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BEA: A Little Down In The Valley

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DQI Bureau
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When Alfred S Chuang took over as chief executive of software maker BEA

Systems three years ago, he inherited one of the great Silicon Valley success

stories of the 1990s. Started in 1995 by Chuang and two other former Sun

Microsystems executives, BEA had rocketed to nearly $1 bn in annual revenues by

2001. It dominated the fast-growing market for software that serves as a

foundation for websites and complex run-the-business applications, with a 34%

share. And it appeared ready to take a seat alongside the software industry's

giants.

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Then BEA stalled. Fierce price competition from rivals coupled with sluggish

overall demand led to the stagnating revenues of the past three fiscal years.

IBM now has 41.3% market share of the $3.5 bn market for application servers,

compared to 27.5% for BEA, according to market researcher Gartner. BEA's

situation is hardly desperate-it has $1.6 bn in the bank and a base of more

than 16,000 customers. But if Chuang can't find a way to get his revenues

growing strongly again, his company could suffer the fate of other software

pioneers such as Novell Inc and Sybase-onetime leaders that were outmaneuvered

by more effective competitors. Like them, BEA is in danger of fading in

importance and becoming an also-ran rather than fulfilling what once looked like

its destiny as a true industry powerhouse.

CEO CHUANG 



“His emphasis on R&D over marketing is riling managers”
 

Can Chuang get BEA going again? The odds are stacked against him. That's

because his own leadership is partly to blame for the severity of the company's

problems. He has been unwilling to make BEA's prices more competitive with

those of its top rivals-IBM and Oracle Corp, according to analysts and former

execs. And while he has begun diversifying BEA's product portfolio, he hasn't

put more aggressive sales and marketing programs in place to build those newer

businesses rapidly. At the same time, at least six of BEA's top execs have

abandoned ship in the past six months, including the chief technology and

marketing officers. Two interviewed by BusinessWeek said they had become

frustrated with Chuang's leadership. Former CTO Scott Dietzen would not reveal

why he left but he acknowledged the company's predicament: "BEA has the

opportunity to be successful and resume its growth, but it's going to be a

challenging road."

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Damn the Torpedoes 



Rather than reassessing his strategies in the face of widespread evidence

that they're not working, Chuang is determined to stay the course. He takes

great comfort in the fact that BEA has weathered the tech downturn relatively

well compared with some of the 1990s' other software upstarts, such as Siebel

Systems. He believes that his aggressive investments in research and development-$140

mn for the fiscal year ended in January, up 87% from 2001-will eventually pull

the company out of its slump. "In the end, we are not a sales and marketing

company," says Chuang. "We differentiate ourselves in the marketplace

by being a very, very innovative company."

But that focus alone has never proved successful in creating large and

powerful software companies. Consider Oracle, SAP, and Microsoft. They focus on

operational expertise and selling-in addition to technology. Indeed, it is

typically at the $1 bn revenue mark that tech companies either develop a

balanced approach to doing business or start to struggle. Often that transition

includes a change of management philosophy or a change at the top. "It's

the point where you go from being just a technology company to a sales and

execution company," says analyst Joanne Correia of Gartner, who thinks

Chuang needs help. "Alfred is a strong technologist, but they really need a

strong businessperson over there." Chuang insists that he's up to the

job. Members of BEA's board of directors declined to comment.

Can BEA Turn Itself Around?

Onetime highflier BEA Systems has been stuck at about $1 bn in revenues for three years. Here's what the software maker must do to grow again

Challenge Prognosis
ENTER NEW MARKETS BEA must expand sales beyond its core slowgrowing businesses of application servers and developer tools. GOOD The company is delivering software for Internet telephone networks and financial processing systems-and plans more new products.
GET ACQUISITIVE With more than $1.6 bn in cash and short-term investments, BEA can acquire smaller companies with key technologies, particularly software that tests computer networks. POOR CEO Alfred Chuang has shown little inclination to make acquisitions.
CUT PRICES BEA has terrific technology, but it's losing ground to IBM and opensource competitors such as JBoss that undercut its prices. POOR Chuang

has resisted trimming prices. He centralized sales, services, and marketing-but that hasn't been enough.
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In spite of the tumult, Chuang has been able to hold on to many talented

engineers. During the downturn, the company only had one round of layoffs-of

300 people. In fact, Chuang has nearly doubled employees devoted to R&D, to

about 700, while sales staffing has stayed about the same.

The problem is, those investments in technology talent haven't yet shown up

in strong topline growth. In the fiscal quarter that ended October 29,

software-license sales slipped by 10.4% to $114.9 mn, even as total sales, which

include maintenance fees, grew 4.8% to $264 mn. Analysts expect more trouble in

the current fiscal quarter, which ends in January. Software sales are expected

to be $130 mn, down 9% from a year ago, says Jason D Brueschke of Pacific Growth

Equities LLC. He forecasts overall sales of $283 mn, up 2% from a year ago, with

net income of $39.8 mn, down 7% from a year ago. BEA's stock is trading around

$8.75 per share, almost 40% below its 52-week high and a long way from the $90

per share of its glory days in late 2000.

But innovation is no longer a trump card for BEA. While analysts say it still

has the best products, the gap has narrowed to a sliver. And the history of tech

has shown that a company with slightly better products almost never beats out a

rival with a much cheaper offering. With so many aggressive competitors closing

in, time is running out for Chuang to come to grips with that brutal reality.

By Jim Kerstetter in San Jose, Calif., with Jay

Greene
in Seattle In BusinessWeek. Copyright 2004 by The McGraw-Hill Companies, Inc

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