BUSINESSWEEK ONLINE : DECEMBER 11, 2000 ISSUE
BUSINESS WEEK E.BIZ -- COVER STORY The New Software Whizzes Meet the scrappy lot who were the first to spot the potential of Web software--and are now cashing in Kevin O'Connor's career was on the line. In the fall of 1999, O'Connor, the head of Deutsche Bank's (DTBKY) applied technology group, was put in charge of building a new Internet computing system for the entire financial-services conglomerate, an outfit with 93,000 employees serving more than 9 million customers. O'Connor needed to pick a technology that would serve as the sturdy foundation of Deutsche Bank's global e-commerce operation. The cost of making the wrong choice could be hundreds of millions of dollars in wasted capital,useless employee training, and ticked-off customers. In another era, O'Connor's job would have been a no-brainer. He could have picked a tried-and-true technology supplier such as IBM (IBM), Microsoft (MSFT), or Oracle (ORCL), knowing that things couldn't go too far wrong. Not these days, however. Even though IBM discounted the price of its e-commerce software by over 50%, Deutsche Bank decided to pass. Instead, O'Connor opted to license software that he felt worked better from a Silicon Valley upstart, BEA Systems Inc. (BEAS) The deal is so important to Deutsche Bank that O'Connor arranged to have a sort of Bat Phone hooked directly into the office of BEA Chief Executive William T. Coleman III. Got a problem? Call Coleman, who will bird-dog it until it's fixed. ''I've never had to use the phone,'' says O'Connor. Move over, Bill Gates and Larry Ellison--there are new pretenders to the software throne. Out of the Internet tumult of the past five years, a band of software upstarts has emerged that, unlike their dot-bomb brethren, look to have real staying power. They're a scrappy lot that were the first to figure out the huge potential of Web software and are now starting to cash in with altogether new kinds of programs--from managing bazillions of Web pages to providing online customer help. With kooky monikers such as BEA, i2 (ITWO), Kana (KANA), and E.piphany (EPNY), the newcomers are snaring big customers, shaking up the computer landscape, and leaving industry stalwarts scratching their heads. Could it be? After more than a decade in which the Big 3--Microsoft, Oracle, and IBM--dominated the software scene, could there actually be competition stiff enough to upset the status quo? Is there a new Microsoft or Oracle in the making? The odds are surprisingly good. Out of the hundreds of software companies launched since 1995, 16 stand out as leaders in their markets. Their quarterly revenues are growing from 77% to 2900% year over year, and half of them are--gasp--profitable. ''We want to do for e-commerce what Microsoft did for the PC,'' says BEA's Coleman, a former Sun Microsystems Inc. (SUNW) executive. BEA is off to a promising start. In just five years, the company has landed 8,000 customers, ranging from Old Economy stalwart General Electric Co. (GE) to Net pioneer Amazon.com Inc. (AMZN) The draw: BEA's specialized computer-server software that allows corporations to custom-build their Web site operations. For the quarter ended on Oct. 31, BEA reported revenues of $224 million, up 77% from a year earlier, and a $31.3 million profit. This year, analysts figure the company will hit sales of $925 million. That may seem like small change in the grand scheme of things, but it's a far sight more than Microsoft's $7.5 million in revenue when it was the same age. ''BEA has an opportunity to be a major platform for this new wave of computing for the Web,'' says analyst Rick Sherlund of Goldman, Sachs & Co. Indeed, it's the promise of radically new ways of doing business that could catapult these small fry into the big leagues. Using the Internet, companies are tackling big and small projects alike--from capturing a company's storehouse of expertise on Web pages so employees can do smarter work to comparison-shopping for tape dispensers and toilet paper with the click of a mouse. The explosion of ways that companies are squeezing out new efficiencies via the Web holds the tantalizing possibility that Internet software will eventually grow to dominate the market. Today, e-business software is a $13.5 billion market--just 13% of the entire corporate-software market. Yet in just three years, e-biz software will account for $44.7 billion in revenues and 24% of the whole, according to Merrill Lynch & Co. Even the threat of an impending economic slowdown hasn't dampened enthusiasm for the brash upstarts. Experts