On July 6th, Compuware announced that it acquired dynaTrace Software for $256 million in cash. dynaTrace provides solutions for tracing and capturing application transactions, code level application diagnostics and real-user experience monitoring (RUM). This company has particular strengths in monitoring Java applications and its products are used in both pre-production and production.

Analyzing drivers behind this acquisition uncovers some of the larger trends in the APM market and brings to light new requirements for creating competitive advantages in this space.

Compuware's position prior to the acquisition

Prior to the acquisition, Compuware's APM portfolio consisted of the Vantage product line and Gomez products acquired in October of 2009. The Gomez acquisition enabled Compuware to offer arguably the broadest range of application performance management capabilities in the market. These capabilities include both synthetic and real user monitoring, monitoring from both inside and outside of the corporate firewall, network, database, server and application component monitoring, as well as monitoring last mile, cloud and mobile performance. Additionally, Compuware had an aggressive agenda for integrating Gomez and Vantage products and the company was able to follow through on this plan and allow their customers to leverage the capabilities of both of these technologies in an integrated way.

It looks like Compuware was in good shape when competing in the APM market prior to this acquisition. So why did they feel like they needed to spend $256 million on purchasing a company with $26 million in TTM in revenues?

Completeness vs. effectiveness of APM product portfolios

Competitive positioning of many APM vendors have been largely focused on the completeness of their product portfolios and making sure that they have all of the major boxes checked. User experience management, transaction monitoring, monitoring application components or parts of the delivery infrastructure are just some of the areas that vendors are looking to cover when trying to position themselves as complete APM solutions. However, the fact that Compuware had user experience monitoring, transaction and Java monitoring boxes checked and still decided to spend more than half a billion dollars on acquiring Gomez and dynaTrace, user experience monitoring and transaction tracing providers, is proof that gaining true competitive advantage in the APM market is becoming a more complex task.

Preliminary findings of TRAC's APM survey show that end-user organizations are evaluating APM solutions predominantly based on effectiveness in their specific use cases and specific pain points that they are trying to address. Even though organizations see the value in managing multiple aspects of application performance management through an integrated solution, what matters to them more than the completeness of APM portfolios are capabilities that vendors are providing within each of these segments. Also, solutions that are focusing on varied individual segments of APM are based on different underlining technologies and approaches for collecting the data, which in many cases determines their effectiveness in different usage scenarios. Based on that, user experience monitoring solutions can be segmented into 2-3 separate sub-markets and the same goes for transaction monitoring products. The dynaTrace acquisition enables Compuware to add strong capabilities in the areas of the APM that the company was not focusing on, such as pre-production monitoring. More importantly, the acquisition allows Compuware to strengthen its offerings in areas that were included in the company's pre-acquisition portfolio, such as transaction tracing, deep dive monitoring and RUM. Even though the acquisition expands the array of capabilities that will allow the company to be more effective in a broader range of APM use cases, the real story of the acquisition, from a technology perspective, is that it allows Compuware to gain new strengths across different functional segments of APM.

The best way to describe the APM vendor landscape is as a set of different micro landscapes that are being defined by the types of applications and technology environments that organizations are looking to manage or blind spots that they are trying to close. The acquisition enables Compuware to significantly increase the number of usage scenarios where their solutions are able to effectively address application performance challenges.

Impact on competitors

This move can impact other APM vendors both short and long term. Short term, it can be expected that many vendors will try to take advantage of the fact that Compuware just acquired a technology that significantly overlaps with their Vantage technology and go after current Vantage customers. The same day the acquisition was made public, Compuware announced that their Vantage Analyzer product is being replaced and, due to end-user concerns about the support that Compuware will be providing for Vantage products going forward, this strategy could result in new customer wins for some vendors.

Long term, this acquisition could have a more significant impact on the APM market and cause additional consolidation and, more importantly, a shift in how requirements for effective application performance management markets are defined. Some of the other traditional leaders in the APM market that have all of the major boxes checked when it comes to completeness of their product portfolios may also find that they need to take a good look into each of these boxes and see if their capabilities are really well aligned with the key requirements for managing today's complex application environments. Those vendors that come to the same conclusion as Compuware did, after evaluating their portfolios, will be facing a "build or buy" quandary which, given how fast the requirements of this market are changing and what technology backgrounds their solutions are, should not be a tough dilemma. The real question is: How many of the vendors who are left in this market can be good acquisition targets? Even though new vendors are constantly entering this market, the list of acquisition targets that can help create true competitive advantages across a broad range of deployment scenarios is still fairly short.