BEA's growing pains

newsmaker In less than 10 years, BEA Systems became a billion-dollar company.

The Java software maker saw explosive growth during the Internet boom of the late 1990s by supplying the back-end application server software to run Web applications. Company CEO and founder Alfred Chuang wants that growth to continue. His goal is to make BEA a $3 billion company within the next five years.

But things have changed since the go-go days of the Internet boom. BEA is facing increased competition from IBM, Oracle and Microsoft. Open-source application servers are increasingly popular. Corporate customers are also winnowing down the number of technology suppliers they work with.

There are a lot of dogs out there. You can buy something and it will go nowhere. Most acquisitions fail.

That can pose a challenge for BEA, which doesn't have the same broad product line or as many contacts within corporate customers as its larger competitors.

BEA's strategy has been to widen its product line around a suite of server products and to popularize cutting-edge software like its WebLogic Workshop Java development tool. In its latest "Liquid Computing" vision, BEA's sales prospects depend largely on the adoption of a modern, more modular design approach called services-oriented architecture. At its eWorld customer conference in San Francisco, company CEO Chuang discussed the company's strategy and size.

Q: You said BEA is the perfect size to innovate. But you could make the argument that as a midsize company with a billion dollars in revenue, you don't have the same development and marketing resources, compared to IBM or Microsoft.
A: Well, you could always argue that we are already too big. We have 700-plus engineers, and I had so much more fun when we were 10 people in 1995. But you can't stay at 10 people--this is about growth.

Innovation has two parts. One is making the technology itself, and the other is taking it to the market.

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From our perspective, we're still at a size at which we can build something new, like (mobile-technology initiative) Alchemy and get it to market. Large companies can't do that. Their sales process is too complicated, and updating their legacy is too hard. I think we're still at the size where we can innovate and get it to market very quickly.

BEA's always been a company that's invested in cutting-edge technology. Yet some of your competitors, including Sun Microsystems, are implementing the Java standards available rather than adding features beyond the standards and trying to sell on price. Is cutting-edge technology what the market wants all the time?
First of all, until we get to a much bigger size, that's the only way that we can play. Otherwise, why would people buy from us? People come to BEA because we have the most innovation, the most reliable, the most usable, most user-friendly technology. That's the driver.

Many new technologies are being sold. Look at how navigational devices in cars went from 1 percent to 15 percent last year. Why is that happening? Ultimately, technology does change the way we live life.

These people are saying, "We don't need to implement more technology, and because we're bigger, you'll buy from us."

At our size, we can't just sell products anymore. We have to sell both products and vision.

That never flies. If that were the case, then (mainframe makers) Univac and Sperry should still be in business. They were big enough, had stuff that was good enough, and thought that people don't need to innovate further. I really believe that innovation will be a very important factor for a very long time for a company like us.

How do you become a $3 billion company by 2005, innovative technology aside?
Distribution is a very key part. You can't just keep hiring sales reps to sell directly--the Oracle model. Eventually, you get stuck even at that size. Or at IBM's. IBM is not a growth company, and neither is Oracle. People don't talk about it, but neither is really a growth company! We have to look at what technology we have that isn't worth selling on our own anymore. Those are the technologies that the distribution channel can really help us selling. Do you want to stake out the high end in terms of product functionality and consider open-source products?
Not necessarily. I only see open source as an opportunity to create broader adoption. I don't see the application server facing competition from open-source technology any time soon, because the API (application programming interface) is too dependent. People depend on the application server to run reliably, and there's such a small cost.

Linux is being adopted because it runs on cheap boxes. They don't care--you can take an application that runs on Solaris and put it right onto Linux because of J2EE (Java 2 Enterprise Edition).

IBM is not a growth company, and neither is Oracle.

But that is not the case with the application server. The application server today is not as transportable, because it's not a commodity.

Do you see any competition from open-source application servers?
Not at all. And I don't think we will anytime soon. Are you feeling any price pressure from open source?
No. Price pressure comes from real adoption--if people really adopt it, then you'll have real price pressure. If people are not adopting, then there's no price pressure. You've talked a lot about services-oriented architecture, or SOA. Other companies, including IBM, are talking about it as well. Is there something that you can say that you do differently from the others?
We actually have the real thing. We actually have a product that is an SOA platform product really built from scratch. They're all preintegrated. You open the box, and you're ready to go and implement a services-oriented architecture application. Everybody else's is 400 products under one name; they're not the real thing. That is a differentiator on its own.

But right now, services-oriented architecture seems to be a pretty technical discussion. CEOs probably don't talk about SOA.
Some do, but what they do talk about is a more adaptive enterprise. People do understand that their clientele is becoming more literate about the online usage of their services. From that perspective, CEOs understand the value of enabling technology to make that happen faster, because that is a competitive pressure. So, for example, if they're not way in front on online banking, it will be very difficult for a retail bank to survive. They know that.

IBM and Microsoft have lots of different ways to sell into a company. They have more contacts, and they have more products. Is that a challenge for BEA?
That challenge existed before I started in this business.

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Every customer we had was--and could still be--an IBM customer. You can't forget that at one point in time, there was only one information technology company. That was IBM. There was a monopoly for the whole thing. It was time-share, and they controlled it. By nature, this is the beast. We had to go through that. Oracle had to go through that. Everybody has to grow through that. One analyst told me that BEA should consider acquisitions as a better way to grow than through organic growth.
We've been very open about acquisitions; 30-some acquisitions since 1998, so that's five or six a year. The analysts refer to "magic acquisitions." They look at us and ask, "What is the next WebLogic?" WebLogic was not a magic acquisition. It's what we made it into.

I'm not precluding a big acquisition or small acquisition, but the one thing I'm focusing on is to add shareholder value by growing licenses. There are a lot of dogs out there. You can buy something and it will go nowhere. Most acquisitions fail.

Are your new products, like Quicksilver (messaging integration software) a way to diversify your products?
It's not to diversify. It's filling the parts. At our size, we can't just sell products anymore. We have to sell both products and vision. We don't have a choice. We can't just keep selling the application server, saying, "But this is SOA. SOA is just an application server." We've got to tool it enough so that people say, "Ah, I understand."

It's no different from Microsoft on the desktop. They have to have enough pieces so that everyone is productive the minute they use the system. We need to do the same thing.