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Big-ticket software gets a trim

Open-source alternatives and bundling by larger vendors are putting price pressure on back-end middleware providers.

The market for big-ticket server software is going the way pork bellies and other commodities once did: Prices are going down.

The overall market for infrastructure software needed to run business applications grew in 2004 by nearly 6 percent compared with the previous year, to $6.7 billon, according to market research company Gartner, which released its results Tuesday.

Gartner analyst Joanne Correia forecast that the segment will continue to grow at a "slow but positive" pace--in the low single digits--for the coming years, as corporate customers invest in integrating their existing systems or building new applications.

News.context

What's new:
The market for back-end infrastructure software is growing, but open-source offerings and discounting by larger vendors are putting pressure on prices.

Bottom line:
Market dynamics are heightening competition and changing the landscape. Companies increasingly are selling larger suites of server software--and this is where the "real battleground" will be, an analyst says.

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But despite the uptick in spending, providers of infrastructure software are facing more price pressure in an already highly competitive market. The culprits are discounts on product bundles by larger vendors and the effect of open-source products.

"There's more activity, there are more projects going on, but the price somebody is paying for this, compared to three years ago, is 15, 20, 30 percent less," Correia said. "And the value of what's in an application server today versus 2000 is huge."

The Gartner study tallied new license sales of server software worldwide, including Web portals, application servers and integration software, but did not include corporate databases.

This back-end "middleware" is expected to be one of the most contentious battlegrounds in the coming years as corporate customers spend on upgrading their infrastructure to be more flexible and cost-effective.

Instead of offering individual components, such as application servers, software makers have assembled suites that include tools to tie together existing systems and serve up Web pages to end users. "This is the real battleground moving forward," Correia said.

The database "drag"
To compete for middleware business, larger vendors can offer discounts by selling several components together. In particular, databases drag in follow-on sales of other back-end products, such as application servers, Correia said.

Database giant Oracle, for example, is using this bundling strategy to good effect, selling an aggressively priced application server to its current database customers. Also, open-source application servers, notably from JBoss, are making their mark by providing alternatives to products from proprietary vendors. JBoss does not charge license revenue for its application server but makes money charging for ongoing support.

To make up for the dip in margins, infrastructure software vendors are relying increasingly on partners to sell higher volumes of middleware, particularly to small and medium-size businesses, Correia said.

IBM and Microsoft already have well-established distribution channels, while Oracle and BEA Systems are also trying to expand their partner networks.

Chart: New license revenue for application platform suites in 2004
Results from 2004 indicate that IBM and Microsoft both made middleware market share gains, according to Gartner.

Oracle also saw its market share grow, while BEA--once the market leader in application servers--saw its share slip for the second straight year.

In the category of application platform suites, IBM has the lead with 26.8 percent, up from 23.5 percent in 2003. The figures for all providers include sales on both mainframe servers as well as other operating systems.

BEA retains the second-place title in the segment with 12.4 percent, the same as 2003. BEA, which suffered declining license sales in 2004, along with the departure of some of its top technical executives, saw its new license revenue shrink 3 percent.

Oracle had 8.3 percent share, besting its 2003 showing of 7.3 percent.

Revenue for Microsoft's application platform suites--which represents sales of its SharePoint portal server and BizTalk integration product--more than doubled to $176 million, or 5 percent share.

Sun Microsystems, meanwhile, relaunched its own server suite last year and adopted a per-user license model but did not appear in the top-five server suite vendors in terms of revenue.

Another company that is pushing into the middleware market is SAP with its NetWeaver infrastructure software, standards-based middleware designed to make SAP applications better connect to outside systems. Rather than cede dollars earmarked for middleware to others, SAP is counting on NetWeaver to spur upgrades of its applications and expand its market influence.

Pure-play pressure
The middleware category that is seeing the most price pressure is application servers, software that runs custom-written programs and handles transactions. On top of JBoss, there are other open-source application servers in the market, including Jonas and Geronimo, which are based on the Java 2 Enterprise Edition, or J2EE, standard.

As a result, Gartner forecasts that the total revenue from application server license sales will start to decline in 2006. Estimates of application server market share, which do not figure in open-source products, now represent about $1.2 billion in sales.

Consulting firm Back Bay Technologies, for example, decided to choose all open-source components to rebuild a commerce and news Web site called the Remy Report. The company decided to use open-source software, including JBoss, because the absence of up-front license fees made the total package cheaper, said Marc Maselli, CEO of Back Bay Technologies.

Customers are getting more options to get support services for open-source products. A number of companies have formed to provide maintenance, installation and ongoing support around open-source middleware tools, usually on a subscription basis.

Gartner's Correia said that the competitive forces of bundling suites of server software and open-source will make life increasingly challenging for specialized, or "pure-play" vendors, which sell standalone application servers or integration products.

"The reality in every single (customer account) is that particularly the pure-play vendors have to compete against established relationships or compete with something that's sitting there for free," she said.