say the young software makers are likely to fare better than the rest of the industry because they sell must-have products that can improve productivity or help open new markets. Boise Cascade Corp. (BCC), for example, is automating the way it handles transactions with suppliers and customers, using the Internet to speed up communication and share information. The paper-products company is spending $100 million on technology this year, including about $1 million on marketing software from E.piphany Inc. in San Mateo, Calif. Says Robert Egan, Boise Cascade's director of information services: ''You have to keep moving ahead. Five years out, all of our competitors will have these capabilities.'' It's spending plans such as Boise Cascade's that have kept the stocks of the insurgents afloat in a market that's under water. In the past six months, shares of our 16 upstarts have risen an average 13%, vs. -5% for the Nasdaq Composite Index. And some have soared. The stock of Ariba, a maker of e-marketplace software, is up 44%, BEA's shares have climbed over 93%, and Interwoven, whose software manages Web content, is up a startling 200%. That doesn't mean that every one of these pipsqueaks will grow to be a Goliath. Any Microsoft wannabe must first contend with Microsoft, which is also angling for a fat slice of the Web-software pie. Then there's IBM, Oracle, SAP (SAP), and Siebel Systems (SEBL), today's software kings, each with its own strategy for grabbing market share in the new Net fields. And they wield key advantages: Gobs of money, existing relationships with customers, and the ability to price low on key products to edge out the whippersnappers. Says Oracle CEO Lawrence J. Ellison: ''You have to distinguish between companies that have endurance and meteors.'' Are the upstarts cowed? ''Oracle and SAP are dying a very slow death,'' responds Sanjiv S. Sidhu, CEO of rival i2 Technologies. Who will be the winners and who will be the losers? After the dust settles 5 or 10 years from now, analysts predict that just a handful of companies will end up being the royalty of software. Microsoft seems almost sure to be among the winners, though not likely the king of kings that it is in the PC world. Microsoft's software for heavy-duty server computers is shaping up as a solid foundation for e-business applications. But so far, it's the software platform of choice for only one of the 16 upstarts--Commerce One Inc. (CMRC)--to develop its programs on. Worse, customers have yet to clamor for it (page 42). Other giants that seem likely to retain their thrones: Oracle, because its databases power many of the largest e-commerce sites, and IBM, thanks to its mighty consulting business. And the new kings? A handful of the upstarts will carve out sizable niches where they can thrive--such as Vignette Corp. (VIGN) for handling Web-site content, and Commerce One and Ariba (ARBA) in e-marketplaces. To become a true giant of the industry, the upstarts will have to branch out to offer a broad set of products or create software so powerful that it becomes a platform--much like Windows--for customers and other software companies to build on. Two of our 16 insurgents have those qualities: i2 can help corporations automate a huge swath of their businesses--from ordering and inventory management to collaboration with suppliers--while BEA has the best chance of supplying the basic building blocks upon which Net computing is built. ''BEA is probably the next big infrastructure company,'' says Charles E. Phillips, a managing director at Morgan Stanley Dean Witter. In each case, the Net pioneers spotted an opportunity when others simply didn't see it. Four years ago, for example, Commerce One CEO Mark Hoffman foresaw that there would be a need for software to support e-marketplaces in which buyers and sellers could meet and make deals. Most of the established companies didn't figure that out until late last year. Often, these CEOs took huge risks to get their companies off the ground. i2's Sidhu bootstrapped his company with $200,000 of his personal savings. He didn't collect a salary for the first two years, and, to save money, he insisted that new employees assemble their own desks when they first reported to work. Others walked away from bucketloads of money by leaping from sure-bet mature companies to the uncertainty of shaky startups. BEA's Coleman left behind 50,000 shares of not-yet-vested Sun Microsystems (SUNW) stock, which would now be worth $72 million. His reward: His BEA shares are now worth $650 million. Whether he can turn that nest egg into a