Analysts see growing cracks in IBM-led marketplace

Ariba's acquisition of Agile may be the final straw that breaks the heavily touted business-to-business alliance between IBM, Ariba and i2, analysts say.

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Ariba's $2.55 billion acquisition of Agile Software on Monday may be the final straw that breaks the heavily touted business-to-business alliance between IBM, Ariba and i2 Technologies, analysts say.

The alliance, formed amid much fanfare last March, was followed by a $90 million ad campaign and news of numerous deals to build business e-commerce marketplaces. The trio was created to sell software and services to help build online marketplaces that serve companies in aerospace, construction, retail, chemical and other industries.

Companies like Ariba and i2, as well as Commerce One, provide specialized software used to set up online exchanges that many companies hope will drastically decrease the cost of doing business. Analysts see the business e-commerce market growing from $131 billion in 1999 to more than $7.3 trillion by 2004.

But recent deals cut by members of the alliance--most significantly Ariba's stock swap buy of San Jose, Calif.-based Agile--minimize the value of the alliance and point to its eventual collapse, said David Yockelson, an analyst with Meta Group.

"It may not be the final nail in the coffin for the alliance, but (the Agile acquisition) certainly doesn't help," Yockelson said. "The alliance isn't doing well. I see this as Ariba's preparation move for after the alliance. It allows them to have greater independence from i2."

Other analysts agree.

"In actuality, (the alliance) is nonexistent," said Mark Verbeck, senior analyst at Epoch Partners, who recently released a report examining recent conflicting partnerships entered into by Ariba and i2.

Alliance hit parade
The IBM, Ariba and i2 alliance has won a fair share of large marketplace deals over the past year, including e2open.com, the giant electronics component exchange unveiled last June by founding partners IBM, Hitachi, Nortel Networks, Seagate Technology, Solectron, Toshiba, LG Electronics and Matsushita Electric (Panasonic). The marketplace is being hosted and built by IBM Global Services, the consulting and systems integration arm of Big Blue, and uses software from both Ariba and i2.

The alliance also beat out Accenture (formerly Anderson Consulting), Microsoft, Commerce One, General Electric and Oracle for a contract to build Worldwideretailexchange.com, one of the largest Internet marketplaces.

Originally, analysts saw the alliance as a clever way for IBM, Ariba and i2 to combine complementary skills. Ariba has been traditionally strong in direct procurement software used by companies to purchase materials over the Internet, but weaker in supply chain and online auction software. i2 has been strong in supply chain software while less so in direct procurement. IBM provided the worldwide marketing and consulting clout.

Meta Group says Ariba's purchase of Agile Software is a key move that provides Ariba with the capabilities it lacked to support collaborative manufacturing in Net markets.

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Although executives from the three companies stick by the alliance, Jennifer Tejada, i2's vice president of marketing, said the Agile deal does jeopardize future partnerships between Ariba and i2.

"This obviously increases both companies' product footprint overlap," Tejada said. "This will reduce the instance of us teaming in the future, but we will continue to meet customer needs."

Keith Krach, chief executive of Ariba, told CNET News.com that the "i2 partnership is good. We have agreed to partner where it makes sense on e-commerce platforms. But our footprints are expanding into each other's areas. It's really not different from many partnerships."

Still, deals like the Agile acquisition chip away at the alliance, despite the companies' assertions to the contrary. i2 has also signed deals outside of the alliance, including one that benefits Electronic Data Systems, a competitor to IBM Global Services. Under the terms of the deal, i2 partnered with strategy consulting firm A.T. Kearney to provide supply chain software, source discovery, procurement and other services for companies and online marketplaces. As part of the agreement, EDS, which is A.T. Kearney's parent company, would become a preferred supplier of integration services for i2's software.

The alliance members "can either stand still and let the alliance be their future or go out and acquire what they need or partner with other software makers" to provide a complete offering, said Joshua Greenbaum, an analyst who heads Enterprise Applications Consulting.

Market shift coming
More ominously, a market shift is drying up opportunities to build the huge marketplaces that the alliance was designed to tackle, analysts say.

"The alliance in and of itself was obviously very opportunistic," said Bob Parker, an analyst with Boston-based AMR, who said the huge marketplaces were "the sweet spot" for the IBM-Ariba-i2 alliance.

Analysts point to a slowdown in spending to build big-consortium marketplaces such as Worldwideretailexchange.com and e2open.com. Instead, demand is shifting to private marketplaces needed by companies hoping to automate transactions with their own suppliers.

IBM, so far a silent partner despite this week's events, still sees value in the alliance.

"We've seen a clear shift to private marketplaces, but everything depends on the needs of the participants involved in the marketplace," said Greg Conley, IBM's general manager for e-markets. "We've found that companies either want to start their private marketplaces focused on the supply chain, which is where i2 fits, or procurement, where Ariba fits. IBM provides the middleware and the integration for both."

Conley admits that the private marketplace deals may only demand the services of two of the three alliance members. "It may be that the shift to private marketplaces may mean (customers) want IBM, or i2, or IBM and Ariba. But I don't see it as a problem for the alliance. Bottom line is that the relationships are beneficial for all of us."