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.

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).

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.

One of the key questions in IT performance management is: Does an improved ability to collect more performance data generally lead to an improved performance of IT services? The answer is: No, not necessarily. Actually, a number of end-user organizations that I have spoken with reported that their ability to prevent and resolve performance issues deteriorated after they invested in additional monitoring tools. As new challenges of managing application performance “jump out”, organizations tend to deploy new point solutions that are addressing each of these problems. This does allow them to collect more information about these specific problems, but it doesn’t necessarily allow them to have  better control of the overall IT performance.

Managing application performance is one of the key IT initiatives for end-users, but there is not a single class of technology or solution provider that can address every single issue of managing the performance of business-critical applications. Some major IT management vendors are investing significant resources in acquiring companies to enhance their product offering and enable them to tackle more performance challenges. However, the capabilities needed for end-to-end management of IT performance are rapidly changing and companies that are looking to provide capabilities for addressing each of the major IT management challenges are likely to keep playing “catch-up”. End-user requirements are changing at a pace that is faster than product development cycles or times needed for acquisitions to be initiated, agreed on and completed. So, are organizations that are looking to access all relevant IT performance data through a single platform are out of luck?

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?

Over the last 2-3 years, the term “Application Performance Management” (APM) became an integral part of marketing messaging for more than 70 technology vendors. Even though solutions provided by all of these vendors are helping to improve the speed and availability of business-critical applications, these vendors are providing solutions that are significantly different. These solutions could range anywhere from network performance monitoring to application acceleration, Web management and even managed/carrier services.

However, the APM as a general concept has become relatively easy for decision makers of end-user organizations to digest, as it hits all key pain points that IT organizations are dealing with. As a result, multiple vendors were more than happy to jump on this bandwagon and position themselves as players in this space.

Other than the language in their press releases and marketing collateral, these vendors really have nothing else in common. Technology wise, how similar are the offerings of F5, NetQoS, Keynote Systems and OpTier? They are not similar at all.