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Enterprise Software Trends

Return of the Major Players

On the supply side of the equation, within the independent software vendor arena, 2002 and beyond could well see the return to prominence of the major players—companies such as IBM, Microsoft, Oracle, SAP, and Sun Microsystems. Over the past three years, during the Internet boom, hundreds of startups came to power in a wide variety of market niches, stole some visibility and market share from these major players, and gained large market capitalization in the process. With the slowdown in business spending, many of these newer companies have been struggling for survival as revenues become scarce. Additionally, with stock levels and corresponding market capitalizations back to more normal levels, venture capitalists and private equity investors are becoming more selective in their investments, focusing much more effort on their existing portfolio investments, and are giving out lower valuations for those new companies they do decide to invest in.

The major players are now coming back to the table and are often leading in terms of innovation where previously in the Internet era they had occasionally fallen behind or had appeared to have fallen behind. The next wave of emerging technology innovation is being led by these major players who have the funds and resources to keep the industry advancing. Examples include Intel's peer-to-peer initiatives, Microsoft's .Net initiative, Sun's Open Network Environment (ONE) initiative, and Texas Instruments' work in the RFID area. Additionally, IBM's work in the Web services area, in conjunction with Microsoft and others, is helping to develop the core standards that serve as the foundation for Web services. These include standards such as Simple Object Access Protocol (SOAP), Universal Description, Discovery, and Integration (UDDI), and Web Services Description Language (WSDL). For those readers interested in learning more about these standards, Chapter 2 discusses the evolution of Web services from these first standards to the present and the creation of organizations such as the Web Services Interoperability Organization known as WS-I. An awareness of the major players and standards behind these changes in software industry direction can help businesses more fully exploit the potential of the technology. Web services is a megatrend that is reshaping the software industry and has great potential for reshaping many other industries as it evolves.

In addition to the re-emergence of the major players in terms of visibility and innovation, many other trends are shaping the software industry. Categories of software are becoming increasingly blurred and many appear to be converging. Even the concept of software is moving from a product-centric model to a service-centric model. Rather than a one-time event of purchase and installation, software is now becoming transformed into an ongoing service provided in a variety of pricing models for business customers to utilize. While application service providers suffered considerably over the past several years due to incomplete offerings, incorrectly priced services, and lack of acceptance of the outsourced model at the time, their fundamental business model—providing software services over networks such as the Internet for businesses to subscribe to—was accurate. The software-as-a-service movement (SaaS), which encompasses the application service provider model and several other models, means that software companies need to re-engineer themselves in terms of how they deliver value to businesses and how they monetize that value. The entire spectrum of software licensing needs to be redesigned to accommodate a variety of pricing models and new ways of packaging software elements into valuable business functions exposed as a service.

Wireless Middleware Market

The wireless middleware software market serves as a good example of the return of the major players into niches that were previously filled by startups and specialty vendors. This market showed great promise a couple of years ago but now has too many vendors chasing too few opportunities among enterprise buyers. The wireless application middleware market is still here and is a large growth market, but too many vendors are aiming for dominance. At one time, there were over 100 vendors in the space including major public software companies, public wireless specialists, and private wireless specialists. These companies all aim to serve business by providing software infrastructure to support enterprise mobility via cell phones, personal digital assistants, and pagers. They aim to extend existing applications to any device over any wireless network and to move information and transactions to the point of business activity. They achieve this by transforming content from the typical desktop-sized displays to the much smaller formats and varied user interface designs found on wireless devices.

Today major companies such as IBM, Microsoft, Oracle, and Sybase are moving in to challenge public and privately held specialists such as 724 Solutions, Aether Systems, Air2Web, AvantGo, Brience, InfoWave, Research In Motion, and Wireless Knowledge. With technologies such as wireless and mobile enablement locked in early adopter status within the business due to tight IT budgets, many of the wireless specialists are hurting for revenues. The major software vendors can acquire these wireless specialists at extremely low valuations and effectively absorb their technology into their own portfolio. Companies that are not acquired are going out of business as they run out of cash reserves. Recent examples have included NetMorf and 2Roam. Both were companies with solid technology, management teams, and major customers, but due to market timing they unfortunately ran through their funds and were unable to raise subsequent rounds.

Enterprise buyers are also opting for safe bets by choosing solutions from vendors they know will be around in a year or more. Thus, in this example, technologies such as Mobile Information Server from Microsoft and WebSphere Everyplace Suite from IBM are seeing increased traction in terms of enterprise adoption in the wireless middleware arena. Those private and public wireless and mobile specialists that are still in the game are pursuing a variety of options for strengthening their positions in the market. These options include global expansion to chase immediate revenues outside the United States; increased marketing activity to better position their offerings for enterprise return on investment as opposed to technical feature lists; increased focus on partnerships for channel sales through original equipment manufacturers (OEMs), resellers, and systems integrators; diversification of their core technologies into other related software categories; and deeper specialization within certain industry verticals.

This process of natural selection and evolution plays itself out in many categories of software. First movers come in and help develop the market, many go out of business or are acquired, and the fast followers come in to dominate the market once the demand has been ignited and the best practices and most effective value propositions have been determined.

