Is BEA Systems the Next Microsoft? Part 1
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RULE THE WORLD
Is BEA Systems the Next Microsoft? Part 1.
Paul Philp
Friday, September 7, 2001
Lots of technology companies vie to be a Gorilla -- but BEA Systems may just really be one.
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Welcome to the second era of computing and information technology. Today we may be seeing the rise of the first Gorilla of this new era – BEA Systems, potential Gorilla of eBusiness Infrastructure Software and a serious contender for the oft-sought and oft-lost title of "The Next Microsoft."
BEA Systems is the leading vendor of software infrastructure products that enable the transformation of a business to an eBusiness. The core technology, the application server, separates the business logic and rules used in enterprise applications from the front-end user-facing software (PC, Browser, PDA, Cell Phone) and the back-end database-facing software. This particular structure is much more flexible, adaptable and scalable than any previous generation of enterprise software. The application server technology implemented by BEA and its primary competitor, IBM, is called J2EE – for Java 2 Enterprise Edition – an open standard based on the Java programming language.
Even if BEA is a Gorilla, being a Gorilla in a new market is not enough to earn the title of “The Next Microsoft.” A worldwide opportunity to define the next computing paradigm must also exist. We shall begin our inquiry into BEA systems with this opportunity.
The 2nd Era of Information Technology: Technology as Infrastructure
If the New Economy could talk its first words would surely be, “The rumors of my death have been greatly exaggerated” -- followed by a plaintive cry, “Nobody understands me anymore”.
In spite of the current popularity of denying the idea, the advent of the Internet has indeed unleashed a fundamental change in the economics of commerce. The lessons of the dotcom meltdown have been branded into the genetic material of every technology business on the planet - you cannot ignore issues of profitability for the sake of growth, visibility for the sake of sustainability or strategy at expense of speed.
In this New Economy the basis of competition is fundamentally transforming. Matt Tomkins explained these key transformations eloquently in the July 2001 issue of the Rule The World Newsletter and I will not revisit them here. There is a corresponding transformation in the role technology plays in the economy today and in the future.
The first era of technology was about building technology tools to automate and enhance business processes internal to the enterprise. The first great advantage of technology was that it could perform repetitive tasks quicker and cheaper than people. Information technology does not get bored, does not make random mistakes, does not form unions, does not develop attitude problems and does not complain. The second great advantage of technology is that it frees people to do what they do well: think, create, learn and innovate.
The first era of computing includes all of the first four waves of technology: mainframe, minicomputer, personal computer and client-server. This era also includes the first stages of the fifth wave: distributed computing. However, much of the distributing computing implemented thus far has really been client-server computing layered on top of a distributed computing architecture.
The second era of technology is neither about automation nor internal business processes, although both play an important role. The second era is about connection – connecting individuals with each other, connecting families and communities, connecting businesses with customers, partners and suppliers, connecting customers together. The primary transformation is that technology systems in the first era were designed with a static and isolated view of the enterprise in mind. Technology systems in the second era are designed for the dynamic ecosystem in which the enterprise must exist.
In this new era of computing, technology is no longer simply a tool; instead technology is the infrastructure on which business is built. In this era, it will make little sense to claim your business competes using technology. This would be like saying that a business today competes on the basis that it can make effective use of the power grid, interstate highways and the telephone system.
In many ways information technology has failed to live up to it’s promise. One significant contributor to this failed promise has been the internal focus. For example, since the early 1990s business has invested over one trillion dollars to deploy the client-server architecture in their accounting, manufacturing, human resource, sales, customer support, marketing and product design processes. Despite claims that this investment would free the enterprise from the shackles of bureaucracy, just the opposite has happened. The internal processes that were in use when the client-server systems were first implemented have now been formalized into massive and difficult to change information systems. In effect, we have become caged by the very technology we thought would free us. Client-server technology has become silicon bureaucracy.
The second era of technology, the era of connection and technology-as-infrastructure holds the promise of building flexibility, adaptability, reliability and scalability into the systems from the beginning. Is it any wonder that today the CEO is cutting back on IT spending? She has heard all the promises before and is no longer willing to invest in promise. The first challenge of the technology-as-infrastructure era is results and we will not likely see a significant growth in IT spending until this proof is delivered.
The Return of the Gorilla
Very few ideas have been as discredited during the dotcom boom/bust cycle as the idea of the technology Gorilla. While the boom was in full force the term Gorilla was co-opted. First, it was co-opted to mean a very large technology company. In this way, companies who are not in fact Gorillas but instead Kings, such as EMC, Sun Microsystems, Nortel, and Dell, became known as Gorillas. Second, the term was co-opted to name the large e-commerce web sites as Gorillas. In this way Ebay, Amazon, Priceline, AOL and Yahoo became the on-line Gorillas. The final blow to the dignity of the Gorilla came with the advent of the potential Gorilla. Investors flocked to such potential Gorillas as Redback, Sycamore, Avanex and Ariba.
