NIST GCR 02-834
Benefits and Costs of ATP Investments in Component-Based Software

Determining the economic benefits from the ATP-funded Commerce One Joint Venture was a challenge.  The firms involved have gone through several organizational changes since the inception of the project, and the leading firm, Commerce One, went public in 1999 and was subsequently caught up in the Internet bubble and its aftermath.  The following sections contain RTI's valuation methodology for the products created from the technology produced; several other possible approaches could also be justified.

A brief history of the joint venture shows some of the changes that the companies have experienced:

• The joint venture was formed in 1997 by an e-commerce trade association, CommerceNet, and three start-up firms, VEO Systems, Tesserae Information Systems, and BusinessBots.  VEO, initially called CNGroup, was formed from the R&D arm of the trade association and became the joint-venture lead.
• From October 1997 through December 1999, the joint venture led by VEO Systems received about $4.8 million in matching funds through the ATP program.
• From January 1997, when VEO Systems was founded, through January 1999, when it was acquired by Commerce One, VEO Systems raised roughly $5 million in other sources of funds, mostly through investment by strategic corporate partners.  These funds provided the "matching funds" share for VEO Systems in the ATP program.
• In January 1999, VEO Systems was acquired by Commerce One in a stock swap that valued VEO Systems at $22 million.  Based on interviews with Commerce One, most of the value of VEO Systems in the Commerce One acquisition was for technology developed under the ATP project.
• In July 1999, Commerce One went public at $21 per share.
• Tesserae, which had been renamed Cadabra, Inc., was purchased by GoTo.com on January 31, 2000.  The purchase price was $8 million in cash and shares of GoTo.com then valued at $250 million.
• In January 2000, Commerce One briefly traded at a split-adjusted price of about $700 per share.
• As of November 2001, the stock price of Commerce One was $2.45, and the future of the company was uncertain. 
• GoTo.com, now called Overture Services, wrote off its investment in Cadabra's technology during 2001.  BusinessBots appears to have stopped operating as well.

B.2.1 Demographics of Joint Venture Partners

Notes:  VEO Systems was purchased by Commerce One in January, 1999.  Tesserae, renamed Cadabra, was purchased by GoTo.com in January, 2000.

B.2.2 Technology Description

Goals of the ATP Project

The overall goal for the four joint-venture partners that participated in the ATP project was to develop new architectures and technologies for building Internet marketplaces.  The firms hoped to develop a product that would let businesses build on each other's Internet services, using them as components to create innovative virtual companies, marketplaces, and trading communities.  The fundamental problem was how to combine heterogeneous documents and other sources of information coming from a wide variety of Web sites, catalogs, databases, ERP systems, news feeds, and other applications.  This information invariably exists in incompatible formats and semantic models, which means that the information one business provides to another cannot be used directly by the recipient's computing applications. 

Technical Accomplishments

The Commerce One JV achieved significant technical breakthroughs to transform new ideas into complementary, scaleable, and commercially viable tools and software platforms for creating Internet marketplaces.  The key achievements include the following:

• XML-based Common Business Library (xCBL);
• "intelligent" tools for transforming Web content into XML and other structured formats that can be processed by computers to support application integration, comparison shopping, and agent-based process invocation; and
• architectures and concepts for describing Internet marketplaces, their participants, the services they offered, and the information needed to operate them (the eCo Framework). 

Customer Use of the Product

As a result of VEO System's leadership and its subsequent incorporation into Commerce One, Commerce One was the firm to commercialize the primary technical results produced by the JV.  Customers would purchase the virtual market products from Commerce One and then develop trading markets where different suppliers and customers would be able to purchase products from anyone in the virtual market.  Commerce One's XML-based MarketSite platform is supporting many of the largest business-to-business procurement communities in operation today, including Exostar (aerospace industry), Covisint (automotive), Forest Express (paper products), Quadrem (mining and metals), and Trade Ranger (energy and petrochemicals).  Because MarketSite is Commerce One's main product, we used it to estimate the economic performance of the project

Future Products

Currently Commerce One is not planning on developing any new products.  Rather, they are planning on refining and improving their existing suite of products.

B.2.3 Project Performance

In this section, we estimate the economic performance measures for the ATP-funded Commerce One joint venture project.  In our effort to obtain the information needed to perform the valuation, RTI conducted a structured interview with Robert Glushko, the principal investigator from the lead firm.  We asked questions about product life spans, actual and projected sales, and total project costs.  Because GoTo.com has written off their JV-developed technology and BusinessBots is no longer operating, we did not attempt to value additional products from the JV.

We obtained some information from the interview with Mr. Glushko. In addition, Commerce One's status as a publicly-traded corporation meant that a great deal of additional data was available from public sources.  The information we obtained was sufficient to derive demand curves for the products sold, and to estimate consumer and producer surplus and R&D expenditures.  Based on these estimates, we calculated the net present value, benefit-cost ratio, and the internal rate of return for the component software joint venture.

Product Life Spans

Although other companies tried to develop similar products based on Commerce One's success, Commerce One is clearly the leader in this area.  However, because other companies are starting to develop competing projects, we limited our analysis through the year 2003.  After this time, we conservatively assume that competing products will have emerged and no longer include benefits from Commerce One.

Commerce One's MarketSite product differs from other component-based products because of the significant amount of customization that is required to develop a "marketplace."  This reality dictates the approach that is used to determine the price of Commerce One's products.  Each marketplace that they establish is a unique entity; although the technology overlaps across the products, a significant amount of customization must occur, which makes determining a marginal cost impossible.  According to data from annual reports for Commerce One, the average cost of developing a marketplace is just over $1 million.  This is a one-time cost that must be netted out of the total benefits generated during the year that a new marketplace is developed.

R&D Expenditures for the Technology

All of the JV partners provided funds to the technology development effort.  A substantial share of the amount VEO Systems received as a result of its acquisition by Commerce One was also invested in the ATP-funded technology. 

Estimation of Performance Measures

Commerce One is generating large public and private benefits from its MarketSite product.  From estimates of the number of units sold and price, we estimate that in 2000 alone a consumer surplus of over $150 million was generated; for 2001, we project that surplus to rise to $200 million.  Even with substantial reductions in new implementations forecast for the next two years, the cumulative benefits by the end of 2003 will exceed $800 million in inflation-adjusted (2000) dollars.

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Date created: December 3, 2002
Last updated: August 2, 2005

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