Size Matters in Software Merger Derby

With the software acquisition frenzy showing no signs of slowing, IBMIBM has bought a small, but technologically significant company and strengthened its hold on the $7 billion middleware market.

Its purchase on Tuesday of Gluecode Software for an estimated $100 million is a ringing endorsement of the open-source software movement. And when coupled with IBM's recently completed purchase of Ascential Software, it suggests yet another sign that the largest players with the broadest offerings are calling the shots in the software industry.

Hardly a household name, the El-Segundo, Calif.-based Gluecode sells support and service for an application server called Geronimo, which is used to make disparate applications work together on a computer network. Geronimo itself, like other open-source products including Linux, is free, and is not a direct competitor with high-end application servers like IBM's WebSphere or BEA Systems'BEAS WebLogic.

But the lower end of the market where Geronimo plays is far from saturated, creating an attractive "green field (brand new customer) opportunity." Moreover, IBM figures that customers will start small, and as they grow will scale up to larger and more expensive versions of WebSphere, said Robert LeBlanc, IBM's general manager of application and integration software.

The acquisition also gives a boost to IBM's play to move ever more strongly into services, commented AMR Research analyst Eric Austvold. Open-source products, he says, have largely been used to run less-than-critical functions like Web servers, mail and print servers and the like, processes a company could outsource with less risk than critical functions. "Now IBM can go to a customer and say, 'Why not run Linux on those servers, and by the way, we'll manage them for you,' " he says.

More broadly, IBM, BEA and others plan to provide a software layer to deliver new services -- and drive new sources of revenue. Earlier this year, BEA launched Project DaVinci, a suite of products and tools to help telecommunications companies build VoIP (voice-over-Internet protocol), multimedia and wireless services. The market for those is not yet huge -- about $250 million or so -- but within three years, said Yankee Group analyst Rob Rich, it will be several billion dollars.

IBM's open-source application server will compete directly with a similar product developed by JBoss, an Atlanta-based open-source software maker. While acknowledging the competition, JBoss' vice president of strategy, Bob Bickel, notes that Big Blue gives open-source that much more credibility with customers. "IBM will define and explain the market in ways that we can't," he said.

Bickel's take may sound a bit like someone whistling in the wind, but analyst Dennis Byron of market researcher IDC says he has a point. "IBM legitimizes his business," he says.

But traditional vendors, including BEA and OracleORCL, will be forced to respond. "All of the other app server vendors will have to make a decision on open-source sooner than they might have wished," he said. Those companies will likely jump on the open-source bandwagon, and will have to pick an open-source developer (of which there are a number) to partner with.