The application ecosystem: ten lessons learned

Computer Industry Report, Feb 19, 1999 by Henry Morris

Vendors can learn survival skills from patterns of functional and dysfunctional software industry relationships. Here, The Gray Sheet offers definitions of ecosystem roles followed by lessons learned from interactions among ecosystem players. The model can be applied beyond enterprise applications.

The application ecosystem is "a model of potential software vendor-vendor relationships" that follows the natural flow of information across related packaged enterprise software. The term, which IDC coined in 1995, has proven a rich model. IDC predicted, "The combination of application vendors seeking added value and vendors of complementary software seeking channels is likely to cause more relationships to be forged along these lines. In the future, a vendor's network of alliances, as much or more than its product investment, will become the major defense against potential competitors entering the market."

The broad solution led by an application software leader and extended through complementary software has won out in the marketplace.

The dynamics of ecosystem formation and nurturing can be violated only at the peril of leaders or complementors, as IDC's 10 lessons show. In the future, boundary wars are likely to emerge. Ecosystem leaders will seek to broaden their core to avoid commoditization, inviting inevitable conflicts with partners that have staked out a complementary market. The complementors have an initial window of opportunity before the leaders move in. Major battlegrounds in the boundary wars are analytic applications, Web-commerce applications, and supply-chain collaboration.

ECOSYSTEM LEADERS

The application suite providers (SAP, Oracle, PeopleSoft, and Baan) have been the most successful ecosystem leaders and, not coincidentally, the leading enterprise application vendors. These suppliers have the broadest integrated core and the strongest set of complementary partners. At the same time, complementary partners that understood the dynamics of the model have done well, taking maximum advantage and leverage from their relationships with many ecosystem leaders. These vendors include Cognos, Business Objects, Seagate/Crystal, Edify, Arbor, and IBM/Lotus.

ECOSYSTEM ROLES

An ecosystem is a community of product suppliers, comprising an overall leader and the providers of complementary products that add value by integrating with the leader's product to form a solution. The following points describe the three roles in an ecosystem:

* Leader. Gains competitive advantage by completing the "whole product" more successfully than rival ecosystem leaders. A leader generally makes up at least 60% of a solution's value and defines the interfaces (APIs) to which other vendors (i.e., complementors) must write.

* Complementor. Gains access to the installed base of one or more leaders, often seeking to exploit an indirect channel; the complementor's value to the overall solution may be less than 25% for a secondary complementor or less than 15% for a tertiary complementor.

* Packager. Brings solution elements together, often as a means to gain systems or services business.

STRATEGIC COMPLEMENTORS

Many types of relationships exist between leaders and complementors. The complementor in an ecosystem is more likely to highlight strategic relationships with leaders than to be included in a large catalog of vendor partners. These strategic relationships include the following:

* Embedded. Complementary software from third-party ISVs that is embedded within the leader's core product (e.g., databases). An example is Visigenic's object request broker, which is embedded, integrated, and then relabeled as Oracle's application broker.

* Distributed. Complementary software from third parties that, though not embedded, is distributed by the leader. An example is SAP's distributing of HAHTsite Web development software.

* Bundled. Major software products that are bundled as part of a separately labeled product by the leader, which also offers the first line of support. One example is Oracle's bundling of Manugistics within Oracle CPG.

* Codevelopment. Software vendors that have entered strategic codevelopment agreements with the leader but that have no embedding or distribution agreement. Examples include SAP and the modeling vendor Intellicorp or PeopleSoft and the retail applications vendor Intrepid.

Recently, there has been an increase in the number of acquisitions of complementary vendors by ecosystem leaders, such as Baan's acquisition of Aurum, Berclain, and Antalys; Oracle's acquisition of Treasury Services Corporation; and PeopleSoft's acquisition of Red Pepper, Campus Solutions, and Salerno Manufacturing Systems.

The number and types of relationships forged by the lead vendor give a picture of its priorities in targeting customers by extending its core software. The breadth of the solutions being formed in this fashion gives rise to viewing the leader's software as a platform around which solutions are developed. The most successful of the ecosystem leaders, SAP, attracted several thousand developers to its developers' conference in Atlanta recently, providing training on how to interface complementary software to the R/3 platform.