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Why the Large Players Stand to Win at Web Services

In the brave new world of web services, emerging technologies are reshaping the way that companies do business. While the Internet revolution led to the evolution of web-powered business functions, the concept of B2B computer-based communications existed long before the World Wide Web. Without the benefit of an Internet connection, EDI (electronic data interchange) linked up select larger corporations via a dedicated line. In the late 1960s, the transportation industry spearheaded development of new standards to allow for easy computer-to-computer connections for their marketplace. By the late 1970s, a cross-industry effort took the groundwork of the transportation sector and created protocols to allow for EDI.

Today, however, computer-to-computer interaction occurs mainly through a web browser-based format, alleviating the previous inoperability of differing computer platforms and software that may exist from one company to another. Web-enabled software can take applications and databases to a new level by automating business transactions and creating higher levels of productivity for both internal and external processes. Amrit Tiwana, professor of decision and information analysis at Emory University’s Goizueta Business School, notes that through web services companies can achieve “end-to-end integration of business processes that make firm-to-firm boundaries invisible.”

Much like the telecom revolution, the web services arena has a bevy of larger firms and eager upstarts looking to capture the business client. However, the large players in the IT realm are still dominating the web services technological wave, with IBM, Microsoft, and Oracle some of the favored choices among systems integration vendors. With name recognition, ready access to a built-in client base and deep pockets to invest in ever-new innovations in the industry, it seems obvious that these companies have made a mark the web services arena.

In September 2002, Gartner, a business research and analysis firm, completed an Internet poll of 44 North American consulting and systems integration vendors. Microsoft .NET was targeted by 58% of the vendors “as one of the top three web services products to ramp up delivery capability,” with 40% picking IBM WebSphere and 31% selecting Oracle’s 9i series of developer tools and application servers for their “capability investment.”

Today, the web services industry is beginning to shake out into sectors, from those offering integrated platforms (server applications, network and software) to facilitate web services, vs. those specializing in the various tools and applications to fill in the gaps on such things as security, technology standards coordination, and identity management. Michele Cantara, principal analyst with Gartner’s consulting and systems integration services, notes that her firm estimates the value of IT professional services related to web services integration at about $14 billion in 2002, and growing to $29 billion in 2006. (IT professional services encompasses consulting, development, integration, management services and process management work on systems integration of web services.) The more well-known players in the IT world, from IBM to Microsoft, are looking to keep their monolithic place in this new and still emerging environment. Other well-known companies are vying for their place in this segment of the industry, including Sun Microsystems, Oracle, SAP, BEA Systems, Hewlett-Packard, and Gateway.

Microsoft is capitalizing on its set of software technologies called Microsoft .NET, which includes servers, software, and a host of developer tools, all built around a web environment for the business client. The one-stop shop approach and Microsoft’s well-known name in the enterprise market are key drivers of their success in the web services arena. Microsoft also plans to embed their web services capabilities into their new offerings, with the Microsoft Windows Server 2003 including built-in support of standard web services protocols, as well as their own .NET framework.

On March 19, the company unveiled its Microsoft .NET Compact Framework, a mobile application technology that uses web services on smart mobile devices and allows for those developing and testing XML applications with Microsoft’s Visual Studio .NET tool to design mobile applications on a Pocket PC operating system. Steven VanRoekel, director of web services technical marketing for Microsoft, notes, “Microsoft is all about great software that broadly supports web services and strips away the complexity of implementing these technologies.” While he couldn’t estimate Microsoft’s actual company investment into the field, he did add, “Web services are absolutely an integral part of the business.”

Tiwana notes that Microsoft does enjoy the benefit of control on “a growing share of the back-end server market in the corporate cluster.” Additionally, he says the company can leverage its place in the applications end, where he believes Microsoft holds over 90% of the market share. The company is also steadily acquiring niche players in the web services arena, from Great Plains Software, an enterprise applications firm, in 2001, to Vicinity Corporation, a wireless software company, in 2002, in an attempt to grow market share and gain presence in new markets.

IBM, similar to Microsoft, is heavily marketing its web services capability, placing their various products and accompanying services under their “e-business on-demand” moniker. The company’s market offering is IBM WebSphere, an Internet infrastructure software for developing, running and integrating e-business applications for differing computing platforms. While additional products and services continue to roll-out of the company, Big Blue’s commitment to web services became clear this past fall, when company CEO Sam Palmisano announced a planned $10 billion investment into the field, which included a number of key acquisitions and additional R&D.

Besides their current offerings, IBM plans to spend additional cash on long-range development of the company’s “utility-based” web services environment. Many of the big name players are also working on similar technology, including Hewlett-Packard and Microsoft. Basically, the client would pay IBM or some other provider for access to software, and for as little or as much capacity and storage as would be needed. Of course, the issue of how to charge for such “pay as you go” services remains a hot topic.

