Back in 2000, Commerce One CEO Mark Hoffman was forecasting a major shake-out in the computer industry. But he could not have thought that his company would be one of the victims.

Indeed, by the end of the summer, the vultures might well be circling expectantly over the much down-sized headquarters of Commerce One – unless Hoffman can pull off some kind of magic act. That magic comes in the form of Conductor, the company’s new tool for building composite applications and processes using web services technology. Analysts say it does what it says.

Although Commerce One had $74.6 million in cash and short-term investments at the end of the first quarter in March, it admits that it is still burning cash at such a rate that it could all be gone by the end of the year.

It is a far-cry from Commerce One’s halcyon days less than three years ago, when it was fighting its arch-rival Ariba for control of the emerging e-procurement exchange software market. In 2000, the company grew by an astonishing 1000% and revenues peaked at $191.4 million in the closing quarter.

Then everything started to go wrong: customers grumbled about the quality of the software, the IT spending downturn and a shift away from e-marketplace investments hit Commerce One particularly hard, and enterprise resource planning (ERP) software vendor SAP wound down its strategic alliance with the company.

That last event was critical and must have been especially galling for Hoffman. SAP accounted for a major proportion of Commerce One’s sales, and, moreover, Hoffman had reportedly turned down a takeover approach from the ERP giant in October 2001.

Rebuffed, SAP developed its own e-procurement software and Commerce One still has not recovered from the blow. In the first quarter of this year, Commerce One posted revenues down by 59% to $13.1 million, although its net loss of ‘only’ $29.3 million was quite a triumph compared to the $211.7 million chalked up in the first quarter of 2002. Yet more restructuring costs, the ending of the SAP agreement, a shift away from services, the sale of its e-marketplace network and the shift over to Conductor all played a part.

Compared to its peak quarter in 2000, revenues have plunged by 93%.

Yet its once great rival Ariba – where revenues also nose-dived in a similar fashion from 2001 – has posted stable revenues in the range of between $50 million and $60 million for more than a year now.

In its second fiscal quarter to the end of March, Ariba revenues edged up 3% to $59.3 million, and although net losses still weighed in at $51.6 million, that was largely due to the amortization of $49 million of goodwill associated with past acquisitions.

How did Ariba arrest its decline? Quite simply, the company concentrated on adding new functions to its core software. In contrast, Commerce One failed to rein in its spending and its strategy has appeared confused. It has, at various times, emphasised e-procurement, e-marketplaces, spend management and now composite applications. However, the company does appear to have won at least five big customers for Conductor. It will need quite a few more before the year is out.

800 pound gorillas

According to investment bank Lehman Brothers, the ERP software market contracted by 17% in 2002 and will decline by a further 17% this year. Even market leader SAP has been feeling the pain, so it should come as no surprise that mid-market vendor Intentia has also been hit.

The only surprise, perhaps, is that initially Intentia had seemed impervious. CEO Bjorn Algkvist had suggested early last year that the company might be able to ride out the downturn thanks to its long pipeline and the fact that it does much of its implementations itself.

Now even Intentia’s pipeline is running dry and there is still no end in sight to the IT spending downturn. Furthermore, Intentia can expect increasing competition from SAP as it prepares a renewed assault on the mid-market with its new Business One offering, which has been written from the ground up to appeal to the mid-market.

Siebel Systems CEO Tom Siebel should be able to tell Algkvist what it is like to face competition from ERP’s 800-pound gorilla SAP.

At the beginning of 2001, Siebel could boast a four-fifths share of its core customer relationship management(CRM) software market. But since SAP launched its own CRM modules that year, Siebel’s share has subsequently fallen to under 40%, according to Lehman.

Little wonder that Siebel’s revenues fell by one-third in the first quarter, from $477.8 million to $332.8 million. However, tight cost control enabled it to eke out a net profit of $4.6 million.