Is the Window of Opportunity Closing for Service Orientation Vendors?

Speaking of the ever-changing nature of reality, the ancient Greek philosopher Heraclitus famously said, “you can never step into the same river twice.” He could very well have been talking about the Web Services (WS) and Service Orientation (SO) market. At this point in time, this market is exceptionally dynamic, as several technology and business forces buffet the players. ZapThink’s new report, Service Orientation Market Trends, analyzes these forces, and lays out some bold predictions for the IT industry for the years to come. This ZapFlash is an excerpt of that report.

Web Services, of course, are standards-based interfaces to software functionality. Service Orientation is an approach to distributed computing where software functionality is available as discoverable Services on the network. It’s important to realize that Web Services by themselves do not form a product category in their own right, because they are interfaces to something else, rather than software themselves. Therefore, the market segments that fall into the Web Services market category include products that either use Web Services to accomplish a certain set of tasks (like integration), or products that add value to software that is exposed as Web Services (for example, security). However, as Web Services become ubiquitous, it will no longer make sense to speak of Web Services market categories.

Service Orientation, however, is more of an approach to distributed computing than a market category per se. As companies come to understand the value proposition for Service Orientation and Service-Oriented Architectures (SOAs), they may find they need a range of software, hardware, and consulting services to put together an IT infrastructure based on an SOA. Such products and services may or may not fall into separately identifiable Service Orientation market segments, and even so, these market segments are transitional in nature. SO, however, is here to stay, as distributed computing becomes Service-oriented during the rest of this decade.

The shift to Service Orientation affects all distributed computing

The key market reality that most end-users as well as many vendors haven’t truly realized at this point in time is that the shift to Service Orientation affects all aspects of enterprise distributed computing. We are not moving toward a world where SOAs are one of several possible distributed computing architectures in the enterprise. Rather, other architectures, including n-tier, client/server, and message bus, will all come to be understood within the context of SOA. Fundamentally, SOAs provide a layer of abstraction above other architectural approaches, providing an asynchronous, loosely coupled Service interface on top of a heterogeneous mix of architectural styles.

This transition of the overall IT market toward SO will take time. ZapThink predicts that this transition will not be fully established until 2008, and not truly complete until 2010. Therefore, the period 2004-2007 will be a continuing transitional period for IT, as standards, products, and architectures mature, while at the same time, other approaches to distributed computing will remain separate from SO. Therefore, the markets for Web Services and SO products and services are themselves transitional, with their lifetime as separate markets extending no later than 2007-2008, at which time the vast majority of IT will be Service-Oriented. Once that shift is complete, the individual market segments within the WS and SO markets will have been entirely absorbed by broader IT markets.

This consolidation of markets has little to do with the success or failure of companies within the WS and SO markets, however. On the contrary, the wave of innovation characterized by the SO movement will offer substantial, continuing opportunities, both for new entrants and incumbents, as long as they realize that how end-users will be evaluating, purchasing, and using their products will be changing substantially and continuously during this time period.

Finding the windows of opportunity

As any emerging market matures, two fundamental economic forces cause change within the industry: the forces of innovation and consolidation. As new technologies and approaches for solving customer problems become economically viable, new opportunities open for startups and other nimble companies to devote investment dollars into developing innovative products that capitalize on the emergence of nascent markets. Then, as those markets expand, larger players realize that in order to grow, stay relevant, and continue to serve their current customers, they must also leverage the innovative solutions the smaller players are bringing to market, either by building the innovative solutions themselves, or by acquiring the new capabilities from the new entrant vendors.

As a result, in any emerging market, there is a turning point when consolidation comes to dominate innovation. At that point, smaller players must focus on increasingly narrow niches, go out of business, merge with other small vendors, or become part of a larger player’s plans to enter the new market. Once this consolidation settles down, there are typically a small number of new entrants left standing — those who managed to acquire rather than be acquired, find a defensible niche, or who are able to continue to innovate at the edge of the market. However, the number of survivors is typically much smaller than the number of startups who fail or become acquired.

It is important to point out, however, that in an industry as dynamic as IT, there are always new waves of innovation, as Moore’s Law and other fundamental market and technology forces drive change throughout the industry. So the big picture of change in the IT industry is one of constant ebbs and flows, as new innovators throw their hats into the ring, and established vendors continually move to consolidate the industry.

At this point in time, various parts of the SO marketplace are near the consolidation turning point, as established players are beginning to consolidate the market, and the window for new, innovative startups closes. Therefore, the forces of market change present important imperatives for three basic categories of SO vendors at this turning point:

  • For startups still in or emerging from stealth mode (who haven’t released information to the public) in the SO market, the window of opportunity will be rapidly closing in 2004. In the more active markets for SO products and services, including Service-Oriented management, security, and integration, it may already be too late for companies to emerge out of stealth mode that don’t have compelling intellectual property or possess significant influence on end-users. For the less developed segments, including process and architecture tools, there is a rapidly shrinking window of opportunity that will last for no more than two years. In other markets that play a supporting role to the transition to SOAs, such as information integration and presentation layer tools, there will continue to be opportunity for new entrants to the market for a few additional years.
  • For new entrants now in the market, 2004 promises to be a make-or-break year. New entrants who have emerged in the past few years must be able to positively justify their value proposition to customers and break out with significant sales in 2004. These companies must face the reality that incumbents will be looking to consolidate the market, and taking advantage of the consolidation trend might be a good exit strategy for many new entrants. Other new entrants with sufficient resources will find that making their own acquisitions will make sense.
  • The greatest opportunities, as well as the greatest risks, face the incumbents. It’s still a buyer’s market in the IT industry since new entrants are still relatively inexpensive to acquire, so incumbents with money to spend can leverage the innovation of new entrants quickly by making strategic acquisitions. However, the greatest risk facing these incumbents is that they may miss the broad changes that SO represent for the IT industry as a whole. Because incumbents must necessarily focus on their current customer base while still attempting to innovate in the market, they all risk missing the boat, just as they are buying their tickets for the ride.

Clearly, it is the broad changes that SO represents for the IT industry that are the most interesting part of this story, for all players regardless of size or age. For while the ebb and flow of innovation and consolidation can be thought of as a cyclical phenomenon, in reality true progress does take place with every wave. Players who expect the next period of stabilization to be the same as the last will be caught by surprise.

Unlike the bubble-driven delusions of last decade’s Internet buildout, where new businesses formed in order to “stake out territory” in as-yet undefined markets, the opportunities for startups and other new entrants in the SO space are limited. This conclusion is somewhat ironic considering ZapThink’s predictions that the entire distributed computing world will become SO. The reason that this trend limits opportunities for new players is that existing incumbent vendors are as a rule fully aware of the trend toward SO, and realize that they must move into this “next big thing” to continue growing.

This ZapFlash is only a small excerpt of ZapThink’s provocative new report, Service Orientation Market Trends.