Swimming With Sharks
As larger rivals circle, BEA Systems CEO Alfred Chuang says he wants to keep his software company floating free.
(Business 2.0) – Back in June, Alfred Chuang and his team at BEA Systems held a press conference and a cocktail party at the Nasdaq tower in Times Square. The San Jose software company was launching a new product family (dubbed AquaLogic) along with a new branding campaign ("Think Liquid"). After the presentation, before sprinting to the open bar, I asked Chuang about the image makeover, which BEA's marketing chief described as "Apple-esque." "Oh, my God, I don't even want to think about how much it's costing us," Chuang groaned, referring to a slick TV ad playing on a screen overlooking Broadway. "It's really for the benefit of our employees; they need to feel that BEA is cool."
Once upon a time, not long ago, the coolness of BEA (among alpha nerds, at least) wasn't in doubt; neither was its bright, shining future. Founded in 1995 by Chuang and two other Sun Microsystems veterans, BEA pioneered the market for Web application servers, propelling the company to grow as fast as any software outfit in history. Today, however, BEA stands at a familiar crossroads in the annals of Silicon Valley. Its growth has stalled, its stock has tanked, and its rivals are circling with a ravenous glint in their eyes. As the industry consolidates, BEA may be about to discover that innovation isn't enough to protect it from being devoured.
Chuang took over as CEO four years ago--at almost exactly the moment when bubble turned to bust. At 43, he's slender and hyperkinetic, a former amateur race car driver who owns a dozen Ferraris. (Because of his notoriously heavy foot, his BEA contract requires that he be chauffeured to and from work.) A Hong Kong native and a Grade A geek, he speaks an infelicitous but still comprehensible version of English. At the press conference, for example, Chuang declared, "Ambition we're not lack of."
Kidding he ain't guilty of. After three years in which BEA's annual revenue has trudged uphill from $976 million to $1.1 billion, Chuang says he aims to triple sales by the end of 2008. "I think we did the right thing during the downturn--we delivered profit," he explains, pointing to BEA's operating margin of 18 percent. "But, now, look, we know that our job is to grow. Growth is what BEA is about."
With Chuang's lofty goals in mind, the company this year unveiled three initiatives to push beyond its core application server business. The first was Project DaVinci, a suite of products and tools to help telecom companies build VOIP, multimedia, or wireless services. The second is the AquaLogic cluster of products. With AquaLogic, BEA is taking a headlong dive into the blooming Web services market by devising a layer of infrastructure that it hopes will be as essential to the next generation of enterprise software as its WebLogic line of application servers was to the previous one. Finally, there's the $200 million acquisition of Plumtree, a maker of "portal" software that companies could use to stitch all of this code together.
Certainly these moves seem plausible, at least on paper. Among the techie smart set, what's known as services-oriented architecture, or SOA, is almost universally touted as the future of enterprise software. For the countless corporations whose IT setups resemble, in Chuang's phrase, "the classic American garage"--packed to the rafters with hastily accumulated, incompatible systems--SOA promises to render blessed order out of rampant chaos. Thus it's no wonder that research firm IDC expects the market for SOA-related software to hit a staggering $9 billion come 2009.
By no means will BEA have this pot of gold to itself, however. Instead, the company is likely to be locked in a furious scrum. Chuang already counts IBM as BEA's bête noire. Then there's SAP and Oracle, the world's top business software vendors. All three companies are many times bigger than BEA. All have product lines that are deeper, broader, and more integrated. And none is asleep any longer about the Net, as they all were in the mid-1990s--the very lapse that allowed BEA to gain its commercial footing.
Chuang adopts a stance of nonchalance about his competitors. He says BEA's "nimble size" is actually an asset, letting the company "invent stuff that's new and futuristic" while the giants plod along behind. "At the end of the day, what are customers buying?" Chuang asks. "High-quality technological advantage--and that's what I give them."
Yet despite all Chuang's bravado, there's no denying that BEA's edge in innovation hasn't been sufficient to stem the advances of its larger foes. In what IDC calls the "application deployment market"--Web and app servers plus a panoply of other network middleware--the research shop says IBM was firmly in the lead last year with three times BEA's share, while Oracle was rapidly closing in on second place. Recently, Oracle's Larry Ellison voiced the received wisdom in the industry when he publicly declared, "BEA is in decline."
Chuang and the rest of the BEA brass fiercely dispute that idea. They also claim another advantage in the war over SOA: independence. A BEA white paper distributed at the AquaLogic launch lashed out at the "digital imperialism" of the likes of Big Blue and Oracle, proclaiming that "BEA is the only company in the industry focused purely on infrastructure ... not as a sidekick to a database, or as a gateway to other applications, or as a backdoor for selling services."
BEA's effort to position itself as the Switzerland of software might be compelling--or at least kinda cute--if it didn't fly so flagrantly in the face of the industry's prevailing dynamics. Not long ago I had a chance to moderate a panel of Silicon Valley bigwigs before an audience of Fortune 500 CIOs. The panel was private and off the record, but I can say this much: The consistent message from the CIOs was one of abject frustration. During the boom and bubble, they'd been sold a bill of goods--a jumble of software and hardware "solutions" that hadn't solved much at all and that they were still struggling to untangle. The CIOs were less concerned about the perils of being locked in than about driving down their costs and making their technology work. This has led to a preference for soup-to-nuts suppliers, which is the force, at bottom, that compelled Oracle to acquire PeopleSoft. And it's the force that leads MIT professor Michael Cusumano to argue that "there are too many software companies in the world by a factor of three or more."
If that's true, and I suspect it is, then enterprise software is going to be a consolidation story for years to come. And BEA is destined to be an even more tempting takeover target than it already is. (In Ellison's testimony during the legal contretemps over Oracle's bid for PeopleSoft, the billionaire acknowledged that BEA had been on his shopping list.)
Chuang, of course, has been asked a million times how he feels about BEA being acquired--and his response has always been the same. But that didn't stop me from asking him anyway, so I could hear it for myself. "When you're out building a company," he answered, "you're not doing it to be fish bait for some shark to come in and swallow you. That's not in the formula--it's not in the mix."
It never is for a guy of Chuang's energy and aspirations. But unless he can get BEA surging forward again, and soon, the writing's on the wall. In a business as competitive as software, one breakthrough gets you only so far. You need kick-ass management, strategic vision, and tactical savvy. Most of all, you need a second act. Without it, all the slick aquatic branding in the world won't obscure this truth: One minute in the Valley, you're a kingfish in the making; the next, you're digital chum.
John Heilemann wrote "Pride Before the Fall." His next book is "The Valley." He lives in Brooklyn.