Sector Spotlight: Online Customer- Service Players Head for Consolidation

For Internet-related companies, the rest of the year promises to be a time of consolidation. Companies that focus on what's known as electronic customer-relationship management are likely to be no exception.

And while eCRM companies are unlikely to be in the dire straits that other dot-com brethren are navigating, the third quarter seems likely to witness the continuing trend favoring firms that have broader selections to offer their customers.

Like e-commerce and email, eCRM is an Internet-based incarnation of a traditional business function. In the pre-Internet past, CRM was all about keeping track of two major business operations: the sales force that went out in the field and sold whatever widgets a company had to sell, and the customer service representatives back at the office who answered the phone whenever a widget customer called up with a question or problem.

Trickier

Now that the Internet walks among us, the customer-relations management business has gotten trickier. Instead of a sales call or a phone call, companies now have to handle new ways they interact with customers -- a visit to a Web site, an email pitch or an unsolicited email from the customer back to the home office. Furthermore, the amount of information that companies can collect and analyze about customers has grown, too: We're not talking just phone call records anymore, but records of all the clicks a customer has clicked on a company Web site.

No surprise, then, that it's a time of heady growth for eCRM -- roughly, Internet-based systems used to organize a company's interactions with its customers, whether or not those interactions take place over the Web. To get a sense of how fast that growth is, consider the high-tech research group International Data Corp.'s estimates for CRM growth: Software license revenue alone will jump to $10.1 billion in 2003, from $2.3 billion in 1999; the services market -- for example, the people who might help a client set up a call center -- is seen growing to $125 billion in 2004, from $34 billion in 1999.

"You really saw the CRM market pick up in 1998," says Katrina Menzigian, program manager, CRM solutions services, for IDC. "That's when you saw it form into a recognizable market segment."

Taskmaster

Sorting out the publicly traded players in the eCRM software landscape is not a straightforward task. That's partly because of the multifaceted nature of CRM. A company might be focused on analytics, such as E.piphany (EPNY); or maybe on content management, a la Vignette (VIGN). In addition, the people who look at the market segment the players in different ways.

Top o' the Heap Potential eCRM consolidators
Company	Market cap ($billions)	Recent price
Siebel (SEBL:Nasdaq)	36.9	177 3/8
E.piphany (EPNY:Nasdaq)	4.2	92 1/8
Kana (KANA:Nasdaq)	3.3	35 5/8
Broadbase (BBSW:Nasdaq)	1.0	21 7/16
Source: Yahoo! Finance.

That said, the shadow of one company looms over the sector, says Cameron Steele, a research analyst at Dain Rauscher Wessels who follows the space. And that's Siebel Systems (SEBL), a pioneer in enterprisewide sales force management software. The company, which had revenue of $700 million in the first half of 2000 -- more than double the corresponding figure one year earlier -- has seen its stock rise more than 100% since the first of the year. "A lot of these companies want to compete with Siebel at the end of the day," Steele says.

Unfortunately, stock performance in most of the eCRM sector has come nowhere close to Siebel's run over the past few months, going the way of most tech stocks. Jason Maynard, senior analyst at First Union Securities, attributes the disparity to a big run-up in eCRM stocks during the Nasdaq's October-March frothathon. Since then, investors have retreated to the stability of larger-capitalization companies like Siebel.

Being Like Siebel

To be more like Siebel, several companies have been making acquisitions so they can offer products in several different areas of eCRM or sell a wider range of products in a particular category. "Everyone is trying to round out their suites, because they'd like to be one-stop shopping," says Mike Gotta, vice president of the Meta Group research and advisory firm.

Managing to Relate Other eCRM players
Company	Market cap ($millions)	Recent price
Primus (PKSI:Nasdaq)	461	25 3/4
eGain (EGAN:Nasdaq)	261	8 13/16
PrimeResponse (PRME:Nasdaq)	124	6
Source: Yahoo! Finance.

Case in point: Kana Communications (KANA), which started out with an application enabling companies to respond efficiently to inbound email. "Kana wakes up: 'Email response is not a business. It's a function,' " Gotta says. The company, which went public last fall, acquired Connectify, NetDialog and Business Evolution last year, and Silknet Software this year.

Further consolidation is likely. Companies with a history of acquisitions and market capitalizations big enough to use their stock for additional purchases, says Steele, include Siebel, Kana, E.piphany and Broadbase Software (BBSW). (Of those stocks, Dain Rauscher Wessels has a banking relationship only with Broadbase; Steele has strong buys on Siebel and Broadbase, and a buy on Kana.)

Companies, because of their market cap, in less of a position to be consolidators right now, says Steele, include PrimeResponse (PRME), eGain Communications (EGAN) and Primus (PKSI). (DRW has a banking relationship with PrimeResponse; Steele rates that company and Primus as buys.)

But Steele also expects a wave of eCRM companies to go public in 2001 -- specifically, sales-management software that isn't installed on customers' machines, but hosted on outside Web sites. These companies, including salesforce.com, Siebel spinoff Sales.com and UpShot.com, have a "huge, huge" base of customers they can sell to -- companies too small for current sales-software systems.

First Things First

But before then, companies will have to get through the third quarter.

First Union's Maynard says he notices that over the past three months, customers have calmed down and feel less urgency to make a quick move to decide on an eCRM solution. "It's not just a 'Let's buy the first email response system that shows up,' " he says.

Instead, how companies do in the quarter ending Sept. 30 will make this "one of those quarters that will separate the contenders from the pretenders," Maynard says. It's not that companies are facing dot-com doomsday this year, he says; rather, companies have a limited time to start offering the right products and find the right positioning in the marketplace so they can reach $100 million run-rate revenue plateau -- a plateau that will give companies the currency to consolidate.

Like Steele, Maynard expects further consolidation soon. "The pace of M&A activity is probably going to pick up," Maynard says. "We'll probably see more deals inked post-Labor Day."

But despite the consolidation, says Maynard, there's room for more than one successful company. "Nobody's going to get Amazoned," he says. "This is a great market. ... There's a lot of customer pain to be addressed and solved by vendors."

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