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Companies that use Cisco's application monitoring products today will have the option of improving visibility significantly when the company completes its $3.7 billion acquisition of AppDynamics. But adding the startups' application performance management technology could remain too expensive for many small and medium-sized businesses.
Analyst firms Gartner and Forrester Research rated AppDynamics a leader in the application performance management (APM) market. Quality technology and excellent customer support have made the startup one of the fastest-growing APM vendors, despite AppDynamics pricing that's unfriendly to smaller enterprises.
In the nine months ended Oct. 31, AppDynamics revenue rose 50% from the same period a year earlier to $158.4 million. As a result of its success, the company, which is valued at more than $1 billion, notified regulators in December that it planned to go public.
To date, big enterprises have been the driving force behind AppDynamics's market gains.
"Product costs are consistently cited as being too high for smaller enterprises with modest monitoring requirements," Gartner said in a report released in December. "Customers further cite the inability to take advantage of higher discount levels enjoyed by customers with larger contracts."
Cisco, which announced the acquisition this week, has not said whether it would make AppDynamics pricing more affordable to smaller companies. The vendor did not respond to a query about pricing.
However, Rowan Trollope, the senior vice president at Cisco who will be responsible for AppDynamics, said during a conference call that he did not plan to change the company's existing sales model. "It's working really well," he said.
Balancing AppDynamics pricing with need to raise software revenues
Cisco is likely to balance pricing with its strategy of increasing software revenues to offset declining sales in its core business of selling routers and switches, which make up 47% of total revenue. Cisco expects AppDynamics to become a major contributor to its software business by jump-starting its anemic IT monitoring business, which Gartner estimates at less than $100 million a year.
That makes Cisco a "relatively small player" in the $8.8 billion market for tools that monitor application performance and help locate and fix problems that lead to slowdowns and crashes, according to Gartner. AppDynamics could change Cisco's standing by providing the vendor with technology that isn't limited to Cisco-provided infrastructure.
"AppDynamics complements the network centricity of Cisco with application instrumentation, end-user monitoring and performance testing," said Milan Hanson, an analyst at Forrester. "It makes the whole Cisco portfolio stronger."
Nevertheless, Cisco will have to convince AppDynamics customers that it won't change the broader uses for the startup's technology or alter the close relationship many of them had with the startup. AppDynamics' strength was in helping enterprises overcome the technical challenges of a complex product to reap its full value, Gartner reported.
How Cisco will affect the dynamics that have made AppDynamics successful won't be clear until after the company completes the acquisition in the spring.
"A challenge will be how Cisco successfully integrates not only the technology bits within their strategy, but also retains the AppDynamics culture," said Cameron Haight, an analyst at Gartner. "Cisco does not seem to have an extensive track record with ITOM [IT operations management] software acquisitions."
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