BEA Systems Inc. next week will hold its annual developer conference in Orlando, Fla., where the company will pay homage to a supportive developer community and announce beta versions of upcoming versions of its next-generation application server platform and other products. BEA last week announced increased revenues and a tripling in profit for its fourth quarter. CEO Alfred Chuang talked with eWEEK Senior Writer Darryl Taft on two occasions over the last month on IBM, the application server space and where BEA is headed.
eWEEK: You are bitter competitors with IBM.
Chuang: Yes. Well, I dont know if its bitter, but its highly competitive.
eWEEK: How do we know who is ahead? At one point you say youre ahead; at another point they say theyre ahead. If I talk to you guys you say theyre losing share, and if I talk to them they say you havent had a positive quarter in more than a year.
Chuang: I think the software industry fundamentally is somewhat flawed with counting these numbers. We are relying on industry research firms. They go out and they do a bit of research and they ask companies: How much are you selling for? So for people like us, under all the new laws and under the old law, we have to report very clearly what we have sold, how much is license revenue, how much is new revenue, how much is maintenance, is the maintenance growing?
I think that competing with IBM this is one of the challenges because they are a very large conglomerate. Something I admire that they do is they sell services, they sell storage, they sell PCs, they sell servers, they sell mainframes, they sell software. And they put out one number and they dont really have to say this is the same number that we put out for the street.
So if you look at what theyre saying and what were saying, if you look at their financial report just on a total software revenue itself, I think through the year its been extraordinarily inconsistent. And those are the kinds of things that frustrate us.
Theres a very interesting article in this weeks Barrons that talks about these market share numbers, and it pointed out the inconsistencies in how they research these numbers.
The way I look at it is I think the most important thing is the customer success. Can you produce enough customer success and put it out and let people know what they can achieve with our software? I think thats the thing we have done better than our competition has.
I think youre right about its been a tough year for us. Our revenue has been flat, but its better than almost everybody. Staying flat is better than people going down the tubes. I think we had terrific performance for two quarters in a row. Were starting to see a recovery. Our license revenue has grown over the past two quarters. Our maintenance revenue has grown drastically. Our profits grown more than 30 percent from a quarter ago. Our cash generation is terrific. The company is extraordinarily profitable. This will be a year where we end up generating close to $200 million net cash for the company. We have lots of cash in the bank. Those are the kinds of things were proud of and that we know were scoring on whats out there. And we have made a difference in the way people do Internet.
eWEEK: Now you have to compete with IBM and their new acquisition of Rational. How will you compete with them?
Chuang: Actually, I think Rational is somewhat irrelevant. I think Rational is very much focused on this UML [Unified Modeling Language] space, which to us is a very niche and very specific space on its own.
The other thing I think is very fascinating about IBMs business also is I dont think they have run a truly exclusive business where they have DB2 not working with WebLogic, or Rational with WebLogic, because that wont do them any good. Rational has been an open company for years. Even if they wanted to shut it down, they will not cut off their own legs and forgo half the revenue. I dont think that makes any sense. So the way we looked at it is that we have the responsibility to evolve and change and groom our developer community. Thats what we did.
eWEEK: You guys have been criticized about who exactly is your friend. For instance, in the WS-I formation and the exclusion of Sun, who thought they were your friend. Now youre involved with both WSCI as well as BPEL. And now WS-Reliability against other competing strategies. How can you simultaneously entertain all these positions?
Chuang: Theres always been a difficult balance. The problem that we run into is the following. We have a very open mind. Some of the people that create these consortia have double-sided agendas. One side wants to be open, and the other side says selectively they choose who they want to be open to. We have, and I think Sun will tell you this, BEA has been instrumental in getting Sun into the WS-I. I think theres no doubt that people would love to exclude them if they could. I think our relationship with Sun is better than it has been for a long time. And Sun is not the easiest company to partner with. We will not be the first one saying that, but if you look at what we have done with them we are first-class partners with Sun, and Sun is first-class partners with us. But its a fascinating industry, and people love to beat on people when theyre down. We happen to not think that way. I think Sun is an enormously great company. I worked for them for nine and a half years. So in every sense I would love to see their success.
