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IBM software strategy: Knock off Microsoft

Jan 06, 20038 mins
Enterprise ApplicationsIBMLinux

It has taken nearly seven years and billions of dollars in development and acquisitions, but IBM has chiseled itself into a software power and set its sights on one lofty goal: beating Microsoft at its own game.

It has taken seven years and billions of dollars in development and acquisitions but IBM is now in position to achieve one more lofty goal: beating Microsoft  at its own game.

Part 2 of this series: IBM hitting pay dirt with software push

Rivals such as Oracle, Sun and BEA Systems have felt Big Blue’s muscle. Now Microsoft, IBM’s sometimes comrade, sometimes competitor for the past 20 years, is the foe as the two giants have emerged as heavy favorites in a race to build software that connects systems, applications and business processes between and among corporations of any size.

“These two are the leaders in the battle to define who will become the company that is the major influence for IT architecture and systems for the next 20 years,” says Dave Cearley, senior vice president for research operations for the Meta Group.

However, clearly the companies have different strategies to win this software race. IBM takes a cross-platform, heterogeneous approach; Microsoft relies on Windows and its broad .Net  umbrella for integration. And each has a prizefighter’s eye for pinpointing the other’s glass chin.

“Software is an engine for IBM’s services organization and I don’t think their software is easy to use, and I don’t think it is easy to integrate,” says Paul Flessner, Microsoft’s senior vice president for .Net Enterprise Servers. “It works once you put it together, but it takes 140,000 people worldwide to make that happen. That is not the case for Microsoft software.”

Steve Mills, IBM’s senior vice president for software, says Microsoft is one-dimensional. “Microsoft is a great marketing company and they generate a lot of attention and a lot of imagery around what they do, and in particular what they intend to do,” Mills says. “But the one-size-fits-all notion is naive.”

The war of words is part of a complex relationship between the companies. Over the past year, they have collaborated on defining security and workflow standards to help jump-start Web services . IBM is a top reseller of Windows, and Microsoft partners with IBM’s large service organization.

The two basically created the PC revolution in the late 1980s before a fallout resulted in Microsoft building a monopoly with Windows and IBM’s OS/2 becoming an afterthought.

Stage set for battle

Now with the broadest software portfolios in the industry, the companies are set to clash. The stakes will be high as Windows and Microsoft development tools based on .Net and Java 2 Platform Enterprise Edition battle IBM’s WebSphere and Linux products . Messaging/collaboration servers, databases, management and security products also will be key competitive arenas.

IBM is entrenched in large companies that need to integrate across platforms internally and externally. Microsoft excels with companies ranging from 100 to 1,000 employees, as these midmarket types are attracted to ease-of-use and low-cost software.

Each wants to maintain its dominance while stealing a slice from the other.

To achieve that, experts say, IBM will have to exploit its cross-platform strengths and overcome the challenges of integrating its stable of software products built through acquisitions – it bought seven software firms in 2002  – and cater to midmarket companies without hiding behind an army of consultants.

“IBM has to make its software easier to use and put together simple packages so it can grow into the small to medium-sized business market,” says Tom Bittman, an analyst with Gartner.

Microsoft on the other hand has to again springboard off its strong development tools and depth of operating system services while proving it has the security and scalability to support enterprise-class applications. The company also must convince users to commit core infrastructure to Windows all the time.

“Microsoft has to move into the enterprise data center and that has been tough for them,” Bittman says.

In April, Microsoft will make its best data-center effort to date when it is expected to ship a 64-bit version of Windows called .Net Server 2003 and a 64-bit version of SQL Server, both designed to handle top-tier corporate applications.

The companies are throwing all they have into the battle.

IBM has 40,000 people working on software and is dedicating almost half of its $5 billion research and development budget to developing middleware to integrate Web-based commerce, Web services and applications. It’s a strategy key to IBM’s future success as both its services and hardware revenue are flat, and those businesses are producing rail-thin profit margins. Conversely, IBM’s fiscal third quarter in 2002 showed software contributed 15% of revenue but 34% of profit.