When the boom turned bust, the stock and business prospects of many of these pseudo-Gorillas resembled the Hindenburg landing in New Jersey. It all ended with a sudden explosion, flames everywhere, people jumping for their lives and many casualties. It is no wonder investors run when they hear the term Gorilla today.
In the meantime true Gorillas remain as rare and as powerful as ever. In the period from 1996 to 2000, I argue that only four companies managed to meet both the technical definition of Gorilla status as well as Gorilla status from first-principles: Siebel, Qualcomm, Veritas and I2. Whether or not this list is correct and exhaustive, the point remains that real technology Gorillas are a truly rare breed and investors chasing a wannabee Gorilla can lose much of their capital.
The possible emergence of BEA Systems as a new Gorilla presents us with the opportunity to revisit the concept and restore the discipline and rigor required for profitable Gorilla Gaming. As you will see in this article, it is easier said than done, and at best, this article will serve as a kick-off to each investor’s own due diligence and thinking. The stakes are very high and as of today the situation is not black and white.
The fundamental idea behind Gorilla Gaming is to reduce the risk of investing in technology companies by identifying companies with very large opportunities and significant and sustainable competitive advantages. The idea is very similar to Warren Buffet’s search for great companies that are under-valued and have large moats protecting their position.
A detailed exploration of Gorilla Gaming is outside the scope of this article but I strongly urge all technology investors to read both Inside the Tornado by Geoffrey Moore and The Gorilla Game by Moore, Johnson and Kippola before investing in any company somebody (including myself) has suggested is a Gorilla.
Moore suggests six properties, which a company must possess to be considered a Gorilla. The definitions are taken from The Gorilla Game, Second Edition (GG) and Inside the Tornado (ITT):
1. Discontinuous innovation.
“Truly discontinuous innovations are new products or services that require the end user and the marketplace to dramatically change their past behaviors, with the promise of gaining equally dramatic benefits.” – ITT pg. 13
2. Proprietary open architecture.
“The power of the gorilla is based on its control over a value chain. That control, in turn, has its roots in what the high tech community calls architecture. Architectures define the way in which various parts of a system hook into one another in order to make the whole thing work. They are incredibly significant because, once an architecture has been agreed to, it is very hard for a competing architecture to gain adoption. Architecture is proprietary when it is under the control of a single vendor, in this case the gorilla. It is open if its interfaces are published and other vendors are encouraged to integrate their products with the gorilla product to create a whole product for a target customer.” – GG pg. 52
3. High barriers to entry.
“Barriers to entry represent the work that a competitor must do in order to match another company’s offer to the customer. The more work, the higher the barriers to entry. In high tech the Gorilla has an advantage – it can make more work for its competitors any time it wants! Any time the gorilla changes any of it’s interfaces, everyone else in the market has to match it just to stay with the standard.” – GG pg. 49
4. High switching costs.
“Switching costs represent work that a customer or a business partner must do in order to change to another company’s offer. The more the work, the higher the switching costs. In high tech, switching costs are exceptionally high. The interdependency of systems can be so complex that wholesale switching is simply not an option. High tech systems become obsolete so fast, taking time to switch eats into the total time one could benefit from the offer” – GG pg. 50
5. Strong value chain.
“A value chain is a linked set of products and services that delivers something of value to an end customer. In the case of a discontinuous innovation, technology of a new and unique capability if being incorporated into products, which propose new and highly, differentiated benefits to customers. For these benefits to be realized, the new products must be integrated into the world’s existing systems, and the resultant whole product must be sellable through a sales channel. Creating a value chain is no slam dunk.” – GG pg. 152-153
6. Tornado market.
It is critical to pay close attention to the definition of a Tornado, for as we shall see next month, this is the issue that will most likely determine how you view BEA Systems.
“The tornado is a metaphor for the hypergrowth stage in technology markets caused when the buying resistance of the pragmatist herd finally caves in, and they rush to adopt the new technology en masse. This creates a massive updraft in demand, and that sucking sound you hear is every supply chain in the world rushing to fill the void.” - GG pg. 34
When this rare breed actually emerges, their ability to create wealth is truly awesome. BEA Systems products fit into the category of enabling systems software – the very category that produced the wealth creating machines of Microsoft and Oracle.
The Disintegration of the Server
In the May issue of the Rule the World Newsletter I wrote that growth in technology proceeds in waves of integration and disintegration. The typical example is how the vertically integrated IBM mainframe disintegrated into storage, CPU, operating system, personal computer, systems management, and application software.