Convergence of Software Categories

Another trend occurring in the independent software vendor arena, in addition to the return of the major players, is the convergence of software categories. As the number of software vendors increased over the past couple of years, so did the number of categories of software. In addition to core categories such as enterprise resource planning, customer relationship management, and supply chain management, we now have software for partner relationship management, customer experience management, enterprise interaction management, and the list goes on.

With the slowdown in the economy, however, these categories have naturally started to converge at a faster rate as the larger companies acquire these additional capabilities in order to extend their own core offerings for their customers. Supply chain management vendors have added collaborative commerce capabilities, application server vendors have added wireless middleware capabilities, and enterprise application integration vendors have added Web services capabilities. Additionally, the various players in the larger software industry value chain are taking on new roles: Systems integrators are adding managed service and business process outsourcing capabilities, independent software vendors are adding application service provider capabilities, and application service providers are adding systems integration capabilities.

This convergence of software categories is part of a process of natural evolution for the software industry. New categories spring up and the most promising become embedded into the core offerings of the strongest players as they build out their platform functionality. There is always a battle between those vendors aiming at platform dominance with a suite of software functionality for the enterprise and those aiming at being best-of-breed within a particular software application niche. Examples include IBM, Oracle, and Microsoft, who provide platform solutions and companies such as BEA and I2, who focus on being specialists in areas such as application servers and supply chain management.

Software as a Service (SaaS)

One of the major trends in the software industry at the present time is the rise of software as a service, or SaaS. This approach to delivering and running software functionality over the network has been in practice for several years by many vendors such as Intuit and McAfee but is now becoming an option for most of the industry. The most well-known approach for software as a service is the application service provider or ASP. Other models, which may or may not differ slightly based upon the business models of the various companies, include application infrastructure provider (AIP), business service provider (BSP), and solutions service provider (SSP).

Software as a service represents a much larger trend in the software industry than the initial application service provider model that we have witnessed over the past several years. While ASPs have had their ups and downs in recent times, the longer term trend of software as a service stands to reshape the entire industry and to have a major impact on how the enterprise purchases and exploits software in the future.

The SaaS model delivers software functionality over the network, including Internet, intranet, local area network, and virtual private network delivery options, and helps software companies avoid the costly process of producing and distributing shrink-wrapped CD-ROMs to their customers. Additionally, software vendors can charge for their software services via ongoing subscription models instead of one-time license fees and annual support fees. This can help to smooth out revenue bumps associated with traditional one-time license fees and can open up a wider business audience for the vendor, thanks to the Internet delivery model. One of the challenges with shared services such as the application service provider model, however, is the determination of usage and pricing per customer. Today's electronic business applications are so complex that it is often hard to determine which customers are consuming the most amount of computing resources and to charge accordingly.

In certain cases, software vendors can take advantage of dynamic pricing and vary their pricing based upon enterprise or consumer demand at key points in time. Upgrades to software are also a lot easier for the software vendor to implement using software as a service: One change made on the network is cascaded to all users. Under the old paradigm, vendors had to ship upgrades and new product releases via shrink-wrapped software to each of their customers.

For the enterprise, one of the future benefits of this model includes the ability to combine multiple externally provided software services to form more complete solutions to its business problems. It can take the best-of-breed approach and combine elements of functionality from different vendors over the network—even down to the individual software component level. At least this is one of the goals of the software as a service movement.

One of the barriers to this end goal is that the software standards are still being defined. Making software components from different vendors talk to one another is still far from complete, but as we shall discover in our section on Web services, this is becoming far more possible today than it ever has been historically. We are on the verge of a monumental breakthrough in software interoperability where the holy grail of software interoperability and business process discovery is within sight. Software components written in different programming languages and running on different operating system platforms can now discover one another over the network and interoperate with one another, in effect, creating applications upon demand. Today, much of this integration is achieved with prearranged business partners. Tomorrow, the ad hoc assembly of business processes with new partners may also be within reach, assuming that trust issues and other fundamental business relationship factors can be resolved.

The SaaS movement is also subject to all the pros and cons of the outsourcing model. Typically, enterprise IT managers will outsource only certain aspects of application functionality in order to save time and lower cost for nonstrategic and noncore competency IT functions. They will outsource those elements that they feel comfortable placing in the hands of others, and, in so doing, will sacrifice some control and security over the content and applications. Typically, elements that may be outsourced include news and information feeds, data storage and backups, alerts and notifications, email functionality, desktop productivity enhancements, security upgrades, utilities, and, in the consumer market, entertainment and education. An example of software as a service in the consumer space is the relationship between Exent Technologies, an application infrastructure provider, and Bell Canada, a broadband service provider, for delivering subscription-based games-on-demand to Bell Canada's DSL subscribers.

SaaS Value Chain

The SaaS value chain is composed of hardware providers, software infrastructure providers, network service providers (NSPs), independent software vendors (ISVs), business process outsourcers (BPOs), and application service providers (ASPs). One or many of these providers may combine to provide the final software as a service solution to the end user. The end user can be a large enterprise, small or medium sized business, or consumer.

Figure 1-3 shows the software as a service value chain. Included within this value chain is the entire range of xSPs, including application infrastructure providers and application service providers.

Figure 1-3Figure 1-3 SaaS Value Chain.

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