Q3 2008 Infrastructure Software Market Overview

The Infrastructure Software sector covers a lot of territory. We’ve seen a healthy number of deals in this sector during the third quarter across most infrastructure segments including Communications, SOA, Network Management, Security, Systems Management and Virtualization.

SOA has certainly maintained its spot among the top trends in software even if the number of acquisitions in this sector dropped this past quarter. Businesses need to reduce time to market, improve business alignment for growth, and do a better job of unlocking valuable information within an organization. SOA market license forecasts relate to growth of the middleware infrastructure. SOA markets at $2 billion in 2007 are expected to reach $9.1 billion by 2014 according to extensive research done by SOA experts at WinterGreen Research. Growth comes from creating ways to reduce the cost of running an IT department by creating more automated processes from software and freeing the budgets for investment in flexible response to changing market conditions.

To deal with the growing complexity and cost of application deployment, maintenance and performance, organizations are looking for solutions to streamline, secure and manage delivery of their most business critical applications.

Virtualization, server consolidation, performance management, etc., were hot topics and this was reflected in acquisition targets during the quarter. Virtualization will be the highest-impact trend changing infrastructure and operations through 2012, according to Gartner. Virtualization will transform how IT is managed, what is bought, how it is deployed, how companies plan and how they are charged. As a result, virtualization is creating a new wave of competition among infrastructure vendors that will result in considerable market disruption and consolidation over the next few years.

As usual, security was a strong sub-sector this quarter. McAfee came in with the largest security deal of the quarter with news that it planned to embark on a $465-million acquisition of Secure Computing. The merger will ultimately make the combined company one of the largest network security players in the industry. McAfee CEO Dave DeWalt said in a written statement that executives anticipated that the combined company will generate annual projected revenues of just under $500 million in the network security segment of its security risk management portfolio. Even though security sees a significant number of deals each reporting period, the space is broad and still fairly fragmented. Consolidation in the marketplace is becoming increasingly necessary as more end-user customers demand end-to-end, best of breed security solutions from a smaller number of vendors.

Security - ID management

Consolidation is a never ending process. This quarter, three of the security leaders, Utimaco, nCipher, and Secure Computing, have been swallowed by larger companies.

From inception Secure Computing has always tried to make security as simple and easy to use as it should be: in security, simple means efficient. Who has never thought that security is more a cost than a “profit center?” From a user stand point, security has always been difficult to implement and expensive to maintain. After a few months, its level tends to decreased by being misused or over-passed by end users. When Secure Computing buys Securify, Secure Computing shows that they have understood this problem. They targeted a solution that removes complexity without removing its efficiency.  When McAffe buys Secure Computing they strengthen a security initial vision where there is no “obvious and visible” perimeter to secure: their “in-the-cloud” security as a service. ID management is just the key to making the vision become real.

ID management is a necessary solution in IT since it is actually used in every IT process. There is no IT process that doesn’t use an ID management system related to a human, a network, an application, a server, a PC, a mobile, a customer / supplier, a flow, etc.  ID management is anywhere, anytime, more or less transparent. It makes (or should make) our IT world safe(r) and (more) reliable. Get rid of it and you can close your business.

Legacy Extension / SOA

The transaction levels in the EAI/SOA sector have slowed somewhat, possibly suggesting that the bulk of the much anticipated consolidation in this sector is now behind us as the largest ISVs ($billions in market cap) have already consumed most of the mid-market players ($hundred of millions in market cap—think Progress acquiring Iona, or IBM acquiring ILOG), effectively reducing the buyer pool.

In the wake of this consolidation, one would expect to see a declining number of announced deals. However, it is our humble opinion that we should start to see an increase in announced deals, as the few remaining mid-cap ISVs look to acquire some of the smaller founder-managed lifestyle businesses, struggling public companies, and any number of VC-backed startups at even lower deal values – think Micro Focus buying NetManage.

Moreover, we see increasing customer demand for service-oriented architecture and web-services, with the Global 2000 IT organizations looking at lowering the TCO by going with a single SOA vendor strategy.  This heightened market demand has attracted a large number of start-ups with early seed money competing for market attention and market share. Coupled with time-to-market issues and declining R&D budgets associated with the tougher economic climate, we expect a solid resurgence in deals with smaller companies getting gobbled up by the larger players looking to fill gaps in their product strategy, resulting in further massive consolidation around SOA.

Net result: SOA will go the way of ERP – a few large players will dominate with others being either left behind or being acquired.

Network Management

The economic forces and the current trends in network management are converging into a practical solution. Earlier this year, an argument was put forth by Nicholas Carr that IT departments would become a thing of the past in the near future due to utility computing and outsourcing. Although the premise has met considerable doubt from IT experts around the globe, it does touch upon the fact that IT departments will inevitably downsize as the devices and styles of computing change. Especially during fiscally tight times, corporations will be interested in how to optimize the IT infrastructure to make it more efficient, without having to worry about exporting the company’s lifeblood of data and information. Hence, some of the deals this past quarter reflect both the continued evolution of network infrastructure as well as a financially sound solution.

Network management and its infrastructure are constantly under development for new ways to be more efficient. Many of the IT departments of large scale companies will be looking toward utility applications that run through datacenters, as exemplified by Expand Networks acquisition of NetPriva, a company that offers traffic visibility software. As companies deploy more advanced technologies such as IP telephony, unified communications and MPLS WANs, more and more traffic flows bypass the datacenter. Visibility is crucial when running multiple applications. Insight Enterprises announced that they have acquired MINX limited, a small UK-based European Network Integrator with Cisco Gold Partner accreditation. The acquisition will significantly help Insight’s capabilities in sales, management of network infrastructure services and solutions. Mid-market companies are gearing themselves up as well to handle datacenter traffic and management.

Some acquisitions are purely on a consolidation basis, such as Managed Data Holdings, a leading operator of state-of-the-art data centers, which has acquired Stargate, Inc., a local data center operator in suburban Chicago offering collocation, managed servers and managed services. However, the big consolidation in the sector this quarter was the acquisition of Foundry Networks by Brocade. This acquisition made Brocade more like its much larger rival Cisco Systems, Inc. The acquisition makes Brocade and Cisco the only “end-to-end” networking players in the market, and expands Brocades total addressable market from $2 billion to $20 billion. CEO Mike Klayko said the two companies share a vision for the future of next-generation data centers and networks.

Network infrastructure remains the lifeblood of a company’s IT infrastructure, and will continue be a business enabler going forward.