Software toolmakers struggle in shrinking market

Faced with declining profits, these software companies, once numbering in the dozens, have whittled down in recent years as profits have evaporated and buyers' needs have changed. Software development tools allow businesses to create software geared for their own specific needs, such as accounting or human resource software.

Just in the past few weeks, Sun Microsystems bought its way into the development tool market by acquiring toolmaker Forte Software for $540 million, and Motorola purchased Metrowerks for $95 million.

Some of the remaining players, including Inprise and Symantec, are struggling to make money and are attempting to branch into new areas. Meanwhile, venture capitalists are shying away from funding new tool start-ups, analysts said.

"You can't make enough money by just selling development tools," said Mike Gilpin, an analyst with Giga Information Group.

Reasons for consolidation include buyers' expectations of low-priced--or free--tools, and the increasing tendency of companies to buy packaged applications rather than build their own, analysts said.

Big technology firms, such as IBM, Oracle, and Sun, are still willing to invest millions of dollars in tool companies and in research and development to make their overall product lines more attractive. To those companies, tools are necessary components of their technology "platforms."

Oracle, for example, spent $30 million in the last year to lure more developers to its application development environment and to get them to buy its Internet-focused 8i database.

"The job of the tool is to simplify the development process and make developers more productive," said Jeremy Burton, Oracle's vice president of server marketing. "If they think what we've got is cool and [they] build applications on top of it?that's how we make our money."

Added Jonathon Schwartz, vice president and general manager of Sun's Internet development products: "Standalone tool vendors are really under tremendous pressure because they're faced with competition [from the] Microsofts, Suns, IBMs, and Oracles of the world."

Attracting customers
The well-heeled software companies use a strategy--perfected by Microsoft in the early '90s--of attracting corporate developers with low-cost, easy-to-use programming tools, hoping to pave the way for businesses to buy their more expensive technologies, such as e-commerce software, databases, or high-powered computers.

Those companies are looking at development tools as more of an investment to bring people to their product family, said analyst Gilpin.

"Microsoft has seen this for years and operates [its] tools division at about break-even," Gilpin said. "By making similar investments, the big companies that can afford to do so--Sun, Oracle, IBM--can counter Microsoft more effectively."

The current Web frenzy has contributed to such consolidation. In the past, during Inprise's (formerly Borland) and Symantec's heyday, developers primarily used programming tools to build software for desktop computers.

But with the rise of e-commerce, corporate developers need new technology to build Web-based software that links the company with customers, partners, and suppliers.

Application server software has emerged as the primary tool for creating Web-based software, a trend that has left Inprise and Symantec reeling, forcing them to adopt Internet strategies.

According to a recent report by International Data Corporation, Inprise's sales of its traditional development tools have fallen 63 percent, from $20 million in 1997 to just $7.5 million in 1998. Symantec, which makes the bulk of its revenue from antivirus and PC utility software, saw its tool revenue drop 29 percent, from $22 million in 1997 to $15.7 million last year.

The numbers for Symantec haven't improved this year. In its last quarter, ended June 30, Symantec made $3.8 million in tool revenue, down from $10.7 million in the same quarter last year.

Analysts say customers prefer to buy all their application development and deployment software, from tools to application servers, from one vendor.

"The leading application servers will have the leading tools in the long run," said analyst Josh Walker, of Forrester Research.

The tools market also is consolidating because more businesses are buying packaged business applications rather than developing the software themselves, analysts said. And in their attempts to lure more developers, tool sellers no longer charge as much as they once did, so profits have fallen, analysts added. Licenses that used to range in the thousands of dollars for each developer have fallen to the $200-to-$800 range.

Cheap and easy
Whether to make tools used to be a strategic decision, but that's no longer the case with Java tools, because they work across platforms and are cheap, said analyst Anne Thomas of the Patricia Seybold Group.

For example, instead of buying a Java tool, a developer can download a 30-day preview of NetBeans' Java tool, and when the time runs out, they can download another free copy, she said.

"Before, if it was determined everyone was going to develop with Visual Basic, everyone used Visual Basic. But now with Java, it doesn't matter, because it's interchangeable," Thomas said. You can use any Java tool and it makes no difference."

For standalone software tool sellers to survive, analysts said that companies need to make good partnerships, to increase revenue from professional services, or to add an application server to their product portfolio.

To augment its development tool sales, Inprise has added an application server to its arsenal, while Symantec plans to release software to help businesses create e-commerce Web sites.

"You've got to have an application server to make money," Giga's Gilpin said. "Otherwise, you don't have enough to fund the expensive engineering work to build a competitive development tool these days."

Besides moving into the application server space, savvy partnering can help boost toolmakers. Gilpin said Rational Software is one of the few standalone toolmakers doing well because the company has carved a niche in modeling and testing tools and has struck valuable partnerships with big companies like IBM and Microsoft.

"[Rational Software] recognized [it] needed to add value around the development tools and app server strategies," Gilpin said.