Analyst's Corner: Will wireless breathe new life into e-commerce?

The business model for e-commerce is nothing new. Much of e-commerce software is sold with traditional software licenses, and there is a large amount of integration work that follows each software sale.

In an ideal world, we’d deploy e-commerce into entirely new IT environments—and not have to deal with legacy infrastructure. Sadly, this is not the case. Many e-commerce initiatives are running into legacy integration efforts that include massive enterprise resource planning (ERP) systems and other corporate enterprise application integration (EAI) initiatives. Consequently, e-commerce is fitting into an increasingly complex IT environment that includes:

• ERP systems like SAP and PeopleSoft

• EAI projects for providing integration between applications

• Browser-based Web applications

• Web-based e-commerce applications

When you look into the product set of leading e-commerce companies, you see that application adapters and other legacy integration tools predominate. There are very few e-commerce installations that don’t involve some form of legacy integration.

Professional Services: The Stumbling Block

Integration is the key problem, as it creates the need for e-commerce software companies to build professional services divisions. But professional services is a lucrative business that suffers from a simple problem—you’re only as good as your last consulting project. The financial community agrees and tends to value professional services at significantly lower multiples than traditional software companies—usually at one tenth the rate.

• Professional Services Firms: 1-2 times revenues

• Software Companies: 10-20 times revenues

Even large software companies—like Oracle—have big professional services groups. At Oracle, professional services accounts for 56% of the company’s revenues. Many growing e-commerce software vendors are fearful that the professional services component of their business will eventually drive their valuations down to the point where they lose their ability to acquire other companies as needed.

Recurring Revenues

This is where many e-commerce and EAI vendors are looking at the application service provider (ASP) model. They reason that they will be able to hold their margins and their valuations by creating a recurring revenue model—sort of a pay-by-the use licensing model for e-commerce software. This is the impetus behind much of the B2B market activity, where exchanges and software companies can charge—by transaction—for their software and services. This will not eliminate the need for integration, but will change the underlying business model and the company valuation for the better.

A proof point for this is that earlier this year, SBC Communications purchased Sterling Commerce and added e-commerce software to their repertoire of services.

The Lack of Branded Client Software

E-Commerce software runs in the background—with Web browsers as the only visible client software. This represents a huge branding issue for companies who face the continual issue of relevance. Effectively, if software runs on a network—and nobody sees it run—is it worth a brand?

In a clientless software environment, there will be companies who will brand themselves, but many will fall to the wayside. Oracle sells the ever-intangible database, but its competitors have fallen slowly to the wayside. In a market for intangible software, there is room for only a few brands.

Like the database business, e-commerce technologies center around workflows, business process modeling and transaction processing. These intangible technologies are difficult to brand.

Is Wireless Really Different?

Wireless "m-commerce" solves several problems for e-commerce vendors and new entrants facing a battle for relevance in an increasingly crowded marketplace.

1. Business Model: Wireless customers are paying customers—unlike traditional Internet access. There are well-established business models for offering services to wireless customers.

2. Recurring Revenues: Because there is a chance to charge a wireless user for the opportunity to process a transaction, there is a better chance for the back-end software vendor to charge a per-transaction fee.

3. Better Opportunity to Brand: The "browser war" has yet to happen in the wireless world, and the additional technologies required to make wireless commerce services work provide a new ground upon which technology vendors can build their brands

4. Better Valuations: The financial community is rewarding m-commerce business plans today. Number 4 is probably the most important. Now that e-commerce is old news and mobile commerce is new, companies are scrambling to boost their valuations, raise more money and stay in business long enough to see the fruits of their labor.

The Downside

The financial community tends to hold wireless companies to a much higher standard—expecting profitability and subscriber/revenue growth. The downside to the wireless commerce business is that financial analysts will have a well-trodden path for valuing wireless commerce vendors--and they’re quick to punish companies who don’t meet expectations. Nationwide wireless carriers like Sprint PCS and Nextel Communications have recently been hammered by the financial community for missing revenue/subscriber growth expectations. It will be interesting to see how m-commerce companies valuations change when wireless commerce services fall short of expectations.

High tech is not the Indy 500--and we’re not waiting for the crashes and flameouts. The reality is that the financial community has created a system of positive reinforcement for new technologies and business models that will replace "the old way" of doing things. The companies who develop e-commerce software are simply software companies who have seen their valuations rise to a point where they are hamstrung by their valuations—they have to continually appear to be innovators who are rewriting the rules for their industries. This is a difficult challenge.

For wireless commerce, it will be interesting to see what services will actually sell. Like everyone else, we’ll be in line for the new gadgets as quickly as they appear.

Dan Taylor and Barton Taylor are Analysts at Giotto Perspectives, Boston, MA.

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