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BEA's strategy: Get inside to get ahead

The company insists it only wants its applications to be compatible with leading software, but some analysts see its growing list of partners as a Trojan horse.

BEA Systems has been friendly of late. Eventually, it may become a little too friendly for its partners, say analysts, who think the software maker is employing a Trojan horse strategy to eventually compete with its allies.

Last week at the JavaOne conference in San Francisco, BEA announced partnerships with Computer Associates, WebMethods, PeopleSoft and Siebel Systems, to name a few. And this week BEA executives are in Europe meeting with analysts and customers and announcing more partnerships.

A few years from now, those arrangements may be seen as the beginning of an expansion into new areas--areas that are currently occupied by those very partners.

"We believe these new partnerships are stopgap measures until BEA makes a decision to eventually buy or build the technology themselves in the future," said Credit Suisse First Boston analyst Wendell Laidley.

BEA makes application-server software that allows customers to bridge various software programs and conduct e-commerce transactions. With its WebLogic server software, developers have a base to integrate e-business processes. The company's software is also what links front-end applications--sales, for instance--to companies' databases.

BEA and IBM are ranked first and second, respectively, as application-server software makers. That leadership position has enabled BEA to embed itself in the e-commerce operations of many companies. The ancient Greeks employed a similar strategy to get inside the gates of--and soon conquer--their Trojan War rival.

According to Alfred Chuang, BEA's chief operating officer, the San Jose, Calif.-based company can thrive as long as there's a "gazillion-application world" in which companies have to connect a host of disparate programs.

Through announcements last week, the company ensured that its products will work with those from "best-of-breed" software makers such as Siebel, which sells customer-service software. (The best-of-breed approach requires customers to pick and choose from a number of software vendors.)

"The real challenge is applications integration, and that's where we come in," Chuang said.

On the surface, analysts say, BEA's series of announcements proves that the company's software will work with a wide range of products as WebLogic becomes a de facto industry standard. Below the surface, though, a strategy of a different sort is taking shape.

"Individually, these announcements only say 'all our products work together,' but in total it's huge," said Bill Schaff, portfolio manager for the Berger Information Technology Fund, who owns shares of BEA and rival IBM. "It adds up to their business model down the road."

Schaff, along with other analysts, said that BEA's shift is subtle, but it's clear that the company is broadening its horizons. It may have no choice.

For now, BEA is dominant in its domain, but hardware vendors--such as Hewlett-Packard, whose Bluestone unit competes with BEA, and Sun Microsystems, which offers a rival product dubbed iPlanet--are getting into the act.

For companies such as HP and Sun, bundling application servers along with hardware is a way to boost sales. At some point, hardware companies and budding rivals such as Oracle will begin to erode BEA's profit margins, analysts said.

"It's not a question of market share, but it's a question of future profit margins," said Schaff, who noted that BEA won't see problems for a while but will have a "tougher and tougher" time pleasing Wall Street. For its fiscal first quarter, ended April 30, the company reported net income of $20.6 million, or 5 cents a share, on sales of $257 million and topped estimates.

Because of the potential erosion in profit margins, BEA is going to have to expand into other areas if it wants to continue its 22-quarter run of record revenue growth. Indeed, it recently announced that it would offer a portal technology that lets customers present different versions of a Web page to partners, employees and their customers.

WebLogic Portal 4.0 "brings into focus BEA's successful Trojan strategy to outflank applications players like BroadVision and Art Technology," said Richard Williamson, an analyst with Jeffries.

For its part, BEA said its recent moves don't show any motives other than that of being compatible with leading software companies. Chuang, who noted that e-commerce transactions will only grow, said that BEA will expand by broadening the appeal of the company's application server software to new customers.

"Don't get me wrong, I do want to sell more software," said Chuang. "But the majority of revenue will continue to come from WebLogic. We are complementary to our partners."