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.

On April 4th, 2011, SmartBear Software enhanced its traditional focus on application testing and QA by acquiring AlertSite, a developer of application web performance monitoring and management tools. SmartBear's products emphasize the importance of managing the entire application lifecycle from code review to application profiling and automated testing for QA. By way of contrast, AlertSite is focused on synthetic monitoring and testing of web site performance. The product lines of both companies are complementary and together form a suite of applications that monitor and manage applications from inception to deployment and actual use.

This is a good move for SmartBear for several reasons. To begin, both companies have sizeable communities of users: SmartBear has a development and QA community of more than 100,000 users, while AlertSite's DejaClick has had more than 250,000 downloads, providing an opportunity to cross-sell and up-sell across both communities. While AlertSite's approach for monitoring Web performance has been resonating well with their customers, the company lacked resources to truly challenge companies that have been leaders in this space such as Gomez and Keynote Systems. Through this acquisition, AlertSite gains additional marketing muscle and research and development resources.

However, when you take a closer look into the product portfolios and strategies of these vendors, it becomes apparent that some of the key dynamics in the application management market are influencing this acquisition.

 --  The concept of a lifecycle of application performance management has been present in the market for some time and has been accepted mostly by vendors who provide solutions for application testing in pre-production. Vendors are becoming increasingly aware of the importance of providing solutions which identify how the lifecycle of application management affects both end-user experience and business goals.

This acquisition gives SmartBear opportunities that go well beyond extending their current community and creating new channels for AlertSite's products. SmartBear now has an opportunity to capitalize on market trends that call for a more user-centric approach throughout the entire lifecycle of application management. Taking advantage of these trends will require tighter integration with AlertSite's product portfolio, as well as building product capabilities that enhance their appeal to companies that are adopting a DevOps methodology.

Web performance has become critical to conducting business – nothing discourages customers or potential customers faster than poor website performance. However, TRAC's recent research shows that issues with the quality of end-user experience for websites occur 10 times more frequently than website outages. For that reason, organizations report losing twice as much revenue due to issues with end-user experience as they do for issues with site availability, proof that end-user experience should be at the core of application performance management initiatives. Including user experience in the entire lifecycle of application management should lead to better customer retention and increased revenue.

The market for Web performance solutions has experienced significant changes in 2010 and many of the trends that have been driving new dynamics in this market are expected to be even more accelerated in 2011.

Traditionally, these types of solutions have been predominantly deployed by large Web properties (media, entertainment, social networks, etc.) and organizations that are either using their websites to generate revenues or rely on Web portals to share information internally. However, changes in the way that business users are accessing corporate data are causing Web applications to became more than just revenue generating, branding or collaboration tools. In 2010 we have seen applications that are being accessed through Web browsers and delivered over public Internet become more critical beyond business-to-customer (B2C) environments, as organizations are increasingly using these applications to communicate with their employees and partners.

End-user organizations who participated in TRAC’s recent survey reported that they anticipate 11% of overall network traffic that is currently being delivered over corporate private networks to be delivered over public Internet in the next 12 months. Deployments of SaaS applications, more organizations considering and deploying Infrastructure-as-a-Service (IaaS) models and looking to achieve cost savings by leveraging advantages of public Internet are increasing the importance of managing Web performance. As organizations are becoming more dependent on the performance of Web applications they are also realizing that some of the same trends that are driving increases in the importance of these applications are also posing new performance management challenges.

New challenges of managing Web performance are forcing both technology vendors and end-user organizations to respond, which in turn is driving new dynamics in this market. Based on TRAC’s recent research, we identified ten areas that are significantly impacting how different flavors on Web performance management solutions are being deployed and managed, as well as some of the capabilities that are becoming more important in this market.

Industry analysts tend to classify vendors into technology "buckets" and create "labels" for each of them, as that makes it easier to compare products, capture key trends and provide context around problems that these products are addressing. This method also resonates with some technology marketers, as it allows them to partially benefit from promotions that other vendors and media are conducting around a label of a technology bucket their product was put into.