In 2003, IBM will push its middleware portfolio by expanding its 10,000 member salesforce by 5%.

Microsoft’s financial commitment is on par. The company’s research and development budget will increase by 20% in fiscal 2003 to $5.2 billion, with about $2 billion earmarked for its line of 13 .Net servers, such as a new technology debuting in SQL Server that could become the foundation of a universal file system.

Microsoft will increase by 22% the headcount and dollar investment in its server platform salesforce this year in an effort to understand the sales cycle in the enterprise server market, which differs so dramatically from the desktop model Microsoft used to build its current $40 billion cash reserve.

Microsoft CEO Steve Ballmer says the server platform business is being counted on over the next five years to significantly increase cash flow, as Microsoft’s dominant profit makers – client desktop operating systems and Office – struggle with market saturation.

WebSphere key for IBM

On the product side, IBM is using its WebSphere platform as the anchor of its middleware portfolio that features the DB2 database, Lotus collaboration software, and Tivoli management and security tools.

IBM hopes to use WebSphere as the platform for enterprise application development and integration in an effort to make a commodity of the operating system that is key to Microsoft’s strategy. IBM also is counting on Linux support across its hardware lineup to eat away at the Windows franchise.

“You can build your application principally anchored to the middleware layers and use the middleware runtime to shield you from operating system differences,” says IBM’s Mills, who helped IBM acquire Rational Software in December for $2.1 billion to pressure Microsoft in the development tools area. “That is a powerful value proposition for application portability and interoperability.”

On the other side of the fence, Microsoft is making no bones about its leading punch.

“If Windows doesn’t win, then we don’t win,” Flessner says. ” We know that, and that is the cornerstone of our strategy.”

And it is a proven one against IBM.

After a six-year battle for dominance in messaging and collaboration, where the majority of servers run on Windows, Microsoft Exchange has almost 40% of the market compared with about 35% for IBM/ Lotus, according to IDC. In the database market, IBM’s DB2 is king with 36.5% compared with Microsoft’s 13%.

Microsoft’s integration story is centered on Windows, including BizTalk Server, for XML transformation and business process orchestration, and Host Integration Server for mainframe connectivity. And the company is relying on Web services and .Net as a standards-based link to other platforms as a way to let customers tie in non-Microsoft products.

“Microsoft is using Web services as the ‘get out of jail card’ for its proprietary Windows world,” says Dwight Davis, an analyst with Summit Strategies.

Running the gauntlet

IBM and Microsoft also are throwing down the gauntlet in other areas.

In the midmarket the pair differs in that IBM plans to partner extensively to push its Express middleware to smaller companies on the back of applications from business partners and independent software vendors, such as makers of CRM and ERP products.

Microsoft formed a Business Solutions division in fiscal 2003 and is entering the ERP and CRM markets with its own applications and high hopes of profit growth after losing $68 million in the division’s first three months of operation.

Each company has its own philosophy on services. In August 2002, IBM spent $3.5 billion to acquire PricewaterhouseCoopers Consulting and establish itself as a leader in IT services with 55,000 employees and $13 billion in revenue. Microsoft relies on partners and its Microsoft Consulting Services (MCS), which caters to large customers. But Microsoft has no plans this year to expand MCS beyond its 4,000-plus employees, according to Flessner.

“We are a software company. We’ll let our partners make money on services,” he says.

But even with all the battlefronts, observers say the IBM/Microsoft war might not have a clear winner.

That’s because there are plenty of companies that act like Fortis Health in Milwaukee. The 110-year-old company and the oldest national health insurer recently consolidated some of its applications on the Windows Datacenter platform to save millions of dollars, but it also maintains two mainframes and a slew of Unix servers.

Fortis CIO Roger Jones says, “Our decisions will continue to be cost-based and will focus on where we can get the performance that we need.”

Microsoft isn’t the only target on IBM’s radar. Next week, in part 2, we look at IBM strategies for future growth in everything from autonomic computing to software for small to midsized corporations.