This process of vertical disintegration is now attacking the hardware server and the server operating system. The proprietary CPU is being replaced by the commodity CPU from Intel, the proprietary Unix-based operating system is being replaced by the commodity Linux operating system, the integrated filing system is being replaced by the network-based filer. This process is in the very early stages but, like the disintegration of the mainframe, the economics of the process are undeniable and once started there is no turning back.
Recent events have confirmed this trend. First, Compaq sold the Alpha chip technology to Intel and announced that within three years all Compaq servers will be based on the Intel IA64 chip architecture. Second, Intel announced a comprehensive partnership with BEA to optimize their primary product, the WebLogic line, for the IA64 chip. This relationship gives Intel the killer applications it needs to be accepted in the enterprise server market and gives BEA privileged access to develop relationships with Dell, Compaq, NEC, Bull and every other manufacturer of Intel-based servers (except IBM for obvious reasons).
What is arising in the place of the standalone vertically integrated server is the modular, distributed network of commodity computers and storage. Tying all the pieces together into a coherent unit, the virtual server, is the eBusiness infrastructure software. The center of gravity is shifting from the individual computer to the distributed computer and this layer of software now defines how all the components interact in much the same way as Windows does on the PC.
EBusiness Infrastructure Software – The Distributed Operating System
The product category BEA competes in is not simply J2EE application servers. Instead, the category is eBusiness infrastructure software. The application server is at the core of the eBusiness infrastructure in the same way as the SQL-relational engine was at the heart of the relational database and BIOS was at the heart of DOS. However, there is much, much more to eBusiness Infrastructure. It is in with proprietary extensions to the application servers that BEA and IBM deliver eBusiness infrastructure and try to differentiate themselves in the marketplace.
Here is how the two leaders, BEA Systems and IBM, define the category.
First, from the most recent BEA annual 10K filing:
“… A leading provider of e- business infrastructure software that helps companies of all sizes build e- business systems that extend investments in existing computer systems and provide the foundation for running a successful integrated e-business. The BEA WebLogic E-Business Platform (TM) provides infrastructure for building an integrated e-business, allowing customers to integrate private client/server networks, the Internet, intranets, extranets, and mainframe and legacy systems as system components. BEA's products serve as a platform or integration tool for applications such as billing, provisioning, customer service, electronic funds transfers, ATM networks, securities trading, Web-based banking, Internet sales, supply chain management, scheduling and logistics, and hotel, airline and rental car reservations. These must be highly available, scale to process high transaction volumes and accommodate large numbers of users. BEA provides an e-business platform that is designed to address this demand and help companies quickly develop and integrate e-business initiatives and reliably deliver a wider range of dynamic, personalized services. In addition, BEA provides a personalization engine and components used to build common e- commerce functionality, such as online catalog, dynamic pricing, shopping cart and order processing.”
From the IBM Systems Journal, Vol. 40, No. 1
“The IBM Application Framework for e-business is a means for achieving business transformation and a foundation framework for developing and extending e-business processes and applications. An e-business connects critical business systems directly to customers, employees, suppliers, and distributors via the Web to improve time to market, access a broader base of customers and suppliers, improve efficiency, and reduce costs. To achieve these benefits, existing businesses must transform their traditional business processes with e-business applications. New businesses can adopt e-business applications from the beginning to achieve the same benefits. To allow e-businesses to reap the desired benefits, e-business applications must meet some fundamental requirements; they must be: Standards-based, Server-centric, Scalable, Available, Secure, Easy to develop and deploy, Manageable and Extendable.”
Conceptually there are four layers to the eBusiness infrastructure, I am tempted to give them fancy names but instead I will use their relative position: below the application server, the application server, above the application server and client transcoding.
Below the application server has to do with how well the eBusiness platform integrates with the hardware, storage, systems management, Web servers, networks, legacy data, legacy applications and trickier issues like clustering. These are issues of real-life deployment and implementation and the J2EE standard does not and cannot define this layer. Some of these issues are very tricky and when solved well, provide a significant barrier to entry. BEA, for example, does a good job of clustering up to 8 servers together. While the other vendors catch up, BEA is surely working on 16 CPU and 32 CPU clusters. Clustering on this scale is rocket science and BEA has a significant lead. This allows deployments that have high-availability, even load sharing and high performance for crunch applications.
One reason why an ISV, VAR or customer wants to standardize their eBusiness platform is so they need only implement this layer once and optimize it continually. One reason the market wants a Gorilla is so the Gorilla is incented to do more and more of this work, leaving the developer free to create more value-added applications at the front end.
The key here is to free up time and money for the developer must invest in integration, implementation and deployment issue. The developer needs to change the underlying hardware and systems environment and have this change be transparent to the applications.