The term "application performance management" (APM) has been one of the hottest technology "labels" over the last few years. Performance of enterprise applications impacts nearly all of the key business goals, and it shouldn't come as a surprise that technology solutions for managing performance of these applications has been very high on IT agendas. With that said, it should be even less of a surprise that technology vendors, who are involved in managing the delivery of applications to business users in any way, realized this opportunity and started calling themselves "APM vendors". However, every "hot" industry term has an expiration date attached to it and sometimes it doesn't take long for a company to go from being one of the biggest promoters of an industry term to getting to the point where it doesn't even want to be associated with it.

Back in 2008, there were more than 50 technology vendors that used the term APM to position products that they provide and that number is now down to less than 30. So, had these 20+ companies gone out of business or completely changed their product portfolios? No, but they had realized that the term APM got diluted and that it is in their best interest to separate themselves from technologies that address the same problem as they do, only from a different perspective.

Emergence of new categories

Being thrown into the same technology bucket with companies that are addressing a similar problem from a different perspective could be a major challenge for many technology companies. Organizations that are in this position typically have two options: 1) wait until the market matures to the point when it becomes obvious that their solution is significantly different than other products in the same "bucket", or 2) coin a new term to describe a category in which their product belongs, promote the heck out of it and hope that it will become an industry accepted term. It took a combination of these two approaches to somewhat change the boundaries of the APM "bucket". That resulted in more market awareness about the differences between two groups of products that are also addressing challenges of managing application performance, but doing it from different perspectives: end-user experience monitoring and business transaction management (BTM).

The increased interest of end-user organizations in having visibility into how their applications are performing, not only from the perspective of their IT departments but from the perspective of business users, resulted in more market awareness about the role that end-user experience monitoring solutions are playing in managing application performance. The market matured enough to become more aware of the fact that different flavors of technologies for monitoring the quality of end-user experience, such as those provided by Aternity, Knoa Software, Coradiant or AlertSite, do not compete against, but complement vendors such as OPNET, OpTier or Quest's Foglight.

On the other side, vendors that specialize in managing application performance from a business transaction perspective also found a way to raise awareness about the differences between their solutions and many other APM products. This resulted in an increased adoption of the term BTM when describing capabilities of these solutions. These solutions are taking a different approach when addressing issues with application performance, as compared to some other APM vendors, and enable organizations to monitor the performance of applications across an entire transaction flow. Some of the vendors that fall in this group include OpTier, Nastel, INETCO, Correlsense, Precise Software, dynaTrace and AmberPoint (acquired by Oracle).

Web experience monitoring solutions have traditionally been drawing interest from industry sectors that conduct most of their business online. With the proliferation of public cloud services and SaaS applications, more internally facing business-critical applications are being delivered across the public internet and accessed through a Web browser. Having full visibility into the performance of these applications requires capabilities for monitoring performance from outside of the corporate firewall, which increases the importance of and creates new usage scenarios for Web experience monitoring solutions. These new opportunities in this market have caused new vendors to enter this space and try to challenge a market leading position that has been held by companies such as Keynote Systems and Gomez (a division of Compuware).

This Solution Overview report from TRAC Research examines the technology capabilities, strengths, and weaknesses of Catchpoint Systems, a company that has recently entered the Web experience monitoring market.

Click here to download the report

Today, Keynote Systems and dynaTrace announced a strategic partnership that would allow end-users to leverage these two solutions in an integrated fashion. This is the second strategic partnership that Keynote has created in this space over the last two months, as they formed a similar type of relationship with OPNET Technologies that was announced on July 22. These partnerships might be confusing to some, as it might seem that these three companies are essentially doing the same thing: to monitor the performance of business-critical applications. However, while Keynote is specializing in monitoring the quality of end-user experience and performance testing for Web applications from the outside of the corporate firewall, OPNET and dynaTrace provide solutions for monitoring application performance across enterprise infrastructure inside of the firewall.