For now, though, much like Microsoft, IBM is looking to acquire other businesses to facilitate their growth in the web services field of today, purchasing some well-known players in the software and consulting industries to beef up their web services offerings. In December 2002, Big Blue acquired Rational Software, one of the top software tool makers, for $2.1 billion. IBM also acquired PwC Consulting, the global management consulting and technology services unit of PricewaterhouseCoopers, for $3.5 billion, in October 2002.

Fortunately for IBM, says Wenli Wang, professor of decision and information analysis at Goizueta, the fastest growing segment of IBM is its global services consulting, which includes its web services work for larger corporations. While she sees Microsoft as a formidable competitor, Wang notes that IBM may have the technical advantage in the long run in the large enterprise market, as they have “more secure platforms than Microsoft Window-based servers.” She adds, “For server-side web services, IBM provides both hardware solutions (such as mainframe servers and low-to-medium-end Intel-based servers) as well as software solutions (such as Linux and AIS-based operating systems and Java and Apache-based WebSphere Application servers).

The other point of positioning for IBM, is their conscious decision to offer hardware and software of their competitors, as well as their own products. Robert Sutor, director of web services strategy for IBM, says, “Of course we’d love to only sell IBM hardware and software, but realistically we have to integrate Microsoft, Oracle and Sun and new programming work into it as the market evolves.” IBM’s revenues are “over one-half solution-driven and not product driven,” notes Sutor. This distribution may give the company more flexibility in their approach to large customers with embedded systems.

Wang adds, “Microsoft generally sells its proprietary standards and its own products, which ensures that once customers start to use Microsoft systems, it is difficult for them to switch to other players.” Though based on industry-standard technology to some degree, including XML and SOAP, Microsoft’s .NET only works within the Microsoft platform. Wang adds, “IBM claims that it supports open standards and open-source solutions, which currently allows customers to switch to other service providers. But, of course, I don’t doubt that IBM’s strategy is mainly to counter Microsoft.”

IBM and a majority of the other well-known IT companies (Bea and Oracle) use the programming language Java 2 Platform, Enterprise Edition (J2EE) as the underpinning of their web services technology. Microsoft is one of the few that doesn’t use Java for its .NET web services offering. Drew Engstrom, senior market strategist-web services for Sun Microsystems, sees his company retaining an advantage in the web services field by virtue of Sun’s development of Java, and their building upon that technology to market and sell Sun One offerings, an integrated Java-based platform, with servers, software, and developer tools. For the time being, the company still enjoys the benefit of limited fees for portions of its Java technology, in the form of royalties from other companies on products sold using certain portions of Java, or fees for Sun logo use and support. However, the fees paid by companies to Sun are somewhat of an industry secret.

But despite Sun’s hold on Java, Professor Wang observes that Sun is steadily losing ground in the web services marketplace. She notes, “Sun focuses on pushing its own Solaris operating system and its own Spark hardware, but its technology is neither the fastest nor the cheapest. It is losing market share in the server market too.” Sun may be trying to change their pricing structure somewhat to counter this share loss. In February, they unveiled initial details of “Project Orion”, which will consist of a soon-to-be offered diverse selection of the company’s products and services with differing pricing scales.

Of course, all of the major players remain somewhat vulnerable to the issue of technology standards. While the various companies meet at a handful of industry standards organizations to hash out what will be the ultimate standard to use in support of the web services platform, the uncertainty itself makes long-range planning of products and services somewhat of a gamble.

Professor Tiwana notes that web security matters also remain a looming factor in the minds of potential clients, who may not yet be comfortable with exposing their company’s innermost workings to the Internet. And beyond perception, there are some real security concerns, says Tiwana. While industry execs don’t generally speak on the matter directly, their participation in a variety of web services industry associations, including OASIS, a not-for-profit, global consortium on e-business standards, includes considerable work on security matters. Tiwana adds, “Most security loopholes come not from the services themselves, but from internal networks through which those services are accessed. To paraphrase Sherlock Holmes, it is no longer a question of how secure the locks are; it’s about how much the butler can be trusted with the keys.”

Until standards and security issues become less of a concern, predictions on how the marketplace will develop, and who the ultimate winners in the web services arena will be, are difficult. However, industry pundits note that completely open standards are needed, and are only a matter of about three to five years down the road. Professor Tiwana adds, “The premise of Web services is that almost complete reliance on open standards will give adopting firms unprecedented flexibility in adapting their infrastructures to evolving needs, not all of which can be foreseen. It is like investing in real options, which give adopters the ability without the obligation to exercise that flexibility. Whether the dominant standards that emerge will indeed be open is a matter of perspective.”

Despite the stumbling blocks, the potential gains from web services will ultimately propel the industry forward. While IT spending remains lackluster due to the economic downturn, the one area of hot promise in the industry remains web services. Forrester Research notes that expected IT spending for U.S. companies will increase a mere 1.9% in 2003, but web services will make up a high portion of the expected expenditures.

Says Professor Wang, “Even with the dotcom crash, for those who can benefit from web services, moving toward the new transactional platform can’t be stopped. Budgets may be a big constraint now, considering the unstable economy, but I still foresee that companies will regard developing web services as a high priority.”