IBM on Tuesday reported second-quarter earnings that slightly beat analysts' expectations, in large part due to a strong showing from its software group. Company Chief Financial Officer Mark Loughridge singled out the growth of its WebSphere middleware brand and the customers' increased spending on service-oriented architecture (SOA), a system design meant to encourage software reuse and lower costs.
Although the concept has been around for some time, some analysts expect that in the coming years investments inwill be the primary fuel for business software vendors' revenues, notably providers of middleware, or software that connects separate applications.
Signs of SOA spending are showing up on the ledgers of IBM's software competitors as well.
Middleware company Tibco Software has exceeded analysts' expectations for four straight quarters. BEA Systems, which saw revenue decline in 2005, has seen itsin the past six months.
Although most financial analysts focus on Oracle's larger database and applications businesses, the company this week said that its fast-growing middleware portfolio has passed $1 billion in fiscal year 2006. Meanwhile, Microsoft's server and tools business continues toand now approaches the size of its Windows and Office business units.
The SOA approach is touching nearly all corners of business software. But providers of, as opposed to companies like SAP that sell packaged applications, initially stand to benefit the most, said AMR Research analyst Dennis Gaughan.
That's because corporate customers are deciding to build their own applications using SOA concepts--often starting with small internal pilot projects--rather than buy off-the-shelf packaged applications.
"In the short term, that's definitely benefiting the IBMs and BEAs of the world," Gaughan said.
That doesn't mean applications providers are cast aside from SOA spending, though. A "front and center" decision for companies embarking on SOA projects is whether they should go with their packaged application or middleware provider, Gaughan said.
Austin Energy, an electric utility based in Austin, Texas, chose the middleware route, using IBM software. "I'm so enamored of SOA and what it can do for an enterprise, so I think of what a world would look like that is SOA-pervasive. It would be fantastic," said Andreas Carvallo, chief information officer of Austin Energy. "If you could take the top 10 companies in the world, and you could drive an SOA transformation through them and they force that through their own supply chains--a GE, a Wal-Mart, etc.--the benefits would be tremendous, tremendous."
A service-oriented architecture is not a product, but rather a way of designing systems with the goal of being more flexible and cost-effective. Typically, an SOA project will involve sales of infrastructure software components such as integration software, application servers and development tools.
In IBM's case, its WebSphere line, which includes integration software and application servers, grew 17 percent in the second quarter of this year. The company is investing $1 billion a year in SOA-related efforts, such as partner incentive plans.
Some analysts expect spending on SOA to continue growing, as more mature products and increased standardization make the approach worth exploring.
Web services protocols have become widespread, making it much easier to share information between disparate data sources. In addition, IT architects and developers are designing systems to be more modular, rather than monolithic chunks of code.
For example, a service that taps a customer database and presents that information to a Web portal could be used in many applications, rather than be rewritten many times.
The primary benefit is more flexibility and the ability to change systems quickly, some customers said.
"We want business processes to be changed quickly and adapt to how marketing wants to bring services and features to our customers," said Jim Haney, Harley-Davidson's chief information officer, who is heading an SOA project. "It used to be that to make one change you had to change everything, because all the systems were tightly coupled."
Typically, customers can modify existing systems to communicate via standards-based products, rather than have to start from scratch with SOA projects. That incremental approach is pushing customers toward building their own systems, instead of purchasing packaged applications, according to analysts.
"The acceptance of service-oriented architectures by large and innovative end users is one of the means by which the movement toward 'building' has been facilitated," Erik Keller, president of software consulting company Wapiti, wrote in a recent essay.
In his piece, Keller presented research indicating that in the last five years the pendulum has swung from customers primarily buying packaged applications to building their own, spurred by SOAs, open source and offshore programming.
"Enterprise application vendors have to acknowledge and plan for this fast-moving and invisible competitor or face the death of packaged apps in the future," he concluded.