You Want The Next Big Thing? This Stock Is Not It

  • April 19, 2005
  • Melanie Hollands


WebMethods. Man, what a fun time that was during the
bubble! Great people, great technology, the gorillas were a million
miles behind.

These days
the company is holding its own, but my expectation is that Microsoft and IBM
will continue their work on the standards committees that govern Web services
and will eventually leapfrog WebMethods in terms of functionality. Once that
happens, WebMethods will probably get squeezed out of the marketplace by
existing WebMethods / IBM customers who are looking for a single-vendor solution
to reduce complexity. 

In my opinion, WebMethods is going to end up being a sad story like Novell
(marginalized when Microsoft added network functionality to Windows),
SilverStream (ruined by its own outlandish pricing model and bad performance),
and other first-movers who enjoyed an early lead only to have their lunch eaten
when the 800-pound gorillas (Microsoft, IBM) move into the space. |

WebMethods started off as the garden-variety Internet startup. Phillip Merrick
(the company’s founder, chairman and CEO) came from Australia to the U.S. and
became Director of Engineering at Open Software Associates (yep, he’s a
technical guy). In his basement (not kidding, he really did this in his
basement) he started toying with a software project that could be used to
automate any activity on a Web site — for instance, searching Amazon.com or
buying something on EBay, etc. This might not sound like such a big deal, but he
did this in 1998 when folks still thought the Web was a collection of pages for
users. Merrick saw that the real value of the Web was the interface that the Web
could expose for other businesses to use. Before the Internet, integrating
business back-ends with other companies was next to impossible due to the cost
and complexity. 

Merrick heard about XML at a conference and decided that it would make a great
lingua franca for companies to use to exchange information over the Internet. He
started a company and got some angel money and VC funding. WebMethods was born,
and the rest, as they say, is history. 

As the integration market started to heat up WebMethods went public on Feb. 11,
2000 and started making a ton of money. IBM, Microsoft, and Oracle took notice.
Other direct competitors popped up, including Vitria, SeeBeyond, and DataChannel.
They presented weak competition at the beginning, but things started to change
as they gained toeholds in the market. Vitria quickly dropped off because it
didn’t do B2B and was offering content management (which was a space that was
just as misunderstood as B2B). But SeeBeyond stuck around. There were a few
industry specific integration players that came and went, most of which used
homegrown tools. 

Well, WebMethods started to get squeezed by BEA on the J2EE front; WebMethods
didn’t have a J2EE story when J2EE was on the rise. So the company changed its
story to say it did enterprise integration, and in May 2000 spent $1.3 billion
to buy Active Software — a true EAI (enterprise application integration) play
with amazing engineering talent. With Active came Jim Green, the founder and one
of the originators of the big technical standard CORBA.

Around this time, Web services standards started to form (SOAP, UDDI, ebXML).
IBM followed suit with a bunch of open source projects that implement the
standards and rolled them into WebSphere. Microsoft moved in with BizTalk (which
has floundered and died), and BEA moved in with its own integration strap-on for
WebLogic. 

Last year, WebMethods spent $10 million and acquired ElectricXML and with it
that company’s CTO, Graham Glass. Glass is another great rags-to-riches story;
he was a laid-off software engineer in Dallas who started to build XML products
to stave off boredom during his job hunt. He ended up building one of the
easiest-to-use and efficient Web XML standards implementation. Instead of
looking for a job, he started his own business. He’s a great technical mind and
hopefully he was re-igniting some of the original innovation that existed at
WebMethods. 

WebMethods continues to grind away, presenting at Wall Street and industry
conferences and updating its product portfolio. In early June, 2004, it
introduced an enterprise services platform and business solutions for the
high-tech industry. 

My long-term view of WebMethods is similar to that of Aether,
discussed in

this column on February 8.
They were both great first movers that saw an early opportunity at a large
market and moved quickly to try and capture it. However, several things happened
as each of their markets matured. Customers figured out what they wanted, what
the value was and what they were willing to spend, and the market figured out
what the technology was best applied to. 

So while it’s great to be a first mover and capture the early lead, when it
comes to making long-term investments we’ve seen this story before: It’s not a
sprint, it’s a marathon. It doesn’t matter who wins in the one-to-two year range
(unless the company’s exit strategy is acquisition). It matters who is winning
(or even still running) at the five-to-10 year range. In this regard, I think
Microsoft played it smart in the past: It may not be the first one out of the
gate with a new technology, but it waits and sees how things shake out and then
cherry-picks the tried and true ideas/concepts. I know Microsoft does a lot of
its own basic research, but looking at its consumer products, there’s not a lot
of leading edge stuff out there. (And I’ve expressed my long-term concerns about
Microsoft in

this column previously.)

