When an 800-pound gorilla jumps into the pool, a lot of people get lashed. And that's exactly what happened last week when a

Microsoft

(MSFT) - Get Report

exec said his company is getting ready to increase its presence in the $2 billion market for business intelligence software.

Business intelligence tools pull information from databases and generate preformatted reports, such as sales updates, while analytical tools add depth and sophistication to those functions. End users receive the information on their desktop computers, without help from the IT department.

The announcement that Microsoft will add reporting capabilities to its SQL Server sparked a wave of heavy trading that on Wednesday took an average of 6% off shares of the three leading BI players,

Business Objects

(BOBJ)

,

Cognos

(COGN)

and

Hyperion

(HYSL)

, as well as the smaller

Brio

and

MicroStrategy

(MSTR) - Get Report

. Microsoft was unchanged.

By the end of the week, the stocks had largely recovered as investors likely realized that Microsoft's expanded BI efforts won't immediately cut into the market share of the existing players. "We believe the buzz on Microsoft's BI threat is somewhat overstated," wrote U.S. Bancorp Piper Jaffray analyst Tad Piper, whose company has an investment banking relationship with Business Objects. "Importantly,

Microsoft BI Manager Bill Baker indicated that the beta will likely last a year, and that general availability of a reporting product will be sometime in 2004."

Moreover, says First Albany analyst Mark Murphy, "Microsoft's enterprise reporting product will only run on Windows (ignoring Unix and Linux platforms), will likely favor its own SQL Server database (running less efficiently on Oracle, DB2 and Sybase) and probably won't scale well at first." First Albany does not have a banking relationship with Microsoft or Business Objects.

Nevertheless, there's plenty of reason for investors to watch BI stocks closely. On the one hand, an overreaction to Microsoft's move could create a short-term buying opportunity. But longer term, it's important to note that Microsoft isn't alone in moving on the BI market. Database makers

Oracle

(ORCL) - Get Report

and

IBM

TST Recommends

(IBM) - Get Report

, and application vendors including

SAP

(SAP) - Get Report

,

J.D. Edwards

(JDEC)

,

Siebel

(SEBL)

and

PeopleSoft

(PSFT)

, have been adding analytic and reporting capabilities to their products.

In fact, an Oracle ad that ran in

The New York Times

Monday touted its claim that the company's application server now has "built in business intelligence."

While customer relationship management deployments and other complex IT schemes come under increasing fire for not living up to expectations, business intelligence is winning a can-do reputation. A study by Nucleus Research, a Wellesley, Mass., market researcher, found that CIOs and IT managers surveyed "consistently reported that BI solutions -- designed to support reporting, scorecarding, analytics, and querying functions -- led both to boosts in employee productivity and to faster decisions based on better data." And a report by researcher IDC found that BI solutions earn a median return on investment of 112% within a year.

In addition, some IT managers argue that buying a unified suite from a company like SAP or Oracle results in lower integration costs and a unified user interface -- no small advantage when budgets are tight.

Meanwhile, the market for business intelligence capability is growing, despite the continuing slump in IT spending. A report by market researcher Gartner Dataquest forecasts that spending for BI software will be $2 billion this year, growing to $2.3 billion, a 15% increase, by 2005.

Hearing Footsteps

Bernard Liautaud, CEO of Business Objects, acknowledges the increasing competitive heat, but says the Microsofts, SAPs and Oracles of the world may find the tasty BI market a tough morsel to swallow. "You must be database and application neutral to succeed," he said in an interview. BI offerings that favor one vendor over another won't do the job in today's heterogeneous environments, he argues.

Still, Liautaud is pushing Business Objects to become somewhat broader by offering additional analytics capabilities. Currently analytical applications account for less than 10% of the company's licensing revenue -- or $21 million in the fourth quarter. By year's end, he expects to increase that number by 50%, while overall revenue increases by 10%.

He now refers to the Business Objects "platform" and says he is focused on developing an "end-to-end" stack that integrates data integration, querying tools, a portal, as well as analytic applications.

Most of the company's new applications will be homegrown, he said, although the business intelligence sector will continue to consolidate. Last year Business Objects acquired privately held Acta Technology for its data integration capabilities.

Although Liautaud professes not to be overly concerned about the Microsoft threat, he (and a number of analysts) suggest that privately held Crystal Decisions, which specializes in lower-end reporting tools, has more to worry about. Some analysts say

Actuate

(ACTU)

, which focuses on large-scale reporting applications, is also threatened.

Business Objects itself has been mentioned as a takeover target, but Liautaud, who founded the company in 1990 after leaving Oracle, has no interest in being acquired. "It's his baby," says an associate.