
Earlier this month, Microsoft bought an undisclosed stake in Radiant Systems Inc., a developer of software for gas-station convenience stores. The companies plan to build a convenience-store marketplace for Shell Oil similar to the Oracle-Chevron-McLane effort. In January, Microsoft took a $100 million stake in marketplace operator VerticalNet Inc., and last month it invested an undisclosed amount in Honeywell Inc.'s MyPlant .com exchange for process plants.
Laura Jennings, Microsoft's worldwide VP of strategic planning, says the company won't copy Oracle's practice of charging transaction fees--at least not in heavy industries. "That's a short-term window of opportunity," she says. The transaction-fee model won't work in sectors such as auto manufacturing where a small number of buyers controls the action, she says.
Which vendors will come out on top? It's too early to tell. "We're still in the building phase," says analyst Keenan. "There's so much market interest right now that there's a lot of work for everybody."
Photo by Dan Brinzac
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