So, all in all, WebMethods is a wonderful fairy tale of a startup that grew up
and is still swinging when many of its peers have fallen off. Optimistic
outlooks are being touted by some; WebMethods was “recognized” in 2003 as the
fastest-growing software company in North America by Deloitte, for example, and
some smaller boutique research shops have had it rated a “Buy” for a year or
more. However, I don’t see it becoming the next big thing. 


Is WebMethods a potential takeout? 

As far acquisition goes, I can’t see who would want WebMethods. 

  • IBM
    already has most of the core pieces that WebMethods has. However, it just
    doesn’t have the easy to use front-ends for it all, because IBM never has
    easy-to-use front ends for anything. 

     

  • BEA
    Systems (discussed
    on February 28    ) might want it as an extension to WebLogic, but that’s really iffy. BEA
    already has its own integration story with WebLogic, and I’m not sure it’s in
    a position to be buying anyone these days. 

     

  • Oracle
    could buy it, re-brand it and ruin it by making it more difficult to use
    (which Oracle does all the time; just look at Oracle 9iAS). Oracle OEM’ed an
    early version of WebMethods’ product in 1999, so there might be some potential
    here. 

     


  • Hewlett-Packard was WebMethods’ first paying customer, so maybe H-P would buy
    it and fold it into its app-server offerings. But H-P bought Bluestone (one of
    the first companies to build a J2EE compliant app-server) and shut it down a
    few years ago. So, maybe not. 

     


  • Microsoft wouldn’t ever buy WebMethods, since the company’s product is mostly
    Java. Hypothetically, WebMethods would give Microsoft a good Unix story, but
    Microsoft doesn’t care about Unix. 

Another
possible buyer could be one of the CRM vendors: SAP, PeopleSoft, or Siebel. SAP
was an early investor and even OEM’ed WebMethods product for quite a while. The
strategy was that WebMethods would be the SAP connector. With SAP + WebMethods,
it would be almost trivial to create global purchasing marketplaces, since
everyone shared a common backend (SAP) and a common Web enablement piece (WebMethods). 

But we all
know what happened to SAP, and the reality is that all SAP businesses don’t
trust all other SAP businesses. People still want to talk with their suppliers,
inspect the merchandise, see the plant and get a good “gut feel” about whom they
are doing business with. I think this will eventually come, but it will take a
few more years for greater commoditization to hit the marketplace, which will
start to bring about greater price competition that can only be solved by
wringing out the inefficiencies in the supply chain. 

The only
thing I can see as a viable future strategy for WebMethods is to keep doing what
it’s doing: 


  • aggressively pricing and out-servicing the 800-pound gorillas, and

  • look
    for strategic acquisitions that meet specific needs that have been identified
    via lost deals. 

WebMethods
should not “do an Aether,” and which had VCs, investment banks, or the board of
directors telling management “you need a portal product” or “you need
subscribers.” WebMethods benefited early on in the era of IT-driven businesses.
During the 1990s boom, the IT department would dictate its budget and say: “We
need B2B to integrate with our suppliers.” And the board of directors would
think that sounded great and would give the company millions for what amounted
to a big experiment.

Now the shoe is on the other foot, and the board of directors dictates terms.
The IT department needs a business case and a projected cost-benefit analysis
for the investment (which is really what it is), and WebMethods needs to start
playing hardball and showing the ROI very quickly. The tough part is quantifying
a savings of a process that is rarely measured in the first place.


Fundamentally, I don’t care for the stock. I don’t see any positive catalysts on
the horizon for WEBM and don’t see a reason for WEBM to break out of this range.
I’d be inclined to stay on the sidelines until I see a technical trade or a
fundamental reason to own this name. 


Technically, WEBM is trying to put in a double bottom – but I’m not convinced it
will hold. The stock would be better off (i.e., be a higher percentage trade) if
it could close over $5.4 with a surge in volume, indicating that it’s bucking
the tech malaise. If does not do that, then WEBM looks like a 50 / 50 trade.



Melanie Hollands

melaniehollands@yahoo.com