Who's afraid of BEA's sting?

Why are all the big software makers gunning for BEA Systems?

Much larger companies, including Oracle, IBM and even software newcomer Hewlett-Packard, are taking aim at BEA after a recent study showed that the smaller company ranks first in market share for application-server software, which businesses use to handle e-commerce and other Web site transactions.

Although BEA Systems' stock has taken a hit lately, the company is thriving against heavyweights Oracle, IBM, Sun Microsystems and others in a market that's expected to grow from $667 million in revenue in 1999 to $2.4 billion by 2003, according to IDC.

It has claimed the top spot in application-server software for a second straight year, capturing more than 24 percent market share in 2000, according to preliminary data from analyst firm Giga Information Group. IBM ranks second just behind BEA, while iPlanet (an alliance between Sun Microsystems and America Online) stands around 9 percent. They are followed by Oracle, Sybase and others, according to the report.

BEA has "the dominant application server, and that's quite an accomplishment for someone that's nowhere near the size of Sun, IBM or Microsoft," said Zona Research analyst Martin Marshall.

And that ranking isn't sitting well with BEA's bigger competitors. Oracle executives, for example, guaranteed in December that Oracle's e-business software runs faster than BEA's technology--if not, Oracle would pay customers $1 million. The company had earlier issued similar guarantees that its software would outpace IBM and Microsoft technology.

BEA Systems Stock price from March 2000 to present.

Source: Prophet Finance

IBM representatives have recently paraded the Giga study, which says that Big Blue is capturing a bigger piece of the market and has the potential to overtake BEA in market share in the coming years. And Hewlett-Packard has issued a press release that takes aim at BEA, claiming that the features of its own Bluestone application server are superior.

The bigger software players aren't afraid of BEA, says Scott Hebner, IBM's WebSphere marketing director, but merely responding to its "aggressive" marketing efforts.

BEA Chief Executive Bill Coleman is enjoying the spotlight. The application server is the operating system for Web sites, and BEA is the company to beat in that game, he says. He goes so far as to say that BEA can dominate the application-server market the way that Microsoft dominates the PC operating system market.

The field is already being winnowed down. The number of application-server makers has dropped in the past two years from about 50 players to fewer than two dozen, analysts say.

"This market has exactly the same characteristics as the Windows market. The winner will be big," Coleman said in a recent interview. "Customers are betting on us. The company is going to be around. People...believe we are going to win."

Capitalizing on WebLogic
BEA entered the application-server market when it acquired start-up WebLogic in 1998. Analysts say the San Jose, Calif.-based company has tasted success because WebLogic was one of the first application servers in the market.

The e-business software

Gartner analyst Yefim Natis says BEA Systems is gradually losing momentum to its application server rivals, but it has faced challenges before and will likely continue to be a leader through at least 2005. see commentary

maker's strong showing in the application-server market has also translated into financial success. In February, the company raked in a fourth-quarter profit of some $43 million, or 10 cents per share, on revenue of $256 million. And having recently joined the Nasdaq 100 index, BEA claims to have reached the $1 billion run rate--the projected annual revenue based on one quarter's worth of sales--faster than any other software company.

While companies throughout the technology sector, including Oracle, have announced profit warnings this year, BEA has left intact its sales target of $1.2 billion for its current fiscal year. It also raised its earnings estimates 3 cents to 4 cents a share to between 39 cents and 41 cents for the 2002 fiscal year.

Still, few companies have been unscathed by the recent market slowdown. Several analyst firms, including Morgan Stanley, recently downgraded BEA's stock because of concerns about the slowing U.S. economy hurting the company's sales.

BEA's shares have been on a slide of late, along with many other tech stocks. Investors had pushed it to a 52-week high of nearly $90 in October, when others in the tech sector were already riding a downward trend, but it has dropped steadily since the first week of this year, losing about 60 percent of its value in that time.

Its shares closed Thursday down 3 percent after published reports suggested that Sun may integrate its application server into its Solaris operating system. Such a move could hurt BEA sales, but Sun executives responded to the reports by saying they have no plans to combine its application server and operating system.

On Friday, however, the stock was up $1.69, or more than 6 percent, to $27.88 in morning trading.

Moving beyond application servers
Analyst Erick Brethenoux, of Lazard Freres, predicts that BEA will maintain its market lead against IBM, Oracle and iPlanet in the application-server market. But the company needs to pump up its family of e-business software beyond application servers, he added.

Gartner analyst Mark Driver agrees, saying that application servers are becoming commodities. The big revenue in the future will come from other e-business software, such as applications that help businesses create corporate portal Web sites so that employees have a single point of access to e-mail, news and corporate resources such as internal sales data.

"The application server is the plumbing--and over time, companies will make less and less money on the plumbing," Driver said.

That idea echoes a theme in the countermelody being sung by BEA's bigger competitors, such as Oracle and IBM, which point out that they have a wider portfolio of products, including database management software, which stores and collects corporate and Web data. The refrain touches on an age-old debate: Is it better for a business to buy all its software from one company, or pick and choose products from a variety of software companies and then meld them together?

"We look at BEA as a company we can knock out," said Jeremy Burton, Oracle's senior vice president of product and services marketing. "In order to broaden their footprint, they will have to acquire companies."

Coleman argues that his company has no holes in its product family, adding that it can rely on partnerships with software companies such as Ariba, which builds electronic marketplaces, and BroadVision, which makes software that manages content. BEA also partners with software development toolmaker WebGain, which it partly owns.

Oracle executives also say that because Oracle built its own applications, its technology is better integrated and easier to use.

BEA isn't sitting still, however. Like other application-server makers, it has added features to its products, including personalization, through which an application profiles Web surfers and targets information and advertisements based on their interests. The company also sells integration software, which allows companies to link computing systems to exchange data and conduct business over the Web.

Gartner's Driver said BEA is on the right track, but its product family still needs some work.

"BEA has been on a massive acquisition strategy for years. They've made the right moves, focusing on more commerce-oriented solutions," Driver said. "But their integration tends to be weak, and they don't have a good portal (software) story right now. They're partnering with other vendors, but they need to expand what they've done. Otherwise, they'll be limited."

Overall, industry analysts expect BEA will continue to do well against its bigger rivals. But to do so, the company has to parlay its market leadership in application servers and capture revenue from related e-business software products.

"They've done a pretty good job. They have become the 500-pound gorilla in the market," said analyst Evan Quinn, of the Hurwitz Group. Now, he said, "they need to continue to invest in research and development and marketing."