fortune of Gatesian proportions depends on what happens next. Taking an early lead with the latest technology plays a major role in separating winners from losers. Unlike the established giants, which are trying to adapt their old products to the Web world, the upstarts have been able to build from scratch. That often means that their programs are easier for customers to install and use and easier to update when new features become available. ''Running these companies is not so much about the competition as it is figuring out the next generation of technology,'' says David C. Peterschmidt, CEO of Inktomi Inc. (INKT) in Foster City, Calif., which makes software that speeds content delivered on the Net. Keeping that technological edge is a necessary but costly proposition. Inktomi, for example, is spending over 20% of its revenues on research and development. And that's not unusual for the top tier of Web-software makers. The 16 insurgents we cite are, on average, funneling 23% of their revenues into R&D--compared with just 7% for Siebel, 11% for Oracle, and 16% for Microsoft. Some upstarts have learned the hard way that old-time technology could hurt them dearly. Last July, BroadVision Inc. (BVSN), a maker of software for running online shops, lost one of its blue-chip customers, American Airlines Inc. (AMR), to startup rival Art Technology Group (ARTG). American Airlines declined to comment on the deal, but analysts estimate that it may be worth at least $150,000 to Art Technology. The reason for BroadVision's loss: It was slow to embrace a new kind of software programming called Enterprise Java Beans that makes software products from different suppliers fit together like bricks do at different construction sites. The fallout was immediate. Although BroadVision was profitable and growing at a 300% annual clip, the Redwood City (Calif.) company's market cap was cut to a third of its June value in September when the shares bottomed out at $17.62. Stung, BroadVision went so far as to forge an alliance with sometime rival BEA Systems to incorporate BEA's Java technology into BroadVision products. Most of the young software makers, BroadVision included, got off the ground by focusing intensely on doing a few things really well. That gave them breathing room because they could invest all of their relatively meager resources in one place and concentrate on small but promising markets that haven't yet attracted the attention of the big players. For four-year-old Ask Jeeves Inc. (ASKJ), the bull's-eye is Web-search technology. Ask Jeeves has kept its 725 employees focused on creating cutting-edge search technology. That made it the choice for Ford Motor Co. (F) when the auto giant went looking for a search service for its consumer Web site. The service, on fordvehicles.com, allows buyers to ask questions about Ford products and services, such as information about discounts for recent college grads. For other upstarts, the key has been to get critical mass in their niche--fast. That way, customers don't spend as much time sizing up the alternatives. Ariba is a good example. Last November, Ariba, which at the time was selling only corporate-purchasing software, spent nearly $2 billion on auction-software maker TradingDynamics and e-marketplace software maker Tradex Technologies. That gave it the complete package of software for companies seeking to set up business-to-business e-commerce Web sites. Those that don't broaden their portfolio are destined to run into trouble. Lower-tier outfits, such as e-sales specialists InterWorld Corp. (INTW) and Web-marketing company NetPerceptions Inc., posted disappointing revenues for the third quarter and watched their stock prices crater by as much as 90%. ''Those companies that haven't moved beyond being a small piece are getting killed,'' says Internet software analyst Greg Vogel of Banc of America Securities. That's why forming alliances with major tech players looks mighty attractive to some of these emerging companies. Back in March, for example, Ariba and i2 Technologies made a three-way partnership with IBM, which bought small stakes in Ariba and in i2. The idea is that by making their software work well together, selling each other's products, and approaching customers as a team, they'll be able to land major buyers. It seems to be working. So far, the alliance has won 25 customers, including such online exchanges as e2open, MetalSpectrum, and Worldwide Retail Exchange. But it's not just the upstarts that badly want these partnerships. The tech giants need the little guys every bit as much--if