Sometimes, it's the companies that
aren't
involved in a deal that tell its tale.
On Wednesday, a press release went out announcing that media giant
Viacom
(VIA) - Get Report
had picked little-known
elcom
, a unit of
Elcom International
(ELCO)
, to manage its purchases over the Internet.
elcom, a midget in business-to-business software compared to the likes of
Ariba
(ARBA)
and
Commerce One
(CMRC)
, somehow managed to land this big fish. The company did it, apparently, on one point that's becoming a bigger issue when it comes to software that lets companies buy office supplies over the Internet: price.
"When we first started evaluating this product, the pricing was significantly less than a lot of the big players that we looked at," said Bill Ross, vice president of east coast operations for
CBS
, a Viacom unit. Those companies included Ariba and Commerce One. "We wanted to ensure that as we rolled it out in the organization, we would have a stable cost structure throughout the relationship."
Ross says that tiny little elcom, which has a
market cap of just $35 million, had the goods he needed.
Chugging Up the Hill
"These guys are the little engine that could," Ross said.
But the Viacom contract, while certainly important for elcom, may speak more about what's happening in B2B than about elcom itself. Because CBS was already an elcom customer before that company's acquisition by Viacom, the announcement was correctly viewed by the market as being less than big news. Shares of Elcom International fell a few cents on the day it was announced.
But investors in Ariba and Commerce One might want to examine elcom's victories when considering their prospects. Namely, as can been seen by the emergence of elcom and other, smaller competitors like
Idapta
and
RightWorks
, the software they build doesn't involve rocket science. In fact, many analysts are starting to compare it with the type of software that
Amazon.com
(AMZN) - Get Report
uses for its Web site, something that can be quickly and cheaply replicated.
Many of the procurement software programs on the market "are starting to look a lot more similar to me," says Patrick Walravens, an analyst at
Lehman Brothers
. "If I do one more product demo where you pick something from a catalog and pass it on to your
pretend supervisor for approval, I'm gonna go crazy."
Cool Ratings
In a recent research report, Walravens initiated coverage on Ariba with a neutral and Commerce One with an outperform. One of his reasons? Penetration of software that lets companies buy office supplies over the Internet has reached nearly 25% in the U.S. "Our conversations with customers suggest that as penetration rates climb, Ariba is encountering increasing pricing and growth pressures," Walravens wrote. (His firm hasn't done underwriting for Ariba or Commerce One.)
And other analysts see similar trends. By some estimates, there are as many as 40 software companies competing in the indirect, or office supply buying, business. With some of the smaller ones offering paper-and-pencil buying software programs in the $100,000 range, as opposed to $1 million or more for products from the likes Ariba and Commerce One, companies may well decide to go with the small unknowns that cost less, especially for things that aren't critical like staplers and folders.
Which isn't to say that Ariba and Commerce One are going to fold any time soon. Both companies have repeatedly said demand for their products has remained strong during the fourth quarter, even as evidence of a technology spending slowdown has emerged. Indeed, many analysts give Ariba credit for being the fastest-growing software company ever. And they're both adding functions to their products.
But both companies now need to expand to direct procurement software that lets businesses buy manufacturing raw materials, like steel, over the Internet, which is much more complex.
Partners
While Ariba is partnered with
i2 Technologies
(ITWO)
and Commerce One has teamed with
SAP
(SAP) - Get Report
to help them do this, neither company has that kind of software in its core arsenal of products.
On the other hand, elcom is hardly in danger of becoming the next Ariba or Commerce One anytime soon.
The company has had a hard time getting its own stock off the ground. Thursday it tumbled 19 cents, or 13.6%, to close at $1.19. The stock's 98% off its all-time high of $50.50, reached a year ago.
Still, for the moment, it can say that it's present when it comes to Viacom, and Ariba and Commerce One aren't.
