We recently covered the advances in broadband and its potential impact on Microsoft in the articleBandwidth Is Microsoft’s Enemy!!!. Based on recent developments in the application market space, Bill Burnham writes an interesting piece, titled Can IBM stay out of Application Software Business. Excerpts with edits and my comments added:
The software industry is evolving to the point where it may be impossible for IBM to stay out of the applications business if it wants to remain competitive over the long term.
Two Drivers :
- The first force is consolidation across the stack set in motion by IBM’s competitors and,
- The second is increasing price competition within the core infrastructure software business.
In terms of the software industry’s vertical consolidation, the most recent example of this consolidation has been Oracle’s acquisition of Peoplesoft.This acquisition is helping Oracle to solidify and legitimize its vertical software suite, which starts at database moves up to Oracle Application Server, and then ends with Oracle’s Application suite (and some Peoplesoft components). For IBM, the Oracle deal is bad news as four months back Peoplesoft announced it was going to base all its products on IBM’s infrastructure software. Instead, Oracle now may try to migrate all of those customers to an Oracle-only software stack which could hurt both IBM’s Websphere and DB2 businesses.
While,Oracle is trying to move its center of gravity up the stack into applications, another major software company, SAP, is trying to move down from applications and into the infrastructure, SAP’s NetWeaver application server and suite of infrastructure software products is clearly designed to try and create a Websphere-like layer of branded infrastructure software that SAP can sell to its customers … in place of IBM’s software. The only missing piece is SAP branded relational database.
Jeff Nolan points out that SAP had a branded relational database, SAPdb that is now in the open source community. -it was the old Adabas product and quite substantial. Recently, SAP cut a deal with MySQL whereby they would get the core development assets for SAPdb and assume the support role, they are also using the technology in a new generation of products that will be more able to take on the DB2 and Oracle offerings).
Both SAP and Oracle appear to be taking a page out of the playbook of Microsoft, which tightly tied its office applications to operating systems. One can imagine similar efforts underway at SAP and Oracle where engineers are tightly integrating applications into their supposedly “open” application servers to the point where those applications only seem to work best on each company’s infrastructure stack.
Outside of consolidation, IBM’s is also under attack from pricing pressures, particularly within the infrastructure software space. This pricing pressure is coming from two fronts:
- The integrated vertical players and the open source players.IBM can’t respond to such “bundling” tactics because it lacks an applications business.
- On the open source front, while IBM embraced Linux as a way to defeat Sun’s and Microsoft’s push into the glass house, they have created somewhat of an uncontrollable monster that threatens to erode margins in their application server and messaging products. With corporations embracing Linux as an operating system, many are now looking at open source applications servers (such as JBoss) and databases (such as MySQL) as potential ways to cut additional licensing fees. This pricing pressure is starting to be felt in the infrastructure space with per CPU pricing for application server licenses declining quickly even as IBM and BEA bundle more and more functionality into their products in an effort to justify their premiums relative to open source alternatives.
It appears that IBM’s response to these trends has been to redouble its efforts to make its infrastructure the center of the software universe by fragmenting applications into lots of little pieces. By heavily pushing J2EE, grid computing and SOA’s, IBM is trying to fragment the application layer into lots of little pieces. Fragmenting the application layer lets customers mix and match best-of-breed application components and therefore undermines much of the utility and rationale for monolithic application suites such as R3.It also benefits IBM’s services business by making it easy for customers to custom develop application components and integrate them with 3rd party software.
While in the long term such architectures may predominate, in the short term customers are still looking for solutions and it’s still very difficult to piece together a robust enterprise application using next generation technologies and architectures.IBM may be forced to enter back into the enterprise applications business, if anything, as a purely defensive move against its chief rivals IBM would have to cobble together a solution by buying several companies such as Siebel and Lawson. One school of thought is that IBM may simply fight a rear guard action and be content to gradually let its software growth and margins decline as software isn’t really its core business now anyway. From this perspective, IBM will accept gradually lower margins and growth in its software business as simply the price to pay for keeping its services and hardware businesses in the black. After all, IBM had its chance to get into the applications market by buying Peoplesoft, and instead of playing the white knight (which Peoplesoft clearly desperately wanted IBM to do), it just stood by and let Oracle acquire Peoplesoft without batting an eye. It’s hard to say which strategy IBM will settle on, but it is clear the software world is changing and the status quo won’t survive over the long term. Clearly the sofwtare industry is consolidating, but IBM being IBM can perform a few tricks and disrupt this logical course of action - relate these to the increased focus on web services, SOA etc.. After all SAP and Oracle put together may have just 60,000 customers globally - it can be safely assumed that 1/4th of them are IBM customers - Tomm, we shall look at some points suggesting that things may not dramatically change for IBM in the application software space.Watch this space for related thoughts in the weeks to come.