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The Starting Line: BEA's partnership push

BEA insists it only wants to be compatible with leading software, but some analysts see the company's growing list of partners as a Trojan horse.

BEA Systems has been friendly of late. In fact, it may eventually become a little too friendly for its partners, say analysts who think BEA 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 International, 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. BEA makes application server software, which allows customers to bridge various software programs and conduct e-commerce transactions.

With BEA's WebLogic server software, developers have a base to integrate e-business processes. BEA's software is also what links front-end applications to companies' databases.

BEA and IBM are ranked first and second, respectively, as application server software makers. BEA's position has enabled it to embed itself into the e-commerce operations of many companies.

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

Through announcements last week, BEA ensured that its products will work with those from "best-of-breed" software companies 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.

Expanding horizons
On the surface, BEA's series of announcements just proves that the company's software will work with a wide range of products as WebLogic becomes "a de facto industry standard," analysts said.

But a few years from now BEA's partnerships may be seen as the beginning of an expansion push into new areas, which are currently occupied by the same partners touted last week.

"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.

Bill Schaff, portfolio manager for the Berger Information Technology Fund, agreed. "Individually, these announcements only say 'all our products work together,' but in total it's huge," said Schaff, 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, which competes with BEA with its Bluestone unit, and Sun Microsystems, which offers a rival product dubbed iPlanet--are getting into the act.

For companies like 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 ding BEA 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 ending April 30, BEA 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 in upcoming years. Indeed, BEA 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.

BEA's 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 other motives than being compatible with leading software companies. Chuang, who noted that e-commerce transactions will only grow, said 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."