The companies are set to clash in the business software market, despite public attempts to downplay the budding rivalry.
Spund, chief information officer of Esselte, a $1.1 billion office supplies manufacturer, helped steer his company into a $10 million business applications contract with Microsoft earlier this year. The five-year deal, which in the past might have been a nearly automatic win for market leader SAP, instead became Microsoft's largest-ever sale of such business software. The deal involves replacing a hodgepodge
"Microsoft has extraordinarily ambitious plans for growing this business, which means they have to push very hard. That will definitely put them in conflict with SAP directly."
--Joshua Greenbaum, analyst
Enterprise Applications Consulting
All the more vexing for SAP is that Stamford, Conn.-based Esselte knows the German software maker well; it's been using the company's applications to process orders and run its factories in Europe for years. Spund said that for the most part, the latest deal came down to one factor: money. Microsoft's products were cheaper. Esselte plans to continue using SAP alongside its new Microsoft systems, even though that will require stitching together two incompatible sets of programs.
"The Esselte deal is a harbinger for what this market is going to be like," said Joshua Greenbaum, analyst at Enterprise Applications Consulting. "Microsoft has extraordinarily ambitious plans for growing this business, which means they have to push very hard. That will definitely put them in conflict with SAP directly."
Companies like Esselte will serve as a proving ground for Microsoft as it seeks to grow its share of the multibillion-dollar business applications market long dominated by SAP, PeopleSoft and Oracle.
If Microsoft can hit SAP where it hurts--on SAP's high software costs and complexity--it may have a shot at becoming a big player in the enterprise applications market.
But with Microsoft expanding the scope of its applications and SAP looking to challenge Microsoft for small, high-volume contracts, the gloves are about to come off.
An all-out war between Microsoft and SAP would certainly be spectacular. Microsoft is the largest software maker in the world, with more than $32 billion in annual revenue. Though sales from its business applications unit reached just $567 million in its 2003 fiscal year, the company is expected to boost revenue in 2004 to more than $700 million.
Overall, Microsoft has enormous resources--more than $50 billion in cash--and has proved in the past to be a ferocious foe to those it's challenged in the database, desktop software and Web browser markets, among other areas. The company has invested more than $2 billion into what it hopes will be a $10 billion business by the end of the decade.
Germany-based SAP is the leading maker of business application software, with $7.8 billion in annual sales. For the past 30 years, the company has focused exclusively on business applications--complex software programs designed to streamline corporate bookkeeping, order processing, customer service, human resource administration and manufacturing. SAP is the largest competitor in that market by a wide margin and intends to nearly double its current market share to 25 percent by 2009. Few other rivals in the market, which is slowly emerging from a three-year slump, have set growth goals as lofty as those of SAP and Microsoft.
Yet the two companies downplay their rivalry. As a provider of operating system and database software to SAP customers, Microsoft claims that more than 27,000 SAP installations, about 40 percent of the total, run atop its Windows platform. And Microsoft would like to grow that number. It's also in neither company's interest to highlight a rift that might alarm customers and investors.
"The market for software applications, even in this challenging business environment, is big enough for all of us."
--Herbert Heitmann, SAP
Likewise, SAP says Microsoft poses no major threat. "The market for software applications, even in this challenging business environment, is big enough for all of us," SAP representative Herbert Heitmann said.
Many in the industry would disagree with that optimistic assessment of the market. One of them is Oracle Chief Executive Larry Ellison. Ellison says the business software boom days are over, leaving fewer spots at the software feeding trough.
For that reason, Oracle, which makes business applications and database software, wants to acquire ERP rival PeopleSoft. PeopleSoft has rejected Oracle, while pursuing a similar path. It merged with J.D. Edwards, another top supplier of business applications, this year.
All the merging and acquiring is beginning to reshape the playing field and may be prompted, in part, by Microsoft's entry. For instance, Siebel Systems, which specializes in customer service and sales applications, recently acquired UpShot. UpShot, whose pay-by-the-month sales applications often appeal to small companies, may help Siebel square off with Microsoft, which also entered that software niche this year. PeopleSoft's J.D. Edwards buy has put it in prime competition with Microsoft, whose Axapta product line, gained from the acquisition of Navision, competes with J.D. Edwards.
Terry Petrzelka, president of Microsoft reseller Tectura, said Oracle and J.D. Edwards frequently bid for the same contracts he competes for as a dealer of Microsoft Axapta. He says it's only a matter of time before Microsoft uses it impressive research and development budget to improve its business applications and take on SAP. "Microsoft's initial product is not going to beat the SAPs of the world today--that's a couple years from now," Petrzelka said.
"Microsoft's initial product is not going to beat the SAPs of the world today--that's a couple years from now."
--Terry Petrzelka, president
Microsoft reseller Tectura
SAP has since introduced two new sets of products, one for companies with less than $1 billion in annual revenue, called SAP All-In-One, and one for companies with fewer than 150 employees, called Business One. With these products, SAP wants to grow revenue from sales to companies in the $1 billion-and-under segment--the same category Microsoft targets--from around 6 percent of software license revenue to at least 15 percent by 2005.
In a sure sign that the company's moves are aimed squarely at Microsoft, SAP has stealthily sought to recruit Microsoft Business Solutions software dealers to sell its new competing product line. One major advantage Microsoft has in the small-business segment is its network of 4,500 software distributors. SAP typically sells directly to customers, and the lack of such a network has proved to be a stumbling block in previous attempts to reach smaller businesses.
SAP denies it's trying to appropriate the Microsoft dealer channel in its drive to build a distribution network for Business One. But among Microsoft distributors, SAP's overtures are "certainly the talk of the town," said Steen Frentz Laursen, a spokesman for Microsoft dealer Aston Business Solutions.
Laursen and a handful of other Microsoft Business Solutions resellers confirmed that SAP began to court them earlier this year, but they report mixed responses to SAP's offers. At least two of them, Tectura in Phoenix and ePartners in Dallas, have turned SAP down. Dan Duffy, CEO of ePartners, said he's wary of SAP's spotty track record in the small-business market. "As capital spending picks up, we're not convinced that SAP isn't going to retreat," back to larger companies, he said.
"Microsoft will continue to support SAP running on top of its operating systems and databases. There's that one level on which they have to get along."
--Byron Miller, analyst
Analysts say SAP may appeal to a certain group of Microsoft resellers who feel neglected by Microsoft, whose restructuring over the summer has caused some confusion. "They're certainly cherry-picking some of these Microsoft resellers," IDC analyst Albert Pang said. "It's an obvious target."
However this escalating conflict plays out, analysts suggest it's yet another example of how the information technology industry is rife with "co-opetition," a phenomenon involving companies that both compete and cooperate as partners. Byron Miller, a technology analyst at Forrester, predicts that SAP's relationship with Microsoft will end up closely resembling the one it has with Oracle, which competes with SAP in the ERP software market.
"I would not call SAP and Oracle friends, yet most of SAP's customers run on an Oracle database," Miller said. "Microsoft will continue to support SAP running on top of its operating systems and databases. There's that one level on which they have to get along."
SAP has managed to stay several steps ahead of Oracle as a competitor. Will Microsoft prove a tougher opponent? Among the things SAP has going for it are an exclusive focus on business applications, three decades of experience, platform independence and the most comprehensive product on the market.
Microsoft has none of these, but it hopes to take advantage of SAP's weak points: the complexity and high cost of its traditional products. Esselte's Spund, for one, was convinced. The high price of installing and maintaining SAP's application helped swing his company's decision in Microsoft's favor. "It was equally viable to spread SAP all over the world," Spund said. "It's just more costly."