not more. Look at SAP. It got caught flat-footed last year when corporations started clamoring for software to run e-marketplaces, connecting manufacturers and their suppliers. The German powerhouse is expert at operating, financial, and manufacturing software, but it would have taken too long to create top-notch e-marketplace software. So instead, it swallowed its pride and made a deal with Commerce One. Using Commerce One's products as a starting point, the two agreed in June to jointly develop and sell e-marketplace software. When push comes to shove, will these David-and-Goliath partnerships fall apart? Already, there are signs of fraying. In November, 1997, Oracle and i2 launched an alliance to sell software for managing orders from suppliers to large industrial customers. But a year later, Oracle came out with its own version of i2's product, and the two began feuding and poaching customers from each other. ''These are two independent companies. These relationships will not last forever,'' says former Oracle Executive Vice-President Gary Bloom. Indeed, chronicles of the tech industry are littered with relationships gone awry. So the smart upstarts will hedge their bets--doing their own development while keeping a potential partner in reserve. When it comes to hooking up with the large consulting companies, however, there doesn't seem to be a downside. Since the upstarts don't have armies of salespeople and consultants, they're wise to align with large consulting companies that design, install, and maintain computing systems. Experts estimate that more than half of software purchasing decisions are now made or heavily influenced by such integrators. That's why webMethods Inc., a Fairfax (Va.) maker of software for tying together disparate computing systems, forged partnerships with service giants such as Andersen Consulting and KPMG, plus 92 smaller consultancies. The impact: Thousands of consultants employed by others extend the reach of its 70 sales reps and 110 consultants. Those linkups are paying off. In the summer of 1999, Andersen recommended webMethods (WEBM) to PolyOne Corp. (POL), a $3.5 billion plastics manufacturer based in Cleveland, to connect its own manufacturing and planning software to systems used by its three largest suppliers. As a result, PolyOne has shortened the time it takes to create orders from days to seconds and reduced its inventory by 13%. ''WebMethods is a very good tool, but Andersen Consulting has a deep understanding of how our system works,'' says David Honeycutt, director of e-business for PolyOne. For the software upstarts, buddying up won't necessarily overcome the advantages of the giants. Consider the power of IBM. With annual 1999 software revenues of $12.7 billion, it's the world's second-largest software company after Microsoft. It has 8,000 software sales specialists, compared with just 511 for BEA. Now that IBM has wised up to BEA's market, it's gaining ground. In 1999, BEA claimed 32% of the market for e-commerce application servers, vs. 16% for IBM, according to tech research firm Giga Information Group. But by the end of this year, Giga estimates that BEA and IBM will be tied, with 24% each. Giga analyst Mike Gilpin says that even though BEA's technology has the edge, IBM's long track record reassures potential customers. ''We're gonna be here 20 years from now,'' says Steve Mills, an IBM senior vice-president who runs the company's software division. As mighty as they seem, the software powerhouses have some chinks in their armor. Because they already have thousands of customers, they spend a lot of their time and energy maintaining and updating old software. IBM, for instance, has to make versions of its software for at least eight different server operating systems. That slows down the release of product updates and makes it hard to break from the past and deliver innovative technology. It's one reason why companies that have had tremendous successes in one business era find it hard to replicate them in the next. IBM dominated the mainframe market but was overshadowed by Digital Equipment Corp. in the minicomputer market. DEC, in turn, missed out on the shift to PCs. ''The leading companies always get toppled,'' warns Clayton M. Christensen, a Harvard Business School professor. The bigger you are, the harder it is to shift course. Consider Oracle, which sold nearly $600 million worth of database software last quarter. Its future growth rate hinges on the sales of its e-business suite of applications, which includes software for e-commerce, procurement, and online marketplaces. But