But we do have lots of partners; thats the game that we play in. Were very close to Hewlett-Packard. HP exited the business in the middleware field. We have taken over their installed base, and it worked out very well. We have lots of activity with them both in the field and on the technology side. We also work well with NEC, Toshiba and Sony. Well work with anybody. Customers want to have choice, they want to have bargaining power. There is an ecosystem out there that were growing, despite this economy.
eWEEK: Are you targeting the academic world because that seems like a space to get into early with the new developer set?
Chuang: If you look at what weve done lately with our dev2dev, which is our developer community program, we are targeting three distinct types of developers and weve given them different types of support based on the cost model it can justify. We certainly have the corporate developers that subscribe to our program that pay a small nominal fee to subscribe to our program. They get all the software, support, chat rooms and resources in the dev2dev site, and they can also talk to a live person. Then you have the larger community of developers who are people growing up from desktop applications to enterprise applications. That has historically been the fastest growing and largest size developer community. Those are the people doing things from open source to building Microsoft-based software that can make money, but they dont want to pay a lot of money.
Then you have the academic world. So we have a very strong university program. Over the last couple of years it has worked out very well. We donate not only software but also time and education. They need classes, sponsorship, course material, internship programs. We have one of the industrys best internship programs. And the size of it is amazing for the size company we are. We have some of the best people who have created and groomed the Microsoft developer program.
These are things that are pure investment. Like we have a full product in the Java Virtual Machine space, but we cannot generate any revenue off of it. But those are the kinds of things that clearly cater to the development world and to making things ubiquitous.
eWEEK: Tod Nielsen, your chief marketing officer, mentioned some numbers regarding your developer community and said youd be up to a million within a year of announcing it. Where do you stand now?
Chuang: Very close. We are very close to that number. I think this will be the year that not only will we be expanding on the number itself, were also working on better defining the program and some measurements. Because I think these external numbers are also very good for our internal peoples motivation. Because if you want to grow leaps and bounds in the developer world, you cant just use conventional methodology, which is what we did in the past. We had a pretty good developer site and encouraged people to download—everybody have at it. Thats not good enough anymore. Thats why were changing some of our programs into the subscription-based program for one. So people can get full-blown software at a fixed price on a subscription basis, and they get every new thing that comes out of the company. And were funneling a lot of our partners software through the site.
eWEEK: How viable do you think Sun is?
Chuang: I am the wrong guy to ask that question because I have to have faith. First, I held onto all the stock that I own since the employee stock purchasing program in 1986. So I have to have faith.
No. 2 is these people are my friends. I worked with them for 10 years. And Sun is an unusual company from this perspective. You cant think of them conventionally. Sun is a company that has done enormously more sprinkling of money into inventions than any other company of its size would do. And its cultural. Its a company that relies on very successful technology to spring from these inventions. So I would not count them out. Historically, they always have made this work. I dont think there was a time while I was at Sun that people did not doubt Suns existence, until the dot-coms came out and they became a household name. But for a long time this kind of discussion has gone on. They have so many smart people.
eWEEK: Do you think the J2EE [Java 2 Enterprise Edition] should come out of Sun and go to a standards body?
Chuang: Historically, J2EE and the rest of the Java Community process had success because Sun funded money infinitely into the program without taking a dominant role in dictating what goes in and what goes out. Thats the best of both worlds. So its not a consortium where you would vote.
I used to be on the board of the Object Management Group [OMG], and its an excruciatingly painful process because you have all these hardware companies doing software they want to be advantageous to their hardware. And they put their thing up for voting, and it takes forever. So those types of things dont help the rate of innovation. I think Suns role in Java has historically worked.
