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Volume 14, Number 5 -- January 31, 2005

IBM Buys Application Service Provider Corio

by Timothy Prickett Morgan

In a move that appears to be designed to boost its application hosting business and to prevent its competitors from easily doing so, IBM announced last week that it had acquired Corio, a relatively unknown provider of applications on demand, for $182 million in hard, cold cash. Based on Corio's stock price and market capitalization before the deal was announced, IBM is paying a 38 percent premium to acquire the company.

That may seem like a lot of money to pay for a company most people have never heard of and for an idea--application service providing, or renting out applications over the Internet--that was blown out of proportion by hype four years ago and has been subject to some ridicule since then. IBM is a pretty stingy company, and it rarely falls for its own spin, so perhaps server, software, security, and networking technology have matured to the point that the ASP idea, which both Corio and IBM independently refer to as applications on demand to try to duck the whole ASP comparison, might start to go a little more mainstream.

The Global Services unit is on track to represent half of IBM's $100+ billion in sales in 2005, and an increasingly large portion of that business is what IBM calls e-business hosting, which means either IBM running your applications on your servers in IBM's facilities or your facilities, or running them on IBM's servers in its facilities. Sources at IBM say the overall market for e-business hosting was $16 billion worldwide in 2004, and $10 billion of that was for supporting basic infrastructure and $6 billion being for application hosting, including everything from basic Web applications on up to full ERP suites. Moreover, IBM has 44 mammoth data centers around the world, equipped with just about any machine you want to run software on--and not just its own boxes, either. This money is not peanuts, and that investment in data centers by IBM is not testing out an idea. IBM is apparently making the ASP model work. Given IBM's services bent in general and its whole "on demand" philosophy of doing facilities and application management for recurring and predictable revenue streams, it comes as no surprise that IBM wants to get some more of this action and make sure Hewlett-Packard, Sun Microsystems, EDS, Microsoft, and others get a little bit less.

So why pay so much money for Corio, a company that was founded in September 1998 and that has lost a lot of money since it came into existence? From 1999 through 2003, Corio, which is public company traded on the Nasdaq and based in San Carlos, California, has brought in $227.2 million in sales and $256.4 million in losses; for the first three months of 2004, Corio has brought in $53.1 million in sales with losses of $10.3 million. What seems to be the case is that Corio is heading toward breakeven, and the last thing IBM wants is competition in this application hosting market that is driving a substantial portion of its growth in Global Services. IBM seems to be buying some expertise, which it can put to use in those 44 data centers as it chases a lot more customers than Corio could alone.

The move also suggests that companies are going to start looking around in the data centers for where they can cut costs next, and that application hosting might be the next thing companies want to try out. Corio has expertise among both Fortune 1000 and midrange companies supporting Ariba, Concur, E.piphany, Oracle, PeopleSoft, SAP, and Siebel applications on Windows, Solaris, HP-UX, and Linux (IBM's own AIX is not mentioned on the Corio site as a supported platform, but that is about to change.) Even if Corio couldn't turn a profit with its expertise, IBM is clearly betting that, with its global reach and on-demand preach, it can. In an interesting aside, Corio has a trademark on the term "application on demand," something that IBM obviously also wants to get its hands on. Corio does not say how many customers it has, but says it is managing over 1,000 customer databases in its data centers for its customers' hosted applications.

IBM expects the Corio acquisition to finalize in 60 days, and says it will hire the entire staff from Corio. George Kadifa, Corio's current CEO, will continue to manage the business after it merges into IBM, and will be given additional responsibilities within the company in the application services area.

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Editor: Timothy Prickett Morgan
Managing Editor: Shannon Pastore
Contributing Editors: Dan Burger, Joe Hertvik, Shannon O'Donnell,
Victor Rozek, Kevin Vandever, Hesh Wiener, Alex Woodie
Publisher and Advertising Director: Jenny Thomas
Advertising Sales Representative: Kim Reed
Contact the Editors: To contact anyone on the IT Jungle Team
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