The J2EE application server layer is the glue that connects all the different types of users, all the different types of data, all the different databases, all the existing business applications, all the different types of server hardware and operating systems and all the different types of devices user may use. The application server is the traffic cop sitting at the center of+ the enterprise ensuring the right information gets to the right place in the right format at the right time.
This is the standardized layer that each product in this category has in common. The J2EE standard was developed as part of Sun’s Java programming language efforts and standardizing this layer ensure that the Java Write Once, Run Everywhere philosophy is maintained.
Above the application server: the business application components and the eBusiness applications. Components are the building blocks of the applications - shopping carts, catalogs, invoices, product definition, process work flows, personalization engines, pricing agents, portal elements, credit card processing, credit approval, schedules, auction rules, discounting rules, stock charts, management reports.... This list is very, very long. This is another area where BEA has made significant progress (as has IBM). The WebLogic Portal Server, Integration, Personalization Server, Commerce Server, Campaign Manager are all proprietary components built up from the standard J2EE framework. IBM has their own version and its components are incompatible with the BEA components.
This layer allows the developer to use prepackaged pieces of business logic to accelerate their development time. There is no need to build a shopping cart or an auction from scratch, just select the proper components, extend them to work with your application and you can save months of development, integration and testing.
The transcoding layer is what allows different devices to connect to the eBusiness infrastructure as a client. These devices include Web browsers, PDA devices, cell phones, email pagers, personal computer, ATM machine, kiosks, cars, TVs, stereos, DVD players and other eBusiness infrastructure servers. EBusiness applications can no longer simply assume that the user will be using a web browser. Transcoding is the process of altering the format of the data and type of interaction to suit the client device while hiding the intricacies of the clients from other parts of the application.
The combination of the open, standards based J2EE application server with the proprietary back-end integration and implementation with the front-end proprietary components and the unique transcoding system, all with published interfaces and protocols, is what gives the eBusiness infrastructure category it’s open, proprietary architecture which is central to determining the existence of a Gorilla.
One area where BEA and IBM have clear leads and high barriers is in transaction processing. BEA with Tuxedo and IBM with some versions of CICS are undeniably leaders in providing mission-critical transaction services.
If you are starting from scratch to write a substantially standalone J2EE application, there is a wide selection of application servers available. In this environment, BEA is only as good as it's J2EE implementation and the quality of their development tools. However, most enterprise customers and their suppliers want the time-to-deployment advantages of a more extensive framework and they will select the platform with the most robust set of optimized back-end integrations and the richest set of front-end components. Both these critical layers are proprietary and decisive.
Value Chains – The Heart of the Matter
If there is one central concept that deserves pride of place in the Geoffrey Moore model of technology market development, it is the idea of the "whole product" and the value chain that delivers that whole product to the customer. Many technology companies fail because they do no understand that customers do not buy products per se, they buy whole product solutions.
For example, when we buy a car, we do not go the body shop, the wheels shop, the transmission shop, the car seat shop, etc. We want to buy the whole car and all the support we need to keep it operating. The CEO of a Global 2000 business is no different. He wants to provide all his customers with immediate access to the status of their orders and he does not care which CPU, filer, operating system, application server and system integrator is used to build this application.
The total value of the various players in the eBusiness infrastructure market is determined by the total value provided by the infrastructure and all the whole products developed using the infrastructure for their applications. Moore ties the existence of the tornado to the completeness of the value chain: “Tornados occur when – and only when – a new value chain comes into existence.” - GG pg. 149.
It is BEA Systems unique ability to attract members of the value chain which gives them their awesome advantages as the eBusiness Infrastructure Software market meets it’s first tornado. IBM, in contradistinction, competes with most of the potential members of the eBusiness value chain. This channel conflict with the number two player in the market provides a significant incentive for a potential partner to prefer BEA over IBM and in the last year partners have been flocking to BEA – culminating with the recent alliance between BEA and Intel (more on this next month).
In this way IBM’s position in the market actually increases the strength of BEA’s value chain while proving a significant barrier to entry. Before a new entrant can attack BEA they must first displace IBM as number two – a doubtful proposition at this stage of the markets development.
Conclusion
We have seen that the eBusiness Infrastructure Software market is an important, emerging technology market enabling eBusiness applications, the first wave of technology in the second era of computing. We have also seen that the current market leader, BEA Systems, is well positioned to dominate the market.
In Part 2 we will measure BEA against the six Gorilla criteria and attempt to determine the fit. We also look at Gorilla theory from first principles and examine the unusually strong network effects in this market that promise both a rapid and a brutal battle. The latest financials results will be announced in mid-August and so we will wait to examine BEA by the numbers.
Finally, we will examine the question – “Is BEA the Next Microsoft?”
Read Part 2 of this article
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Copyright 2001 Radical Results, Inc. This article originally appeared in the Rule The World Newsletter, August 2001.
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