ITs Survival of the Fittest

Industry shakeout: good news, bad news for IT

Like many other e-business sectors, application server vendors are experiencing a shakeout that, insiders predict, will leave only a few major companies standing. The rest are likely to be either bought, refocused or pushed into niche markets.

The shakeout is a good-news, bad-news story for IT. While users may have fewer choices, the consolidation should weed out weaker vendors and make the market more stable. The adoption of standards such as J2EE (Java 2 Enterprise Edition) also means its easier for users to swap one vendor for another without having to scrap applications.

There is no doubt among vendors or users that the consolidation has started, with acquisitions in the last 12 months of GemStone Systems Inc. by Brokat Infosystems AG, Bluestone Software Inc. by Hewlett-Packard Co. and the more recent acquisition of Allaire Corp. by Macromedia Inc.

"In many ways, its a good thing," said Suneet Shah, chief technology officer of Diamelle Inc., an application development company in Cortlandt Manor, N.Y. "Its easier to support a fewer number of app servers. And as we get larger and stronger companies, the risk of working with an app server thats not going to be around in a year is less. It gives you a higher level of confidence."

Charles Stack, CEO of Flashline. com Inc., a clearinghouse for components that run on a variety of app servers, said consolidation shouldnt pose a problem for IT. "Interoperability is a great trend for end users," said Stack, in Cleveland. "Making your selection is a little harder, but once you have, youre not as locked in."

Vendors, both large and small, are trying to adapt to the shifting landscape in the market, estimated by Giga Information Group Inc., of Cambridge, Mass., to hit $3.5 billion this year. Some smaller vendors are looking for niches or focusing on the layer on top of the app server, while larger vendors try to add to their servers functionality.

Evan Quinn, an analyst with Hurwitz Group Inc., in Framingham, Mass., pointed to the recent event in support of Sun Microsystems Inc.s J2EE standard and questioned whether the market can support nine J2EE-compliant vendors. But, so far, their growth has been solid, Quinn said.

Market maturity and the loss of differentiation that accompanies the adoption of standards are two reasons for the trend.

"A lot of these [smaller] companies that built these application servers are going to be bought up in the next eight to 12 months," said Blaine Roderique, interactive production manager for TBWA/ Chiat/Day New York, an advertising agency that works with a variety of app servers. "The Web is becoming a more integral part of large companies strategies."

Also predicting accelerated consolidation is Microsoft Corp., which does not have a pure-play app server as do other vendors but competes via the Windows infrastructure.

Tony Goodhew, product manager for the Redmond, Wash., company, said that by the end of the year, there will be only three strong vendors left in the market—IBM; BEA Systems Inc.; and iPlanet, a Sun-America Online Inc. alliance. "The other companies may not necessarily fold, but theyll definitely fall off the radar," Goodhew said.

The app server was established as a must-have for e-business last year. Market share surveys rank BEAs WebLogic and IBMs WebSphere as leaders, with WebLogic having a slight edge. Trailing in third place is usually iPlanet Application Server, with dozens of others in the mix.

Mike Gilpin, a Giga analyst, said the current economic slowdown will make it harder for smaller companies to survive. "A little bit of a slowdown that weeds out the weaker players ultimately benefits everybody," Gilpin said.

Some vendors back in the pack said theyve seen the consolidation coming and have taken steps to add value for the benefit of both their customers and books.

Last year, SilverStream Software Inc. embarked on a strategy to continue selling its app server but also to focus on what it sees as a bigger market—the layer on top of the app server. SilverStreams xCommerce and ePortal products provide specific functionality with Extensible Markup Language, personalization and other features; work on WebSphere; and will eventually work on any J2EE-compliant server.

"That as a strategy gives us a chance to compete and cooperate," said Arny Epstein, CTO for SilverStream, in Billerica, Mass. While Epstein wouldnt comment on acquisition possibilities, he said SilverStream is talking with other companies that need an application server as part of their product line but dont want to build one themselves.

"We have a number of ISVs that have already embedded our app server. We might give that a little more energy," Epstein said.

Following a somewhat similar strategy is Art Technology Group Inc., in Cambridge, Mass. "Even though we have an app server in the market, the vast majority of our revenues come from our applications," said Joe Chung, ATGs CTO and chairman. "We never came out and said were a plumbing company."

Currently, ATG doesnt support other app servers besides its own Dynamo, but Chung said it will gradually start supporting others. "Over time, youll probably see us relying increasingly less on our own," he said.

Now working to integrate its technology into the HP fold is Bluestone.

"With the fact that HP now has something in-house, IBM has something in-house and Sun has affiliated with iPlanet, it becomes tougher for independent software vendors to be just an app server vendor," said Bob Bickel, a former Bluestone executive who now serves as CTO of HPs middleware group in Mount Laurel, N.J.

Survivors will head north to build on top of the app server layer. "They have to find niches where they can add value or find significant partnerships that get them market share and mind share," Bickel said.