Commerce One, the business-to-business (B2B) software company, has pulled out of the e-marketplace operations business that it did so much to create with the sale of its Commerce One.net business unit to eScout, a private US-based e-marketplace services company.

All three of Commerce One.net’s lines of business, including Marketplace Operations, Managed Applications Services (MAS), and Content Operations are being sold to eScout.

The deal should be completed by the end of the first quarter of 2003. Financial details have not been disclosed, although Commerce One has increased its undisclosed equity stake in eScout.

The move is likely to be well received by Commerce One.net customers. They will continue to receive the same levels of support for their e-marketplace initiatives, but will be part of a much larger and diverse community of businesses that use eScout.

For Commerce One, the sale was unavoidable. Although the company boomed during the late 1990s selling e-marketplace technology, it was hit hard when the e-marketplace industry began to collapse at the end of 2000 as the Internet fervour died down, and customers faced the expensive reality of integrating business partners online.

Since then Commerce One’s revenues have been falling steadily. For the third quarter to the end of September 2002, Commerce One reported a net loss of $46.9 million on revenues of just $26.4 million. Its cash pile had fallen to $110.7m from the $192.5m at the beginning of the year, according to financial filings.

Compounding these difficulties, Commerce One’s two-year long software licensing partnership with enterprise applications giant SAP ended in the third quarter of 2002. Royalties paid by SAP to Commerce One accounted for 96% of the company’s total third-quarter licence revenues.

Until Commerce One can build up new licence revenues, the companies’ separation will make Commerce One almost entirely dependent on services revenue, which stood at $17.9 million for the recent third-quarter.

Commerce One has not revealed how much of its service revenue was generated from Commerce One.net, and how much the company will be left with now that it has sold this unit to eScout. Commerce One says, however, that its ‘significant’ investment in eScout will generate some income – implying that its stake is high enough for profits to be apportioned to Commerce One.

Commerce One’s strategy is now clear, but the road ahead challenging. Without e-marketplace services, it has two remaining product areas: Commerce One Conductor, a new flexible web services-based application integration platform; and Commerce One Supplier Relationship Management (SRM), a set of goods procurement and sourcing applications.

These products, which have recently been rebuilt on an web services component architecture, will drastically reduce the cost and difficulty of integrating application processes between two business partners, says Commerce One. Certainly, the architecture has been lauded by supply chain analysts, including e-marketplace analyst Pierre Mitchell at AMR Research.

However, Mitchell also highlights the fact that Commerce One’s SRM applications, which will increasingly use the Conductor platform, have not yet successfully competed in the SRM arena.

The difficulty is that the integration and SRM markets are very different, says Mitchell. “Rich functionality and domain expertise define SRM products, which are sold to a very discerning set of procurement and supply chain managers – in the face of intense vendor competition. A web services strategy is dependent on selling into the IT department and also cultivating an ecosystem of independent software vendors to build on top of the platform,” says Mitchell.

Commerce One, which recently laid-off 350 of its staff, will find it difficult to support both businesses without “commensurate revenue”, says Mitchell.

Yet, Commerce One senior executives are still optimistic that they can turn the company around and reach profitability by the end of 2003. The recent restructuring will save the company an estimated $17 million per quarter, says Narry Singh, the company’s vice president of strategy. And apart from the sale of Commerce One.net, the company managed to buoy up its cash position in September 2002 with a $25 million loan from Santa Clara, California-based Silicon Valley Bank.

These, however, are one-off actions. Now that the groundwork has been laid, Commerce One must find a significant number of customers for its well-Conductor and SRM products over 2003 – or it may have to start sourcing a buyer for itself.