Ariba LIVE – An Update on the Network Business (Dispatch 4, Part 1)

Ariba's Bob Solomon gave a surprisingly detailed presentation yesterday at Ariba LIVE on Ariba's network strategy, including related new applications like Discovery. According to Bob, the network is a "core element of the business commerce cloud." Ariba is seeing, in Bob's words, network growth "re-accelerating" in part because of successful strategy execution but also because of the growing economy, which is fueling volume-based revenues from suppliers. From a strategy perspetive, Ariba's high level approach to driving network momentum involves adding new P2P and eInvoice customers (buy-side customers), growing its sale force to enable customer acquisition and up-sell opportunities as well as adding alliances. Bob suggested that in 2010, Ariba will add 60 buyers to the network, representing 20% growth (the baseline at the start of the year was 300).

Network customer acquisition tends to pay dividends for Ariba only many years after initial on-boarding. As Bob noted, "it takes times to get buyers up," especially in ramping their volume numbers. From a pricing standpoint, Ariba is taking steps to "optimize" its network pricing. I'll share details on the price changes next week and hopefully start a good debate on the subject. But as Bob puts it on a high level, Ariba is making "changes to its network pricing mode (tweaking pricing in the fall), adding value added services, looking for inorganic network growth opportunity and planning to acquire complementary networks."

Who might be on Ariba's network shopping list? OB10 comes to mind as one independent operator, but I suspect the strategy will focus more on regional players in Europe (I honestly don't see OB10 giving Ariba that much more over what they already have today). Ariba may also wish to pursue a strategy that looks more like Basware (a network of networks) rather than focusing on proprietary connectivity. This will be key in Europe, given that so many suppliers are already integrated into regional network players.

In terms of network growth, Ariba shared that there are "strong leading indicators" which are "boding well for growth." Ariba is forecasting a fiscal year 2010 network growth of 20% but longer term CAGR between 20-30%. I suspect that with rising network fees, Ariba could even exceed these estimates (especially if Discovery revenue is combined as well). Still, Ariba is competing in a rather complex ecosystem when it comes to the PO/invoice management side of their network. Bob segmented competitors, substitutes and partners into the following categories: AP / procurement BPO (a $500 million market), document management ($300 million), financial suites: SAP/ Oracle, payment finance systems (banks/Sunguard including P-cards -- $3 billion), competitive purchasing suites ($100 million), invoice networks ($300 million), supplier networks ($500-$700 million), EDI networks (e.g., GXS/Sterling). Clearly, Ariba has done their homework here. Yet their current dollar-based marketshare for supply-side transaction document exchange / invoice management / clearing is less than 1% of the total market, by my estimates.

What's the future of the core Ariba network? Clearly, they have a giant growth opportunity here, but I am skeptical of their ability to continue to push only base-level fees based on transaction volume as a single option. If Ariba wanted to endear itself to buying organizations and suppliers, they would pursue more flexible fees. These might take the form of flexible arrangements based on a percentage of volume or flat-fee transaction pricing models, potentially leaving larger volume-based fees for value-added (e.g., financing) offerings, rather than raising transaction-based pricing as they plan to this fall for all customers that meet certain thresholds. The price raising strategy they are pursuing for the small minority of suppliers that fall into low-transaction volume, high-dollar volume trading relationships could end up raising a lot of eyebrows. I honestly don't believe Ariba wants the press from even the occasional customer taking a handful of suppliers off their network, which is bound to happen in this demographic.

Jason Busch

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