They are the leaders in supplying the hardware that powers the world's information infrastructure. And now all three are turning to software and services to boost margins and growth amid the declining demand for and the growing commoditization of their core technology products.
But IBM Corp., Sun Microsystems Inc. and Hewlett-Packard Co. have recently articulated widely differing strategies for just how they intend to do that.
Monday, for instance, Sun is launching a software organization that unites its enterprise software development and software products groups. Sun sees Java-enabled Web services as the area where it can add the most value with its Sun Open Net Environment (Sun ONE) software suite, and it's hoping that the new organization will give it the needed focus.
HP's software strategy, as expounded at last week's HP Software Forum in Seattle, is to help customers manage a heterogeneous infrastructure using its OpenView software suite. The company sees its biggest opportunity in helping service providers and service-oriented IT shops automate and manage key processes such as service delivery, service assurance, billing and usage.
IBM sees gold in the application and business integration hills, which it says represents the most daunting challenge facing IT shops. Through its huge Global Services organization, the company aims to use its Lotus, DB2, WebSphere and Tivoli software and middleware products to help customers integrate applications, data sources, user interfaces and business processes.
The challenge for all three vendors is to present a coherent vision of those strategies to users who have yet to be convinced of their merits.
Indeed, some users, such as Matt Kesner, chief technology officer at San Francisco-based law firm Fenwick & West LLC, have difficulty seeing the value that hardware vendors bring to the software space. "We've been approached by the consulting teams of HP, IBM and Sun, and frankly, we haven't yet found a lot of value in what they have to sell to us," Kesner said.
In Need of a Differentiator
But almost everyone agrees that hardware vendors are going to have to think beyond the box if they want to sustain long-term growth.
The big hardware makers recognize "that you can't make money off selling commodity devices," said Clyde Poole, vice president of the Encompass Compaq user group and a product manager at Tecsys development in Plano, Texas. "Buying decisions [are] less about the underlying architecture and are being driven more by the total cost of ownership" of a vendor's offering, he said.
With core technology becoming less of a differentiator, software, services and integration become crucial avenues for adding value, said Terry Shannon, editor of "Shannon Knows HP," an Ashland, Mass.-based newsletter. That's the mantra IBM has pitched successfully for quite some time," Shannon said. "Big vendors can't generate margins by being just an Intel or Microsoft reseller."
After years of frenetic growth, hardware sales have flat-lined. The seemingly insatiable demand for capacity generated by Y2k remediation efforts and the dot-com boom have petered out. Now hardware vendors are predicting a period characterized by cautious demand, lower margins and commoditization.
Software and services, in contrast, offer better margins and opportunities for growth. IBM last year generated US$13 billion in software revenue at a profit margin of 82.5 percent. Services, especially at the high end, can typically yield profits of 30 percent to 40 percent.
The middleware market in particular, which both Sun and IBM are going after, is poised to take off. Stamford, Conn.-based Gartner Inc. predicts that the worldwide application integration, middleware and portal markets will grow from $5.1 billion in 2001 to $10.5 billion in 2006 as companies seek to cut costs and streamline processes.
IBM, which is far ahead of HP and Sun in moving to a services model, is positioning itself as a one-stop technology and services shop for application integration projects. Products such as Lotus messaging and collaboration software, DB2 database software and Tivoli systems management software have been stress-tested in enterprise environments for years. And IBM's WebSphere has emerged as a leader in its class, along with BEA Systems Inc.'s WebLogic application server.
While other vendors focus on individual pieces of the integration puzzle, such as application integration or portal integration, IBM wants to do it all, said Ambuj Goyal, a general manager in IBM's software group.
"Integration happens at multiple levels. It is not only about application integration or messaging or user interfaces or single sign-on," Goyal said.
It's a compelling argument for some users. Kaiser Permanente's e-commerce subsidiary, Caretouch Inc., turned to IBM to do all of its initial back-end database and application server integration work because of the sheer range of capabilities to choose from, said Prasuna Dornadula, the company's CTO.
"We had 85 days to bring the site up live. There's no way we would have been able to do it if we had to go to multiple vendors," Dornadula said.
