Tuesday, June 21, 2005

Middleware Inc.

From InformationWeek
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.

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.

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