Software's 'stack wars'

Software companies used to sell on features. Now it's "stacks," or soup-to-nuts offerings.

To move ahead, big software companies are reaching back to a familiar strategy: offering customers a soup-to-nuts "stack" of software products.

It's an old approach revised for new competition. The idea is to increase sales by offering everything from an operating system to database software and business applications. IBM has for years followed that model, selling everything from hardware to software and services to put all of the pieces together. More recently Microsoft has sought to offer one-stop shopping for software buyers, as have Oracle and SAP.

It's a switch from just a few years ago, when the software industry's "best-of-breed" notion was all the rage. Back then, companies were advised to assemble an "all-star" lineup of products from category leaders, picking and choosing the best products based on features, no matter which company wrote the software.

But shifting economics, industry consolidation and dwindling profits have changed that. Now, big software companies, hoping to keep a greater share of software profits, are building and marketing comprehensive product stacks.

Just this week, Oracle CEO Larry Ellison that he would "like to have a complete stack." Oracle makes billions of dollars selling databases and business applications. In recent years, the company has bought up many other companies, including rivals like PeopleSoft and Siebel Systems.

"We're missing an operating system. You could argue that it makes a lot of sense for us to look at distributing and supporting Linux," Ellison told the newspaper.

Red Hat's acquisition of JBoss last week added an open-source wrinkle to an ongoing competition among companies to build all-encompassing product lineups. The company now offers a broader range of big-system software.

So why the newfound love for the stack sell? By offering a broad product set, software companies can maximize revenue from existing customers and maintain control over product development. Customers get "one throat to choke" for product support and better integration--long the bane of big companies attempting to assemble their IT departments from a hodgepodge of components.

The strategy makes perfect sense--for the software companies. "This is all about control," said Forrester Research analyst John Rymer. "Oracle will sell you an all-you-can-eat license...then capture the maintenance revenue--which is almost pure profit--and then you got access to the customer for up-selling and all the growth potential."

Following a multibillion-dollar buying spree, Oracle has assembled a wide range of applications to complement its giant database business and growing middleware line.

Microsoft, IBM and SAP have similar stack strategies. Microsoft covers the broadest ground in terms of products, while IBM and SAP, like Oracle, have some holes.

How software makers stack up
  Business Apps Middleware Database Manage- ment Operating System
Oracle Fusion Apps Fusion Middleware Oracle 10g Enterprise Manager  
Microsoft Dynamics Windows Server System SQL Server Systems Center Windows
IBM   WebSphere DB2 Tivoli Unix, mainframe, others
SAP MySAP suite NetWeaver      
Hewlett-Packard       OpenView HP-UX
Sun Microsytems   Java Enterprise System PostgreSQL (support)   Solaris
BEA Systems   WebLogic      
Red Hat   JBoss     Red Hat Linux
Novell       ZenWorks NetWare, SUSE Linux

Meanwhile, hosted software providers are pursuing a similar strategy tuned for the online world. But don't use the word "stack," said Salesforce.com CEO Marc Benioff. "The concept of a stack is outdated. Unless of course you work for a stack company," Benioff wrote in an e-mail to CNET News.com.

Salesforce.com is looking to drive revenue from third-party products that run on its AppExchange "platform" for building and running hosted applications, according to company executives.

Watch out for the lock-in
However, buying into the stack approach can be a mixed blessing for customers.

On the one hand, customers end up "locked in" to a specific vendor, depending on what products they sell, analysts said. Oracle, for example, doesn't support databases other than its own and Microsoft's products can't be swapped out for a competitor's offering.

"A significant reason for this trend is customer desire to minimize integration, upgrade, and maintenance issues among the different layers of the software stack. (Customers) also want to deal with fewer providers to ensure better pricing and accountability," Merrill Lynch analyst Kash Rangan wrote in a recent report.

On the other hand, industry consolidation and standardization have led to products from large "super platform" providers that are as good as "best of breed" products from more specialized companies, said Burton Group analyst Peter O'Kelly.

"We're getting into this battle of attrition as all (the vendors) try to move to super platforms," O'Kelly said. "It's not just more products at a discount. Now you need demonstrable synergies between the products."