The general perception of solutions for end-user experience monitoring, such as the one that Keynote is providing, is that they are very effective in identifying when business users are experiencing problems with application performance, but they are not as effective in drilling down into parts of the application delivery chain to isolate and resolve the root cause of the problem. On the other hand, tools for monitoring the performance of internal infrastructure, such as OPNET or dynaTrace, are able to monitor the transaction flow of applications across the network and into the data center, and provide a deeper dive into how applications are performing, what is causing performance problems and how they can be prevented and resolved. TRAC’s recent report “10 Things to Consider When Evaluating End-User Monitoring Solutions” revealed that the ability to integrate tools for monitoring the quality of end-user experience with tools for monitoring enterprise infrastructure is one of the key aspects of having full visibility into application performance. With that said, there is a clear value that end-user organizations can experience when products that include robust capabilities for application performance management (such as OPNET and dynaTrace) get integrated with one of the leading solutions for end-user experience monitoring from outside of the firewall (Keynote).

However, in order to evaluate a true significance of these partnerships, they should be analyzed in the context of some of the key dynamics in this market.

End-user organizations are looking to take more of a service-centric approach when managing IT performance, and management vendors, for the most part, have done a good job of adjusting to this trend. Recently, I had the chance to see a number of demos of IT performance monitoring products that are based on different underlining technologies for collecting performance data, are being sold to different job roles within the organization, and even competing in different markets, but they all had something in common. The first screen of their performance dashboards looks almost identical. And products that are based on network monitoring technologies, data center management or application monitoring all of a sudden have the same look and feel:

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One of the emerging trends in IT performance management is that the proliferation of SaaS and cloud computing technologies are changing how organizations go about using and managing IT services. These trends are adding a new dimension to service level and performance monitoring and organizations are increasingly expecting a similar level of flexibility from their management tools as they are getting from their SaaS and cloud deployments. This also opens up new opportunities for management vendors to differentiate themselves from the competition and increase their presence in new markets by acquiring technologies that are well positioned to address new management challenges.

Our recent article highlighted two technology companies that are likely acquisition targets based on their technology, alignment with key market trends and the ability of their solutions to fill in technology and go-to-market gaps that larger vendors currently have. In part two of this series, we are covering two additional companies that meet the same criteria.

Again, this listing is not based on any inside information.

2010 could be a very eventful year in the IT performance management market. It is already becoming apparent that virtualization technologies are moving from lab environments to production, and end-user organization are gaining a better understanding of what cloud computing really means for them and how it should be managed. Also, performance monitoring concepts such as “aligning IT with business”, “end-to-end management of application performance” and “making performance data more actionable” are no longer marketing terms. End-users are now able to translate each of these terms into a set of specific technology capabilities, those that are really needed to achieve their IT management goals. These trends are putting additional pressure on leading IT management vendors to expand their product portfolios and differentiate from the competition.

Even though the majority of large IT management vendors have similar visions of where this market is headed, it is becoming apparent to most of them that they cannot execute these visions by solely depending on their marketing, sales and product development muscles. Their competitors are already getting ahead by acquiring vendors that are leaders in their markets (i.e. Compuware acquiring Gomez, CA acquiring NetQoS, etc.) and many of them will have to act quickly before someone else grabs those few leaders or truly innovative solutions in the various IT performance management sub-markets that are left.

This three-part article series will cover our predictions about the 10 technology companies that are likely to be acquired in 2010. In the first part, we’ll start with two technology vendors, both of which are providing different flavors of application acceleration and traffic management.

Once in a while, IT management vendors pick up a theme that their customers are very interested in; they start building their marketing messaging around it, write white papers about it, and have it all over their websites. Before you know it, what originally was a legitimate request from end-user organizations for addressing challenges that they have, it becomes a marketing term that is very difficult to define for end-users. “Aligning IT with business” is becoming a very good example of that.

The fact is, the majority of end-user organizations are still struggling to come up with a set of metrics that would help them understand how their IT initiatives are contributing to their business goals. These organizations are allocating a significant part of their enterprise budgets to their IT initiatives and they need to figure out:

• How their past investments in IT are contributing to their bottom line
• What criteria they should be using when evaluating the value of new technology investments
• How to prioritize their current IT management initiatives

So the need to align IT is a true pain point for end-user organizations and they are willing to invest in technology that will help them with that. But what technology is the best fit?