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App server shakeout demands specialization

To compete in the booming, but crowded application server software market, many vendors in the next year will need to carve out a specialized niche.

Application server makers are taking a lesson in anthropology: In the evolution of the market, only the fittest survive.

To compete in the booming but crowded market for application server software, many manufacturers in the next year will need to carve out a specialized niche, analysts say.

"Nineteen ninety-eight was the year of the 'my application server can do anything.' In 1999, vendors will have to target their audience, whether their application servers are designed for e-commerce and SAP applications, order-entry capabilities, or content-based applications," said analyst David Kelly, of the Hurwitz Group, in Framingham, Massachusetts.

An application server sits behind the Web server and handles users' browser-based requests for dynamic Web pages or information coming from back-end databases. The market is hot, according to analyst estimates. Forrester Research expects application servers to account for more than $2 billion in revenue by 2002.

During the past year, acquisitions have dwindled the number of application server makers. BEA Systems bought WebLogic. Sun Microsystems purchased NetDynamics in the summer and recently gained rights to Netscape's application server after America Online bought the former Web browser company. But there are still several dozen application server vendors left in the market.

Most analysts believe that the larger companies--BEA, IBM, Microsoft, Sun, and Oracle--will eventually become the leaders in the application server market because they have more complete systems. The remaining smaller players, such as SilverStream, Allaire, and Novera, will have to find niche markets to survive, analysts say.

Initially, makers tagged many products as application servers, which has led to confusion in the marketplace. Now, many companies are refining their products. For instance, companies are now working to improve their development tools, service, and support, and overall performance, including load balancing and failover features, said Joshua Walker, an analyst at Forrester.

Kelly agrees. "You're beginning to see version 2 and version 3 of application servers. Some of them have been out there long enough to be ready for prime time," he said. "There's still some questions in terms of reliability and scalability and that it's not mature enough in general. We're going to see an increased focus on [those areas] in the next year."

In 1999, more vendors will build adapters to enterprise resource planning (ERP) applications and announce support for mainframe connectivity, Kelly said. Some companies have begun to do that. Earlier this year, Netscape Communications announced it was building new versions of its application server geared for SAP and PeopleSoft applications. And IBM recently announced that its WebSphere application server will support OS/390.

More consolidation likely
Most analysts believe the market will continue to consolidate. Several large companies, such as Hewlett-Packard, Novell, and Unisys may want to enter the application server market--and do so by purchasing one of the smaller vendors, such as Bluestone Software or Gemstone Systems, Kelly said.

"Everyone and their mother is calling their product an application server. A lot of people are doing redundant work. How many can survive?" asked JP Morgenthal, an analyst at NC.Focus of Hewlett, New York. "The players who will survive are the big players with a generic app server and small players who will move to specialized services."

Kelly, of the Hurwitz Group, agrees that smaller companies will have to specialize. "The smaller players will be best served by finding niche, whether it's a vertical niche or addressing some sort of specific connectivity they have."

One potential niche market is a new type of application server, called XML servers.

While most vendors plan to support XML, or Extensible Markup Language, within their servers, a few will release standalone XML servers in the 1999 first quarter, analyst Martin Marshall, of Zona Research in Redwood City, California, said.

Object Design, in Burlington, Massachusetts, and Bluestone, in Mount Laurel, New Jersey, will ship XML servers that will let developers use XML to build Web applications and access data from databases and mainframes.

"It's an interesting idea. We don't know if it's going to fly yet," Marshall said. "We do believe in the future of XML--and we do believe it's a way for applications to talk with one another when they were never designed to talk with each other, and certainly, it will help bridge operating systems and application environments."

Marshall, however, believes the application server market is big enough for all the companies because services are important. Thirty percent of revenue for application server vendors are from services, he said.

The application server market is not like the operating system market, where licenses are the primary revenue source. "In this particular field, 10 little guys can, in fact, survive," he said. "This is a rapidly expanding area...it soaks up personnel really quickly. Companies have to implement the systems and get it to work on site."

Betting on niche markets
Oracle's John Fomook said the market is still maturing and it's too soon to tell whether application servers will stay general or become more specialized. "It could go both ways. We will see parts of both...the market is big and there's lots of room for different things," he said, adding that Oracle plans to continue to sell a general application server.

Kenny Rubin, chief operating officer of Secant Technologies, maker of the Extreme Enterprise Server, said the company has its hand in both the Fortune 1000 market and in the niche markets.

Secant sells its application server to Independent Software Vendors, who bundle the server into their sales force automation and supply chain management, and transportation management software.

"Big names want the Fortune 1000 companies. The problem is there's only one thousand of them," he said. "We're going after the Fortune 1,000s and the sub-$200 million market. We need to get into that market."

Rubin believes smaller companies such as Secant can compete with the bigger companies. Everyone is on a level playing field because vendors are building their application servers based on standards, whether it's Enterprise JavaBeans or CORBA, he said. "The standards in the marketplace [allow] companies with a good business plan and good execution to carve out a significant piece of the pie."