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Software // Enterprise Applications
11:25 AM

Middleware Inc.

Don't be thrown by IBM's embrace of open source. Steve Mills' money is still on middleware.

It would be easy to think of IBM as the picture of goodwill when it comes to open-source software. Earlier this year, the company offered 30 of its products under open-source licenses, and IBM's Eclipse development toolset has been downloaded more than 40 million times since it was released as open source last year. Already, IBM has donated hundreds of products or components to the open-source community, spending more than $200 million annually on such efforts, while giving the phenomenon added legitimacy and much-needed business-class tools that layer on Linux. Big Blue? How about Big Benefactor.

But there's a limit to IBM's altruism. It's called top-line growth, and it's seriously lacking in the vendor's software business. With $15.1 billion in sales last year, IBM Software is among the largest software suppliers in the world but grew a measly 1% compared with a year earlier. That makes several years in a row now that IBM's software revenue has been essentially flat when gains from foreign currencies are excluded.

Middleware is IBM's business, says Mills, software group executive.

Middleware is IBM's business, says Mills, software group executive.

Photo by Ken Schles
What's a big software vendor with a large and growing stake in open-source software to do? Crank up its revenue-producing middleware business, a line that includes application servers, transaction-processing layers, data-integration software, and E-commerce tools. In IBM's strategy, open-source software and its WebSphere middleware are connected--literally. All those Eclipse-created applications running on Linux and Apache servers need some help talking to each other and to the many other systems that make up a typical business IT infrastructure. IBM Software has grown through acquisition--Lotus, Informix, and Rational Software--building up a key middleware category that has become its bright spot. That business has grown from about 38% of software revenue five years ago to nearly 50% last year; revenue climbed 8% in the first quarter. Meanwhile, licenses for IBM's own operating systems have shrunk to 16% of revenue.

IBM Software group executive Steve Mills believes there's more money to be made in middleware. He's investing a heavily disproportionate 80% of IBM Software's development budget to expand the key middleware line into new areas of mobile computing, portals, personalization, information integration, content management, and more. "This is our business; we treat it as life and death," the no-nonsense Mills says.

IBM's strategy has some risks. Its pay-to-use middleware is anything but cheap, with some WebSphere products selling for more than $100,000; many customers aren't ready for big upgrades that use middleware to underpin services-oriented architectures; and the specter of vendor lock-in hasn't disappeared.

But Mills is betting customers will be willing to pay for feature-rich connectivity middleware as long as IBM can help hold costs down on other software pieces. IBM Software, after all, is first and foremost a commercial enterprise, regardless of how many customers it hooks with its open-source giveaways. "There is nothing uncommercial about open source," Mills argues. "The money that is derived from being in the software business has always come from a variety of sources. Do I charge for code or not? Do I charge for packaging or not? Do I charge for training? At any point along the spectrum, in terms of selling code, you can make trade-offs in where you will ascribe the value ... but money changes hands, and there is a profit to be made."

IBM's full-bore investment in middleware takes aim equally at keeping Microsoft out of its corporate accounts and at positioning IBM to remain competitive in a rapidly consolidating software market. With the key partners it counts on to drive middleware sales being swallowed up by rivals, à la PeopleSoft Inc.'s acquisition by Oracle, IBM is forging tighter relationships with other independent software vendors, such as the deal it struck last month with Lawson Software Inc. under which Lawson exclusively will use WebSphere as its middleware platform.


IBM's software division is investing 80% of its development budget into adding functions and features to its WebSphere middleware line

Part of the plan is to make middleware so feature-rich that users can deploy lighter-weight open-source operating systems instead of Microsoft Windows

Success can restore growth to IBM's profitable but sluggish software business, where sales were up just 1% in 2004 versus a year earlier

Acquisitions remain part of the plan. IBM's purchase last year of Venetica Corp. brought expertise in unstructured data integration that the vendor will add to WebSphere. Another deal--the $1.1 billion buyout of Ascential Software Corp., completed last month--helps with another aspect of data integration. Ascential's technology is used to extract data from a variety of databases, then "transform" the data for use by other systems, such as a customer-relationship-management module. Mills contends that's a key capability if businesses are to derive the most value from a services-oriented architecture. "If I want one view of the customer, then I have to transform the underlying information into a common view," he says.

IBM also is protecting its own turf. By providing a translation layer between databases and applications, IBM makes it easier for customers to run an application that's optimized for, say, Oracle's database on its own DB2 instead. "It's a strategic play to protect the DB2 business," Gartner analyst Joanne Correia says.

Some customers welcome the fact that IBM is rolling newly acquired technology into WebSphere. Frank Brooks, data-resource manager at Blue Cross Blue Shield of Tennessee, uses Ascential's DataStage tool to underpin a Cognos-based system that customers access directly to analyze claims data. "It's a competitive differentiator that helps us acquire new accounts," Brooks says. He'll likely purchase other WebSphere products, but there's a caveat. Brooks expects the close relationships he has forged with Ascential sales and product representatives to continue under IBM.

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