Commerce One, Ariba in B2B e-commerce battle

At stake is a healthy piece of the business-to-business e-commerce market, which Forrester Research estimates will reach $1.3 trillion by 2003. Commerce One and Ariba provide key tools within that market--complex procurement software that enables companies to automate the buying and selling of goods and services on the Internet. Plus, they are using their systems to build huge online exchanges where companies will do everything from selling crude oil to buying materials required to make clothing.

Analysts say Ariba and Commerce One are in an all-out battle for mindshare, jockeying to penetrate these huge markets first and to become the software platform of choice among a massive group of buyers and sellers. In addition to partnerships, both companies have pushed to expand their capabilities and technological depth, making key acquisitions.

"It's a race," said Laurie Orlove, an industry analyst at Cambridge, Mass.-based Forrester Research. "They're trying to get the greatest penetration of their software platform into the hands of the various industry heavies."

Just last week, Mountain View, Calif.-based Ariba, continuing an ongoing me-too marketing blitz targeted at Commerce One, announced a deal with Chevron to build a trading exchange called Petrocosm that will connect buyers and sellers in the oil and gas industry. Meanwhile, rival Commerce One, based in Walnut Creek, Calif., is tapping the same vertical market with its latest partnership with Shell.

Commerce One and Ariba have also been tackling other markets including auto manufacturing, chemical manufacturing and pharmaceuticals. Commerce One has teamed with auto giant General Motors, while Ariba announced a recent deal with Dupont.

Exchanges that connect companies with their partners, suppliers and customers over the Internet are a huge piece of the business-to-business (B2B) pie. Forrester expects U.S. Internet commerce for auto manufacturing to expand to $212.9 billion and computer electronics to reach $295.3 billion by 2003.

Ariba today finalized its purchase of TradingDynamics and also last month said it would buy Tradex, a company that makes platforms to match large numbers of buyers and sellers online, in a $1.65 billion deal. Meanwhile, Commerce One in November bought business-to-business auction company CommerceBid and e-commerce company Mergent earlier this month.

"Everyone is making deals with everyone else," adds Bruce Richardson, an analyst at Boston-based AMR Research. "This is kind of like the 60s promiscuity all over again--the free love movement in direct and indirect goods."

But it's unclear how profitable both companies will be in the long term. Both Commerce One and Ariba charge license fees for their software and then take a slice of the transaction fees generated from the online marketplaces. They're also taking equity stakes in exchanges they set up with blue-chip partners.

For now, both Ariba and Commerce One are losing money. In its most recent quarter ended Dec. 31, Ariba lost $10.3 million, or 13 cents a share, on revenues that jumped to $23.5 million from $6.9 million. Commerce One's fourth quarter net losses, announced today, totaled $26.7 million on revenues of $16.9 million compared with $1 million in revenues a year ago.

Though analysts expect long-term profitability from both companies, they say both Ariba and Commerce One should be looking over their shoulders at gorilla-sized rivals closing in.

German software giant SAP's procurement software has proven a weak link to date, although it is planning to tap its huge installed base of approximately 20,000 user sites with its new business-to-business initiative. Oracle, which has teamed with auto giant Ford to build the AutoXchange marketplace for Ford's suppliers and business partners, also recently launched its Oracle Exchange marketplace. The company's Net-based procurement software isn't due out until the release of Oracle 11i later this year. In recent weeks, SAP has inked numerous deals in various industries including chemical manufacturing and pharmaceuticals.

Albert Pang, an analyst at International Data Corp., said it's not yet clear how Ariba and Commerce One will fare against lurking competition from giants SAP and Oracle, which have both been making an aggressive market play. Supply chain companies such as Manugistics and i2 Technologies have also made moves in the Net exchange business.

"We're going to see a renewed emphasis on the part of SAP and Oracle and there's no question that anyone should underestimate the underlying influence of SAP simply because of the sheer number of customers they have," Pang said.