Ellison said that Oracle may consider supporting Red Hat Linux itself, rather than have customers rely on Red Hat, to fill out Oracle's stack.

"From the operating system up to the application, we're completely responsible. We test everything together, have one set of management tools," Ellison said of the idea of Oracle supporting Linux.

He added that customers would appreciate the better integration and "one throat to choke" support arrangement, "as long as we do a good job and we don't price-gouge them."

Ellison's comments could have been intended as a warning to Red Hat, the leading U.S. distributor of Linux, analysts speculated. With Red Hat set to compete with Oracle in middleware--and potentially databases--Oracle is looking out for its best interests, analysts said.

Indeed, Red Hat's stock slumped 7 percent on Monday while Novell, considered a potential takeover candidate by Oracle, saw its stock rise slightly.

Analysts also point out that Ellison is known to bluff on occasion. "However, we note that public posturing from (Ellison) does not always correlate to ORCL's actual intentions, as he repeatedly suggested that ORCL could and would competitively crush Siebel Systems--only to end up acquiring the company," wrote First Albany analyst Mark Murphy in a report issued on Tuesday.

Given that history, an acquisition is always a possibility. "The super platform vendors are playing a game of musical chairs and there could be a significantly fewer number of chairs when the music stops next time," said Burton's O'Kelly.

How stacks stack up
Adding additional products and features is nothing new for software companies eager to grow revenue. But technology changes are making the need to build technically coherent packages more important--and realistic--than in the past, said analysts.

Broader adoption of industry standards, such as Web services protocols, is making product integration easier. In a way, customers are forcing the creation of stacks, say analysts. Many corporations are seeking to upgrade their systems around a services-oriented architecture, or SOA, a modular software design that promises to make business applications easier to write and maintain.

As a result, software vendors are busy creating--and selling--the tools and infrastructure required for this architectural shift from Web applications to SOA.

Oracle's Fusion Middleware, which is based on Java standards, is being designed to run the now-disparate packaged applications Oracle has acquired, including those from Peoplesoft, Siebel, J.D. Edwards and various industry-specific applications.

Packaged-application giant SAP, meanwhile, has made a high priority of the NetWeaver infrastructure software and Enterprise Services Architecture.

Through dozens of acquisitions over about 10 years, IBM has significantly amended its software line--which covers application development, systems management and security, information management, collaboration, and back-end middleware.

Rangan said that growth for enterprise software companies hinges on their stack strategies and how "effectively they penetrate their installed base with the expanded product portfolios."

Room among the giants?
The largest software vendors--Microsoft, IBM, Oracle and SAP--have the most complete stacks. But pursuit of stacks and application "platforms" is not limited to the industry's giants.

Analysts speculate that Red Hat will eventually offer support for a commercial open-source database, further filling out its lineup. Red Hat CEO Matthew Szulik declined to comment on its database plans last week, saying that in the short term the company will focus on integrating JBoss.

Meanwhile, software-as-a-service providers are building their own "platforms" meant to provide customers with a suite of hosted applications. Online companies such as Google and Salesforce.com are building up the infrastructure to host third-party applications, a move also being pursued by Microsoft and IBM.

Saleforce.com executives argue that the company's AppExchange catalog of hosted applications is designed around the Internet and connectivity, a more modern approach compared with a single vendor's on-premise vertically integrated software.

"AppExchange is a platform with an OS (operating system) tools and database. It runs hundreds of applications on any device," Benioff said. "But, it is not a traditional stack of code that you install, upgrade, update, etc. That concept is just not relevant any more."

Even as larger vendors seek to build clout with deeper stacks, smaller specialized vendors can outrun them, said Forrester's Rymer. He sees a split among corporate customers, some of which favor buying integrated goods from a handful of vendors while others are more ambitious users of technology.

"The problem with the approach (of buying suites from a few vendors) is that we are starting to see a shift toward service-oriented architectures and what we call digital business architectures...it's the next platform wave," said Rymer. "These people want features, they don't just want relationships and they don't want to wait for IBM or Oracle."

CNET News.com's Mike Ricciuti contributed to this report.

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