If the Next Big Thing in computing were right around the corner–something so big that it could rival the multibillion-dollar database software market–entrepreneurs most likely would flock to it.
If that innovation promised to solve some of the thorniest problems in hot areas such as on-line commerce and Internet development, you would have the onset of a high-tech Gold Rush.
That is precisely what is happening in the software industry with the fledgling but rapidly growing market for “application servers”–a type of software that takes some of the complexity out of building electronic commerce sites and other large Web-based applications.
From computer industry giants IBM, Sun Microsystems Inc. and Oracle Corp. to upstarts like Persistence Software and WebLogic, companies are busy buying, building or cobbling together their versions of application servers. Each is pitching its technology as the latest platform upon which to build programs to customers ranging from financial institutions to Web-based retailers.
“The reason everyone is getting in this game is because they see this as the next billion-dollar software market,” said Scott Dietzen, vice president of marketing for San Francisco-based WebLogic.
About 30 rivals are jockeying for position, hoping to emerge as survivors in a field that is expected to narrow dramatically. Consolidation has already begun with a trio of high-priced takeovers, and venture capitalists have invested more than $100 million on a handful of companies in the last three years.
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Application servers are a bit like a software version of a car manufacturing assembly line. They make it easy to build complex systems by tying together software components into one unified application. They help connect users, typically through a Web browser, with a company’s information resources.
Once assembled, they act as the infrastructure engine that pipes data between corporate databases and other programs, linking product catalogs with billing systems, membership lists with order-tracking programs. Like an assembled car engine, the application server remains mostly hidden from consumers who only get a look at the finished products: increasingly sophisticated Web sites for everything from on-line financial transactions to membership book clubs.
“This is a major sea change,” said Del Yocam, president and chief executive officer for Scotts Valley, Calif.-based Inprise Corp., formerly Borland International. “I believe this will become so pervasive, it will be much bigger than the relational database business has been for the last 15 years.”
Ed Acly, an analyst with International Data Corp., pegs this year’s sales of applications servers at $347 million and predicts they will rise to about $1.65 billion by 2002. In contrast, the $3.7 billion, 15-year-old relational database market took nearly 10 years to reach a similar size, according to Greg Vogel, of NationsBanc Montgomery Securities. Vogel’s own predictions for the market put sales of application servers above $1 billion by 2001.
The interest in application servers has been fueled by a shift in technology that goes beyond the emergence of electronic commerce. As traditional corporate computer systems have grown in complexity, engineers have looked for better ways to design programs. Many corporate applications have been built to run partly on personal computers and partly on powerful server computers and databases. Maintaining those programs on myriad PCs throughout a corporation has become an increasingly unruly and costly chore.
Companies from all walks of high-tech life are tackling the market with a speed and fervor that is remarkable, even in the Internet age. In November, Internet software company Netscape Communications Corp. paid $180 million for application server maker Kiva Software, and Borland bought Visigenic Software Inc., whose technology became one of the building blocks of the Inprise-Borland application server, for $130 million. Sun acquired rival NetDynamics in July for a reported $170 million.
At Oracle, hundreds of employees are involved in the development of an application server, making it the second-largest project at the company, behind its core database technology. The latest release is slated to be unveiled Tuesday.
At start-ups like WebLogic and Persistence, Software executives say they can’t keep up with the demand for their products.
Analysts say the intense competition among application server makers comes partly from the hope that the technology could become the next platform for writing software, a virtual operating system.
But there are at least a few naysayers who look at application servers with some skepticism.
Microsoft Corp., most notably, believes application servers are not viable as an independent technology. As it has done with other products, the software giant has melded some of the application server functions into its Windows NT operating system, the version of Windows targeted at powerful server computers.
“In (Windows) NT you get everything in depth and breadth that you need to build servers that could be application servers,” said Joe Maloney, group marketing manager for COM and MTS technologies, the Microsoft monikers for the building blocks of its Web development technology. Maloney said programmers who buy Windows NT get the benefit of a technology that is well-integrated with Microsoft’s operating system. What’s more, he said, it’s free.
The Microsoft approach has fueled a standards war that resembles other such recent battles. While Microsoft touts its integrated Windows-based technology, most other companies have rallied around a set of technologies closely tied to Sun’s Java programming language. They argue their approach is better suited for companies that have a mix of systems, including Windows, Unix and others.
Most analysts believe a handful of strong players will emerge, while a few others may survive in niche markets. That means the emerging industry will endure massive consolidation in the next two years.
Buyers’ increasing awareness of the strategic importance of application servers could favor big companies, which have staying power. Or it could benefit small ones, which are narrowly focused on the technology and ahead of their larger competitors.
“It’s such a big market opportunity,” Vogel said. “The ones that survive will become big. That’s why investors are so excited. That’s why the acquisitions we have seen today are at premium valuations.”