Opsware vs IBM Battle Brews

Opsware Inc. (Nasdaq: OPSW) yesterday announced extended platform support for Opsware System 4.5, the data center automation software package that it launched last month (see Opsware Extends Platform Support and Opsware Intros System 4.5).

The announcement itself isnt exactly earth shattering, but what’s going on behind the scenes could be, one day.

In a nutshell, Marc Andreessen is taking another crack at outgunning an industry behemoth, this time IBM Corp. (NYSE: IBM), in what looks a little like a rerun of his Netscape adventure, when he eventually succumbed to the might of Microsoft Corp. (Nasdaq: MSFT).

Andreessen is one of the founders of Opsware, previously known as Loudcloud, and right now, the company appears to be making a lot of the running in an emerging market for data center automation. The need for automation has arisen from the proliferation of Web applications and servers, which has increased complexity to the point where administrators are overwhelmed with tasks spanning the whole IT lifecycle.

Opinions differ on whether administrators are ready to take the plunge with automation technology right now, but the size of the potential market for products such as Opsware's was validated last year, when IBM entered the fray with its acquisition of Think Dynamics, according to Gregg Speicher, an analyst with Farmhouse Equity Research LLC. "This market is going to happen," says Speicher. "The question is, can Opsware continue to capitalize?"IBM has brute size and resources and could apply pricing pressure -- just as Microsoft did to demolish Netscape. Right now, however, IBM and other big players are still in the planning and hyping stages of so-called "autonomic" computing, whereby computers manage themselves.

Meanwhile, Opsware is continuing to improve its product story. A good example of this is its 4.5 product, which enables customers to tailor Opsware to their own needs. This could be a shrewd move -- by offering customization as a feature, Opsware avoids having to do custom development of its own -- a mistake learned the hard way at Netscape, Andreessen has previously acknowledged.

"There's a lot of work being done in terms of helping customers get better benefits out of complex change management. We're also doing a lot more work in looking at the ecosystem around the data center such as network management, storage management," says In Sik Rhee, who founded the company in 1999 along with Andreessen, Ben Horowitz, and Tim Howes.

Also planned for the next major release are tighter integration with operating systems and hooks into virtualization software such as EMC Corp.'s (NYSE: EMC) VMware, Rhee says. Hooks to popular management portals such as those from IBM, Hewlett-Packard Co. (NYSE: HPQ), Micromuse Inc. (Nasdaq: MUSE), BMC Software Inc. (NYSE: BMC), and Computer Associates International Inc. (CA) (NYSE: CA) are also planned, he says.

Opsware has about 150 employees and more than 250 customers, according to Rhee, but more than 200 are actually customers from the company's $10 million all-stock acquisition of Tangram Enterprise Solutions Inc. earlier this year (see Opsware Acquires Tangram).Still, Opsware has increased its revenue in each of the last five quarters, from $2.5 million in the first quarter of 2003 to $7.3 million in the first quarter of 2004. Income keeps growing in each quarter as well, from a $3.9 million loss in the first quarter of 2003 to a $2 million profit in the first quarter of 2004.

These figures may underplay Opsware’s progress because the company employs an unusual method of sales accounting says Speicher, the analyst. "Most software companies recognize all deals they win up front. Instead, [Opsware puts] every deal they win into deferred revenue." Thanks to that conservative method, Opsware's financials are better than they look, he says.

Opsware also has a good-sized customer backlog, and, unlike when Loudcloud began as a services company, the current customers are choosing major commitments, not just pilot projects, he says. A decade post-Netscape, Andreessen's coat-tails still impress many IT buyers, he says.

— Evan Koblentz, Senior Editor, Next-Gen Data Center Forum