it's having trouble switching its focus. During the third quarter, Oracle's application software sales disappointed Wall Street. Application sales grew 42%, to $156 million, from the previous year, but analysts were expecting 60% growth. Insiders say Oracle's sales force has a greater incentive to sell its core database product because they know it better--and they get bigger commissions. Despite Oracle's hiccups, the incumbents won't give way without a fight. Kana Communications Inc. Chief Executive Michael J. McCloskey says that heads of big software companies use their clout to try to undermine the small fry. He says the CEO of a large software company, which he would not identify, recently berated a consulting firm for recommending Kana's products. Separately, that same CEO called the head of a large Kana customer to point out that his company's software was already installed on its computers. The not-so-subtle message: You depend on us for help. ''They call very high in the organization and try to unhook our deals,'' says McCloskey. The upstarts fight fire with fire. Roger Siboni, CEO of E.piphany, takes advantage of his decade as a top executive at high-tech consultant KPMG to land customers. A personal plea he made to Greg Carmichael, CIO at Emerson Electric (EMR), helped E.piphany edge out Siebel Systems. ''Roger Siboni called me,'' says Carmichael. ''Tom Siebel didn't.'' At i2, CEO Sidhu went so far as to peg a portion of i2's fee to its ability to deliver savings. That has won him instant credibility. The company's most recently quarterly revenues hit $319.5 million, up 118% from a year earlier. It's not enough, however, to go toe-to-toe with the Old Guard. The would-be software kings must also look over their shoulders at the up-and-coming startups. In October, Wal-Mart Stores Inc. (WMT) selected virtual unknown Atlas Commerce Inc., a one-year-old software maker in Malvern, Pa., to improve coordination with its suppliers. Atlas' product allows numerous Wal-Mart stores to combine orders from various suppliers into a single purchase order--the procurement market that Ariba dominates. As a result, the retail giant can get volume discounts and trim shipping costs. ''I worry less about the big guys,'' says Interwoven (IWOV) CEO Martin W. Brauns. ''I worry more about the three guys in the garage building something no one has thought of yet.'' When it comes to predicting who the new leaders will be, one thing is clear: It's unlikely that any single company will gain the same kind of dominance of Web computing that Microsoft enjoys in the PC realm. While some of these young companies rule their markets, a total Net monopoly isn't likely since no one company can own the operating system of the Net, as Microsoft did with personal computers. ''There's more of a level playing field than there has ever been,'' says Dave Winer, who runs the popular software-developer Web site, DaveNet. Ironically, that level playing field may not be the best thing for the software upstarts. There are some advantages to having one company call the shots. A single standard-bearer can get the whole industry moving in sync, minimize incompatibilities between technologies, and assure customers that they're making smart investments. These days, many in the software industry hope that Internet standards can fill the role that Microsoft plays in the PC realm and that IBM plays in mainframes. But there's still a lot of work to be done to assure that Internet software knits together. It's vital to the upstarts that these complex systems don't devolve into a computerized Tower of Babel. Otherwise, corporations and consumers alike may end up wishing that Microsoft remains king of the software hill. By SPENCER E. ANTE and JIM KERSTETTER Contributing: Jay Greene _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					e.biz Contents for Dec. 11, 2000 issue RELATED ITEMS The New Software Whizzes TABLE: Software's Brash Upstarts CHART: The Upstarts Are Growing Fast...Boosting Their Stock Performance... TABLE: ...And Winning Buy Recommendations GRAPHIC: i2 Technologies Snapshot GRAPHIC: Vignette Snapshot GRAPHIC: BEA Systems Snapshot GRAPHIC: Ariba Snapshot GRAPHIC: BroadVision Snapshot Microsoft's Little Bro' TABLE: Still King of the Hill ONLINE ORIGINAL: A Hill of Beans That Could Have Buried BroadVision ONLINE ORIGINAL: How E.piphany Gets Them to See the Light ONLINE ORIGINAL: Q&A with BEA's William Coleman ONLINE ORIGINAL: Q&A with Commerce One's Mark Hoffman INTERACT E-Mail to Business Week Online

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