BEA Isn’t Scared of Big Blue

For a software company that holds the distinction of being the fastest to
reach $1 billion in annual revenue, BEA Systems Inc.
seems to have a chip on its shoulder lately.

In the last week, the company released statements with headlines like “BEA
WebLogic Server Kicks Apps” and “BEA Sets the Record Straight on Web
Services Leadership.”

BEA has reason to feel defensive. After enjoying a comfortable lead in the
booming application server market, the San Jose, Calif.-based company saw
its wide margin of leadership shrink under pressure from IBM Corp. . Now, it
appears the two companies are locked in a defining battle for the lead in
the market.

A Two-Horse Race
In the latest
research on 2001 license revenues
, IBM pulled into a near dead heat with
longtime leader BEA. BEA has cast its lot with its WebLogic
application server
, which runs on Java. IBM launched its own Java-based
WebSphere
application server
two years ago. Since then, WebSphere has closed the
gap.

The 2001 figures appeared to be a sharp turnaround for BEA, with its lead in
the market shrinking from 11 points to 3 points. IBM used the more cautious
spending environment to capture business from Sun and vendors like Borland,
Sonic Software and Fujitsu-Siemens. Despite the attention paid to IBM’s
gains, BEA actually grew its market share, albeit only by 1 percent.

“Even in the face of IBM’s massive marketing machine, BEA has continued to
be the leader,” says John Kiger, BEA’s director of product marketing. “That
speaks to the value that BEA brings to its customers.”

But it also set up a clear fight between BEA and IBM for the lion’s share of
the market.

“There’s been a big winnowing out among the top vendors,” says IDC analyst
Michele Rosen. In IDC’s research, BEA and IBM had accounted for 58.4
percent of the market. Now they take up 75 percent.

BEA, in many ways, has been a victim of its success. The market for
application servers is huge and growing fast. According to Gartner Group, it
grew 92 percent from 1999 to 2000, scraping the $1 billion mark. But growth
slowed to 20 percent, to $1.2 billion, as the economic downturn continued to
take a bite out of corporate capital spending.

Gartner predicts the market will continue to grow steadily, reaching $3.2
billion by 2006. The size of the market attracted IBM, which has
aggressively used its sales-and-marketing juggernaut to push WebSphere.

“They’re in the rearview mirror,” says Gartner Group analyst Joanne Correia.
“It’s no longer a technology game, it’s a brand-marketing game, and IBM’s
the king of that.”

Continue with BEA’s Five-Year Plan on page 2…

BEA’s Five-Year Plan
After years of skyrocketing growth, which saw the company grow to over $1
billion in revenue in just five years, BEA has hit its first rough patch. In
its last quarter, BEA’s license fees fell nearly 19 percent to $131.1
million, compared to the same quarter a year ago. Although the company
boasted wins with Dell standardizing its operations on BEA servers and Intel
using BEA as a platform for its enterprise server strategy, BEA reported net
income of $3.9 million, down 81 percent from last year.

“It’s really been a story of commoditization,” says IDC’s Rosen. “There’s
been a lot of price pressure on the companies in the space.” BEA’s WebLogic
is priced about 20 percent higher than IBM’s WebSphere.

However, despite a year of anemic tech spending, the company still managed
to increase license revenue 63 percent in its 2001 fiscal year. “BEA’s not
going to go away,” says Correia

BEA CEO and President Alfred Chuang — who, as a founder, is the A in BEA –
says BEA is holding its own in a brutal market. “I am very encouraged by the
level of customer interest and business activity,” he told investors last
month. “BEA is well positioned for an eventual recovery in IT spending.”

When that recovery will occur is the question. According to some
researchers, IT spending won’t start growing again until the end of this
year
or in early 2003. In the meantime, investors have turned pessimistic about
BEA’s fortunes, cutting its market worth nearly in half since early January.

According to Gartner’s Correia, the application server market is dividing
into the high-end, with IBM and BEA unleashing servers breaking the
millions-of-transactions-per-minute barrier, and the small- and mid-market,
where HP and Microsoft battle with low-cost offerings.

“The challenge for BEA is where do they move to,” she says. “In the last
year, they’ve had every major software member announcing products in their
sector.”

Continue with Opening Up Markets on page 3…

Opening Up Markets
One area BEA has moved into is in development tools, with the WebLogic
Workshop. Unveiled
in February
, WebLogic Workshop is a development tool to bring Java to
the masses, allowing non-Java-savvy developers to utilize the J2EE platform
. With only 2 million J2EE enterprise architects, but 9
million
developers using procedural languages, BEA hopes it will widen its market
for WebLogic servers.

Correia points out that development tools aren’t anything new. “They’re not
an innovator,” she says of BEA. “They’re a fast follower, a very fast
follower.”

Moreover, Correia says the market is in transition, with lines between
products blurring into application platform suites. In the bundled market,
BEA is not faring as well. IBM ranked first with 33 percent, followed by BEA
with 24 percent, and Oracle with 12 percent.

“It shows that we have the momentum in the market,” says IBM spokeswoman
Laurie Friedman. “Companies are looking for a fully integrated e-business
platform.”

However, BEA’s Kiger says IBM is just relying on marketing hype with its
platform offering. “When you look at WebLogic versus WebSphere, in BEA’s
case what you have is an offering based on a common set of technologies,” he
says. “This unified architecture is what delivers lower cost of ownership.
IBM’s is a over 100 products slammed together under a marketing brand but
lacking an underlying architecture.”

In a way, BEA’s position is similar to that of Oracle, which has seen IBM barge
into its core business
to capture the lead in the overall database
market. Echoing a Oracle’s claim, BEA says IBM sells its application
servers on the cheap, packaging them as part of larger service deals,
only to require an army of consultants to tie the system together — and
drive up the costs.

Another possible front for BEA opened a little more than a week ago, when
No. 3 application server company Sun Microsystems announced it
would bundle its Sun One application server
into its Solaris 9 OS by the
end of the year. WebLogic counts on Solaris for 60 percent of its
installments.

Kiger points out that Sun was consistently beaten in the market. “This is a
move at trying to salvage some value out of what has become a very small
player in the application server market,” he says. “It signals to that the
company isn’t serious about the market.”

For BEA, the differentiation is that its application servers are rated tops
in the industry. But, as many companies have found, free can be hard to
beat. Talking to an investment conference last week, BEA CTO Scott Dietzen
said the company needed to stay nimble to stay ahead.

“In the long term, BEA has to offer better technology, better ease of
development,” he said. “I would argue this is something IBM has not
historically dealt well with.”

For BEA, the test is how well it deals with the pressure from IBM.

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