Now its a difficult thing to maintain at that level forever. I dont believe that its time yet that this is ready to go to a public consortium and go through this excruciating pain. I clearly think that up to now at least it definitely is still working very well. BEA has been able to continue to invent ahead of the spec yet to not get out of the spec itself. And as long as that is the case, that means innovation.
eWEEK: Lets talk about competition overall, not just IBM. How do you compete with .Net?
Chuang: Well, theres no competition now because the .Net server doesnt exist. Ive been through this several times with Microsoft. Back in 1996 there was a technology called Microsoft Transaction Server. We were doing Tuxedo, just barely moving into our CORBA-based third-generation object-oriented transaction, and we sat around and said, “Oh my God. Microsoft is coming out with MTS. How are we going to survive?” And people asked me the same question. And then MTS disappeared. Im not sure .Net will be the same, but the same symptoms are clearly happening.
There was a lot of momentum for a while and then a bunch of other things distracted it, and it seems to have diluted the whole thing. And I would not be surprised if the whole .Net methodology would be dropped altogether and done as something else.
But I think you are getting to the right point, though. Because the way I look at it I think that Microsoft will ultimately be BEAs competition. Because here is the challenge: Were out there aggressively trying to get the enterprise to standardize so we can see proliferation of applications so we can continue to grow. We are doing more stuff online today than we ever have. If that continues that means the supply of applications real time into the hands of the people using the Internet is absolutely the most critical thing.
We are edging out into the world Microsoft is in. We will cross into their world, and over time Microsoft will be BEAs biggest competitor even though now theres no direct competitive product. But our channel model, their channel model; our product, their product; our ecosystem, their ecosystem; all have different tastes to them and it depends on the next generation of the world what its all going to look like. I think it will be very exciting.
eWEEK: You said you patterned parts of your business after their success.
Chuang: Right, we are. Because what they got right is that volume is critical. Not low price, its volume. Because the only way that the enterprise is going to change is there has to be standardization, there has to be high-volume movement that shows a new standard being adopted. Thats when well see massive amounts of applications not only that well be able to put out but also that interoperate with existing applications.
eWEEK: Whats next for BEA? When do you see the limit of this application server architecture and having to move beyond it?
Chuang: I would contend that it will be the center of innovation for a long time to come because the world is looking for the “Windows” for the enterprise. But its a much more sophisticated Windows because we do have a variety of different heterogeneous systems running. We have a variety of different databases. We are waiting for a much lower-cost, higher-yield computing model to really emerge for the enterprise. I think there are many things the world is still heading to. We dont call it the app server anymore, we call it the platform. Because its the app server, its the JVM, its the integration technology, its many things composed into one.
eWEEK: How about the other competitors? Oracle, Sun ONE?
Chuang: Well, Sun ONE we dont see. Sun doing software has always been challenging for them. The problem with the world that were in is if youre really not heterogeneous, customers dont want to buy.
eWEEK: How big is Linux to you? How important?
Chuang: Linux is the fastest growing platform for us. And its gone from nowhere to about 10 percent. But the thing I dont know is whether Linux is growing the fastest or Intel-based platforms are growing the fastest. Our Intel-based business is rising close to 20 percent from absolutely nowhere. So were seeing huge growth—particularly in the financial services industry. But its hard to tell whether the growth is from Intel or because of Linux. We have some very good relationships with several of the Linux vendors. Its a simple, easy-to-use operating system. Its very lightweight, though it still needs some hardening.
eWEEK: Do you have a mobile computing strategy?
Chuang: Yes, we actually have a mobile product coming out. Most of the people that approach the mobile world are trying to force the desktop computing model onto mobile devices. We happen to think that is not a very practical approach because if you look at mobile devices they work against that. You need to save bandwidth. Its a form factor issue. So our invention is around a new browser technology, a connection technology that allows a minimum of information to be running on the device and maximum amount of information to be running on the server and is still aware in a disconnected mode.
The market is now at the game level; its not at the commerce level yet. I think the next big driver in the marketplace is mobile moving to become a commercially used enterprise device.