Software start-ups think inside the box

To compete better, some young companies are packaging their products as specialized software-hardware appliances.

Talk to Fred Meyer, CEO of start-up Cast Iron Systems, about his company's data-integration product and you picture a shrink-wrapped cardboard box with a few software CDs inside.

Instead, his company makes something that more resembles a server or router, which can be slipped onto a rack in a corporate data center.

That product design choice is not by accident. Selling a hardware, rather than software, product gives Cast Iron Systems, which announced a fourth round of venture funding on Monday, an edge over rivals, Meyer said.

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What's new:
Rather than sell a software-only product, a number of smaller companies are choosing to create specialized appliances that combine software and hardware and can be easily plugged in to a corporate IT infrastructure.

Bottom line:
Although the appliance design does not suit every purpose, the approach could gain ground among risk-averse corporate customers looking for technology that's easy to install and maintain .

"We cheat," said Meyer to explain the company's tactics. "Customers today are starting to buy software the way they bought hardware 10 years ago. There's no longer magic in software--it's just another tool to get the job done."

Though far from widespread, the practice of selling boxes that combine both hardware and software engineering, instead of only software, has a bright future, proponents say. Some predict that appliance design will become a part of more and more applications as the approach catches on.

The main selling points behind an appliance are cost and speed. A device used for a specialized purpose can be easier to install and maintain than component pieces, industry executives said.

And in today's corporate technology market, "simpler" and "cheaper" are words that resonate with risk-averse customers eager to keep initial investments low and start-up time for projects to a minimum.

"The enterprise is really looking for something that has one or two magnitudes better performance and is very easy to insert in an IT infrastructure," said Ted Dintersmith, a partner at venture capital firm Charles River Ventures. "What IT buyer or CIO wants to sign up for a $30 million black hole, when the odds are one in three it will actually work?"

Old wine?
Dedicated appliances, of course, are nothing new. For years, networking companies have combined hardware and software in single-purpose boxes--routers and firewalls, for example.

But now, hardware packaging is being used more broadly.

Five-year-old Netezza, for example, has designed a database appliance tuned for data warehousing applications, where business users query historical data to analyze trends.

Jit Saxena, the company's CEO and co-founder, said Netezza's product design--which combines custom chips, storage and specialized software--gives it a leg up on entrenched providers such as IBM, Teradata, Oracle and Hewlett-Packard.

"Customers pay one-third or one-fourth (the usual cost) and get at least a magnitude of performance better," Saxena said. "This easy-to-use, low-cost-of-ownership (approach) will do a number on these general-purpose silos."

Netezza recently landed a fourth round of venture funding--$15 million--and plans to add 100 employees this year to its existing 140.

Another company, called nLayers, sells an appliance designed to prevent glitches by tracking the dependencies between different data center components. By contrast, its competitors, such as Relicore and Collation, sell their wares as software products.

Meanwhile, Google sells a corporate search appliance, and in the world of XML networking, there are a number of companies that sell appliances for tasks such as speeding up network traffic or providing Web services security.

These companies are taking advantage of the changing economics of the IT industry.

Costs of hardware have been pushed down persistently for years, making appliances cheaper to buy. Also, standardization is increasingly common in the IT industry, affecting everything from chips to software.

Netezza appliances, for example, employ commonly used database access interfaces, while XML hardware companies can use Web services protocols.

Hardware commoditization and better integrated components let start-ups use larger "building blocks" of preintegrated components and develop products more easily, industry executives said.

Dintersmith said this approach is a break with how companies have typically approached engineering. Typically, hardware companies dedicate three-fourths or more of their research and development budget to hardware and the rest to software, he noted.

"But with this new generation of companies, the software mix of their R&D budget is three-quarters or more. So for less than a quarter (of the budget), they are doing proprietary hardware, which is very different than business as usual," Dintersmith said.

Box nuances
Speed of installation is an important factor in choosing a hardware design, according to industry executives.

In the case of Cast Iron Systems, its "application router" can be in production in about a month--a fraction of the time it would take using the traditional method of purchasing integration software, server, storage and other software components.

Meyer, who used to be chief marketing officer at integration software company Tibco Software, said the application router is well suited to relatively simple integration tasks.

"Friday afternoons I used to have beers with the (Tibco) global architects and ask how things went with customers. They'd say that it went fine, but they only used 5 to 10 percent of the product," Meyer said.

Meyer and others said that appliances do not fit every need. For example, Cast Iron Systems' product does not handle some of the more complex jobs, such as multistep business process workflows, that software integration products do.

Also, there is a significant difference between a software product that is simply sold with a commodity server and a device with a proprietary hardware design, said Kevin Anderson, vice president of marketing at DataPower, which sells a line of XML network devices.

"Network appliances are supposed to reduce complexity," Anderson said. "But that requires a totally different engineering discipline. It's not just choosing between shipping on a CD versus (in) a box."

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