Commodity shuffle

THE RAPID COMMODITIZATION of hardware in recent years is yielding great benefits for customers but brutal consequences for vendors increasingly forced to compete on price. And as the capabilities of open-source OSes, Web servers, and application servers begin to rival their commercial counterparts, it’s clear that commoditization is creeping into the software stack as well.

This raises several questions. How far up the software stack will commoditization go? Will the powerful forces that make software development more competitive — open standards, tools, and platforms — eventually affect even the most complex applications? Will it be increasingly harder for enterprise application vendors to differentiate their products on anything but price and service?

Driving commoditization

Flash back to the 1970s, when most software was written either inside enterprises or by IBM. Developers had to write everything: their own development tools, file management systems, testing tools, even their own OSes. The past 30 years brought the development of standardized building blocks, which make it possible to leverage code and services created by others, and allow for much greater output per unit of human effort.

“We’re moving from a craft environment to a production environment,” explains Jim Shepherd, a senior vice president at AMR Research in Boston. “Software developers are moving up the food chain,” he says, assembling solutions faster by including large chunks of third-party code. “We’ve been raising the level of abstraction,” agrees Walker Royce, vice president of Professional Services at Rational Software in Cupertino, Calif. “The opportunity for building small-scale components on top of large scale architectures has dramatically expanded the space of people who can compete in the software market.” Royce points to higher order languages (such as Java and C++), reusable components, standardized architectural frameworks (including, most recently, Web services), and tool-produced software as key contributors to the commoditization trend.

Everyone seems to agree that the lower levels of the stack, including enterprise middleware, are commoditizing. “Application servers, there’s a commodity for you,” says Mike Prince, CIO of Burlington, N.J.-based Burlington Coat Factory, and a big proponent of Linux and open source. “The price is down to zero. It’s not even next to nothing. … it’s nothing.”

Prince sees the commoditization trend reaching into other parts of the stack, such as system management software.

“There’s a whole industry built up on value-add [such as] database administration and monitoring,” Prince notes. “Now Oracle is giving away some of that, too. As the bar keeps rising, more and more of the software stack becomes commoditized.”

Mark Carges, president of BEA’s Enterprise Framework Division in San Jose, Calif., sees a similar trend, but prefers to call it convergence. “What had grown independently is a lot of these separate interesting technologies, such as personalization, workflow, and portals,” Carges says. “What convergence is all about is how all these things are being driven together.” Whereas BEA used to offer an application server, Carges explains, it now offers a platform including integration and portal capabilities, workflow, and b-to-b technologies. With the entry of BEA, IBM, and SAP, the 40 or so portal companies have largely disappeared, he says, and “you’re seeing tremendous pressure” on the pure-play EAI vendors.

Movin’ on up the stack

In a way, commoditization is like Ten Little Indians: Everyone thinks his or her neighbor in the stack has been or will be commoditized, but no one expects that he or she will be next. This is especially true about applications.

“The big enterprise applications are pretty standardized,” says Steve Andriole, a senior consultant at Arlington, Mass.-based Cutter Consortium and professor at Villanova University in Villanova, Pa. “They’re getting close to being commoditized. In a bear market, commoditization’s a pain killer … if you go to SAP right now, it’s basically, ‘make me an offer.’ ”

Not so, says David Schmaier, executive vice president of Siebel Systems in San Mateo, Calif. Schmaier says that to build world-class application software for large enterprises with sophisticated requirements, you can’t just assemble or distribute someone else’s components.

He notes that Siebel has more than 2,000 engineers, and a “core software architecture” that provides complex functionality that competitors would find hard to duplicate. Instead of commoditization, Schmaier sees intense competition and price wars. “You have five different companies fighting for the same piece of the pie because the pie’s gotten smaller,” Schmaier says. “I wouldn’t call that commoditization, that’s consolidation.”

Although AMR’s Shepherd agrees that large-enterprise applications will be slow to commoditize, he sees a new crop of vendors poised to challenge the big ISVs by moving up from below, developing less complex alternatives at lower price points. “What we’re seeing is the inevitable push down in the size of the company you can sell to [at higher volume],” Shepherd notes.

So with all the stars aligned for more competition in enterprise software, is it really getting cheaper to buy (or build) software solutions? The answer is yes, and no. “Software is cheaper to write than it once was,” says AMR’s Shepherd. “Unfortunately the amount of functionality and capability that I have to write in order to be competitive has also gone up dramatically.” Rational’s Royce notes that while in the 1960’s, the average software program had tens of thousands of lines of code; in the 1970s and 1980s that jumped to hundreds of thousands; and most applications in today’s era of n-tier, Web-enabled applications have millions.

And although in theory it’s cheaper for enterprises to write their own code thanks to better tools and processes, explains Shepherd, it’s also getting harder to hire and retain the kinds of people who understand how to build software, make it interesting for them to stick around to maintain it, and enrich them with external intellectual property. “If you’ve got a business problem that needs to be solved,” says Shepherd, “it’s a whole lot faster to just go buy it.”

As a result, when enterprises go to buy software, they are increasingly likely to find low-cost, commodity-like options.

This is especially true for business processes that are repeatable and common across enterprises, and for noncore applications requiring less customization.