Ironically, one of IBM's biggest challenges will be to reassure customers who are concerned that using its stem-to-stern technologies, however standards-based they may be, would lock them into a Big Blue environment, analysts said.
A Modular Approach
Sun's strategy, meanwhile, is to enable Web services by giving users "integratable" Java-based building blocks for tying applications and services together, said Simon Phipps, Sun's chief technology evangelist.
Sun wants to use Java and open standards to enable companies to tie together applications inside the firewall and help them extend their internal networks to outside partners, suppliers and customers. Instead of delivering service to the desktop, Sun says it wants to enable a new generation of services-on-demand that can be delivered on the Web and accessed by a wide range of client devices, including desktops, handhelds and cell phones.
Unlike IBM, which wants to do it all, Sun is content to have users get just the piece they want and integrate it into their environments, said Phipps.
"What differentiates the Sun ONE stack from the competition is the middle ground," Phipps said. "At one extremity, you have a company like Microsoft, where if you buy into any part of their solution, you have no choice but to buy the whole solution. With IBM, you have a whole range of solutions that you are going to need somebody to integrate," he said.
Sun's claim that it's more open than other vendors is resonating well with some users. Consolidated Freightways Inc. in Vancouver, Wash., chose Sun over IBM a year or so ago when the company was looking for a vendor to help it build an e-commerce site.
Consolidated wanted a vendor that could supply an "integrated hardware and software package as much as possible," said Larry Brown, chief IT architect at Consolidated. In almost every respect, IBM with its WebSphere software and Sun with Sun ONE were equally matched. But Consolidated chose Sun because it offered "a little more maneuverability than IBM" in terms of being able to switch vendors if it came to that, Brown said. And the fact that Sun was cheaper didn't hurt.
Changing Users' Perception
Sun's plan is certainly not lacking in vision, analysts say. And it has an impressive and growing array of products in its Sun ONE arsenal, including a directory server, a portal server, an application server, an identity management server and a common development environment. By enabling its Sun ONE application server to run on Solaris, Linux, Windows, AIX and HP-UX, Sun is making sure its technology can be used in mixed environments.
Sun's key challenge, however, is to get users to take it seriously as a software vendor outside of the Solaris space.
"Sun still seems very much tied to being a hardware provider," said Rich Partridge, an analyst at Port Chester, N.Y.-based D.H. Brown Associates Inc.
Despite championing Java, Sun has failed to make much money off the technology. In the application server market, which is going to be crucial to Sun's efforts, the company lags a distant third behind IBM and BEA, which together hold nearly 70 percent of the market share.
HP, meanwhile, is more focused on quality of service and on enabling the delivery of computing resources as a utility. The linchpin in HP's strategy is its OpenView suite, which includes software for a wide range of applications, including order entry management, service activation, service-level agreement management, inventory management, usage mediation and billing services.
Capabilities such as these are crucial for organizations looking for a more service-centric view of their infrastructure, said Joseph Maloney, a vice president at Hughes Network Systems, a Germantown, Md.-based provider of broadband satellite network services.
Hughes is using HP's OpenView to manage its Direcway content delivery services to commercial customers and consumers. What sets OpenView apart from the others is the sheer breadth of functions and the service-oriented view it provides of the infrastructure, Maloney said.
But unlike IBM and Sun, HP seems to be gravitating more toward partners to deliver other parts of the middleware and software stack.
Just last week, HP announced a partnership with BEA under which the two companies will jointly market and deliver integrated application server software across all operating systems supported by HP.
"Our customers are becoming more heterogeneous, not less," said Nora Denzel, senior vice president of HP's software group. "I think the difference in our approach is that we are not focused on J2EE or .Net in terms of interoperability," she said, adding that instead, HP will focus on enabling customers to manage both environments better.
What's crucial for users is that the vendors don't try to use hardware to tie them to software like they did in the old mainframe days.
Consolidated's Brown said he appreciates vendor efforts to provide more integrated hardware and software capabilities.
"[But] we want to be in a position where if we find there's a compelling reason to switch to another vendor, we could do it in the blink of an eye," he said.
Reporter Matt Hamblen contributed to this story.