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Commerce One shifts to old territory

After a tough year, the company releases software that reflects a move away from the large electronic marketplaces that were once its sweet spot.

The latest version of online procurement and auction software from Commerce One reflects a corporate shift away from the large electronic marketplaces that were once the company's sweet spot, but that have fizzled over the last year.

"(The move) shifts them from the mega-marketplaces to enterprise applications that help companies work with their key suppliers and identify opportunities to reduce costs," said Brent Thill, an analyst at Credit Suisse First Boston.

Commerce One 5.0, to be officially unveiled next week, indicates a return to what the company considered its main offerings before it seized on the e-marketplace boom.

Once a key player in the business-to-business market, Commerce One struggled in 2001 when the market for large, public electronic marketplaces faltered. The e-marketplace software maker laid off nearly half its staff in a major restructuring effort and posted a $2.58 billion net loss for the year.

With revenues falling in the company's fourth quarter, Commerce One hopes to regain its footing with the new products, available in April.

Commerce One is also selling the 5.0 applications in smaller, cheaper components, such as the new auction and supplier negotiation software, which starts around $300,000 to $500,000. The package of e-procurement applications--the most basic package previously available--was cut from $1 million to $200,000.

Oracle, a competitor of Commerce One, also announced cheaper pricing recently for its business application suite.

But analysts doubt bargain-basement prices will bring in more business. For one thing, software vendors typically mark prices way down during sales negotiations, so the published prices are always a moving target. In addition, business needs take priority over price in most software purchasing decisions.

"If it's something that customers really need, they'll step up and pay for it," Thill said.

Commerce One is betting that companies need software that automates purchasing more than e-marketplace applications. Eleven customers are already using the beta version of the 5.0 software.

Analysts say that's a safe bet.

"Companies are realizing that a lot of their costs are locked up in inefficient processes," Thill said. "With the economic downturn, it has exaggerated the need to put in new process and new technology to help improve cost management."

E-marketplaces were also supposed to cut down on inefficiencies by putting the business transactions of entire markets online, but they've proved to be an unwieldy and disappointing endeavor for Commerce One and rival Ariba.

The two rivals signed up companies to build e-marketplaces at a fast and furious pace before the dot-com bomb dropped. While Ariba simply collected software license fees from its marketplaces, Commerce One tied revenues to an anticipated windfall of transaction fees that the marketplaces were supposed to produce. It also took equity stakes in many of its marketplaces. The company has yet to cash in on either side of the deals.

None of the e-marketplaces it supports have gone public, and Commerce One said Tuesday that it saw no growth in revenues derived from e-marketplace transactions in the company's fourth quarter.

Among the largest and most high-profile of these exchanges is Covisint, formed by Commerce One, Oracle, General Motors and Ford in 2000. U.S. Bancorp Piper Jaffray analyst Jon Ekoniak estimates the auto-parts exchange produces quarterly revenue for Commerce One of $1 million to $2 million, or less than 4 percent of Commerce One's total revenue.

Commerce One Chief Executive Mark Hoffman admits he expected more from the deal, but refuses to throw in the towel.

"My goal is to get liquidity going there," Hoffman said. "It's getting better but it's a little slower than we'd all like to see."

Such experiences have changed the company's strategy, Ekoniak said: "I don't think they would enter into the same kind of relationship today."

Commerce One faces off against rivals SAP, Oracle and Ariba, all of who are shifting away from large e-marketplaces to expand into the e-procurement market. The company says the 5.0 release will differentiate it from the competition with a set of tools that make setting up and configuring the software easier and more intuitive. The tools were incorporated from software it acquired in the acquisition of start-up Exterprise last year, which allows companies to configure the software to match their unique business processes.

The company also announced a marketing partnership with Compaq Computer on Tuesday that targets small to mid-size companies. As part of the deal, Commerce One is now shipping its e-procurement software bundled with Compaq ProLiant servers and Compaq consulting services. The system can be set up in as little as 15 days, according to Commerce One.

News.com's Sergio Non contributed to this report.