Users Lose Middleware Choice in Oracle Acquisition of BEA

Dennis Byron submits: Oracle (ORCL)-BEA (BEAS). Sun (JAVA)-MySQL. Now that the enthusiastic financial-analyst briefings and press conferences have been held (well at least the Sun-MySQL was enthusiastic), and now that we’ve had time to crunch the numbers, let’s look at the details. Who wins and who loses in terms of competitors, partners, investors and users.

I analyze the two deals in two separate blog posts in order to pick up some separate issues such as the depressing effect of the Sun-MySQL deal on open source software [OSS] pureplay valuation and the depressing effect of the Oracle-BEA deal on WebLogic and AquaLogic revenues for the rest of 2008 (and maybe forever).

Oracle-BEA is discussed below. But there is one major interconnecting theme in the two deals: For users and investors the independent middleware market as we know it is going away.

BEA pretty much launched the independent middleware market as a separate entity in 1995 by acquiring several Bell Labs/Novell TUXEDO-based distributors, IMC and ITI. To be completely accurate, investors still have a few choices. TIBCO (TIBX) is left because Reuters spit it out a few years ago. And Iona (IONA)–which predated BEA–and Cape Clear are still standing, presumably totally because of Irish hardheadedness. In addition, IBM (IBM) and Oracle have succeeded in changing the definition of middleware such that some might argue that Attunity (ATTU) and SAS Institute make middleware.

When I say middleware, I mean run-time code that’s really in the middle of something. And when I say independent I mean “pure play,” software suppliers not selling other types of information technology.

So what does this sea change mean for the users? In the 1990s, users did not buy from pure plays because they were pure but because they offered a choice other than–at the time–depending on the middleware built into application suites such as SAP (SAP) R/3, built into their relational database, or spit out as a by product of their mostly systems-supplier-centric development tools.

The bottom line for the user community now, as I have been modeling for years, is that because of the end of the independent middleware market, each enterprise has to choose whether to get in bed with an application suppliers’ middleware—SAP’s NetWeaver or Oracle’s Fusion—or an infrastruture suppliers’ middleware.

Larry Ellison explained in his conference-call script how Oracle fits in both camps because of his commitment to open standards, but that is not the same as open source. And therefore the Oracle approach does not really represent independent choice for the user.

Partners such as smaller ISVs that used BEA middleware in their products and even much larger companies than BEA that use BEA middleware in their services offerings, face the same more limited middleware choice as users.

For investors, the independent middleware market was a great leading indicator of the overall IT market. This acquisition makes the challenge easier or harder depending on your investment-research technique. Do you try to understand the upstream/downstream aspects of the market when you are investing in auto makers? If so, your life just got harder because there is no more equivalent of Behr, Dana [DCNAQ.PK], Delphi [DPHIQ.PK], Eaton (ETN), Honeywell/Bendix (HON), Magna (MGA), Modine (MOD), Tower [TWRAQ], ZF and so forth in the IT market. But if you just bet on an auto maker because you like the looks of the latest coupe, and an IT supplier because the user interface looks cool, you’re all set.

The most important short term investment aspect of the deal is that it will probably kill BEA license sales until the deal is signed, sealed and delivered in about 6 months. I think the two companies recognize this, accounting for the difference between the $21 asking price and the $19.375 final bid. And the two companies will probably make every effort to prevent it from happening (but I’m not sure of that given the coldness of the joint conference call).

As for competitors, well, as I said above, there are none left.

Comments

[JimD]

"BEA pretty much launched the independent middleware market "

ahhh, No. There were many more independent middleware market companies prior to 1995. BEA did not launch the market.

[Karthikeyan]

These are fantastic observations! Acquiring companies tout acquisitions as the best thing to have happened to the industry and talk about the target company filling missing product/technology links, newer market access, increased market share, complementary offerings, cross selling to customers, a bigger brand motivating employees etc. But why do most mergers & acquisitions fail? I think the most important factor is the demotivation of existing employees in the acquired company. People in the acquired company just lose the plot! For years, they have been competing against Firm A and after the acquisition when they become a part of Firm A, the fire is lost and they miss the David vs. Goliath fight. We also find leaders thrust upon the companies with rules that worked in their companies and make unreasonable organization changes. After the acquisition in most cases, the VPs become manager, the CEO becomes the director and the manager becomes the team leader. These are really demotivating for the people in the organization. Also, the communication they have used for years drastically changes. Till yesterday, they would have thought how a small company means customers are served better in niche products and how a bigger company may not fit a customer's needs. Today, the same employee should talk about how the bigger company has become better with this smaller solution and blah, blah! Most of the time, M&As fail because, organizations want to build empires and are driven by egos! Where does adding to shareholder value figure here? The CEO who acquired trumpets and his PR bandwagon blows his triumphs! The shareholder value is dumped and buried in the longer run! Come on, as long as hedge funds and traders are making quick bucks, does it matter?

[DennisByron(Research2.0)]

Did BEA "pretty much launch" the independent middleware market?

In addition to the comment above questioning my middleware history analysis, I've received a few emails and a phone call on the subject. So here goes:

The key word in my analysis is "market." Prior to BEA, most of the independent software vendors that made middleware positioned themselves as tools suppliers. I believe BEA led the way in turning the value proposition on its head, saying "here's the tools, pay us for the number of instances of the resulting run-time code you deploy." That's what makes a market: the value proposition behind the buying and selling in the bazaar, not just making the product.

As I said in the post, Iona predated BEA as did Netwise, Transarc and a few others. But they didn't really push the deployment value proposition. And since IBM funded Camelot at CMU and quickly bought Transarc after it was founded, I would argue Transarc was not "independent.&quo...

Independent is another key word in the analysis. Most of the early middleware was part of the leading systems suppliers' stacks (to which it has returned, which is the real point I was trying to make in the post).

So whether you agree with my analysis or not, raise a glass of your favorite libation this weekend to Actional, Allaire, Antares, Ascential, Bluestone, Crossworlds (and the woman in the red dress), Haht, Mercator, Oberon, Persistence, SeeBeyond, Silverstream, Staffware, WebMethods, etc and all the other middleware memories.

[By the way, lest you think I just fell of the turnip truck, I fell of the turnip truck a long time ago.

I started researching "middleware" when Chris Stone was forming the Object Management Group in the late 1980s while still physically located in the Data General facilities on Computer Drive in Westboro.

I was the primary "middleware" analyst for the Datapro division of McGraw Hill from 1991 to 1997 and wrote monthly articles for Application Development Trends during the same time period. I put the term "middleware" in quotes because I don't actually remember using the term "middleware" regularly until 1995 doing some consulting for Noblenet (later part of RogueWave, later aquired by Quovadx).

After a hiatus doing ERP research, I was the IDC "middleware" analyst from 2003 to 2006. Again I put the term in quotes because by then it was called application deployment software :) ]

[DennisByron(Research2.0)]

My apologies to Joe Forgione and Herb Osher. How could I forget Hyperdesk!