Oracle was pushed aside as the German software giant's database of choice for internal development of its R/3 business application software on key operating systems, including Sun Solaris, multiple systems from IBM and the increasingly popular Linux.
But Oracle is not completely out of the picture; SAP's R/3 software will still work with its database software on Windows NT and other platforms. SAP's flagship R/3 software automates business functions such as accounting, order entry and human resources.
Today's announcement comes as friction builds between Oracle and its enterprise resource planning (ERP) software rivals. Oracle also makes ERP software, which puts the company in a precarious position with SAP, as both its database software provider and ERP competitor.
Oracle executives say SAP is shooting itself in the foot with its decision, considering that about 75 percent of SAP's customers are using the Oracle database and will suffer if SAP's software development shifts to other platforms.
"Is this really what their customers want?" said Jeremy Burton, vice president of Internet platform marketing at Oracle. "If 16,000 customers run SAP on top of Oracle right now, you've got to question whether this is something that's good for their customer base."
By virtue of its database market lead, Oracle has historically been a close partner of companies it also competes against, such as SAP and Siebel. However, those relationships have shifted recently as software makers have moved into new markets and competition has escalated.
In October, for example, Siebel replaced Oracle with IBM DB2 as its preferred database for customers after Oracle waged a high-profile assault on Siebel's sales and marketing software market share.
The IBM deal gives SAP "something else they can rub into [Oracle chief executive] Larry Ellison's face," said AMR Research analyst Bruce Richardson.
He said SAP's move is clearly another step in the war against Oracle. "They'll take [the war] to the death," he said. "These are a series of companies who [simply] hate each other."
Stephan Rossius, an SAP executive, said today's announcement doesn't change SAP's relationship with Oracle.
"The only [difference] now is that we will use DB2. We're now more a DB2 customer than an Oracle customer," Rossius said.
"Oracle is and will stay a database partner for SAP," he said.
Steve Bonadio, analyst at Meta Group, said today's deal is no big hit to Oracle, but rather an extension of a partnership agreement between IBM and SAP.
"There's die-hard DB2 shops and die-hard Oracle shops, and users are going to use what they want," he said. Considering that most companies run SAP software alongside the Oracle database, SAP will need to continue to support both Oracle and IBM, he said.
The deal is welcome news for IBM, which is trying to expand its database business. Big Blue's database business currently lags behind that of Oracle, which now corners about 40 percent of the market. IBM holds about 17 percent, the majority of which are mainframe customers.
Richardson said Oracle taps about $150 million per year in database license sales from SAP annually--money that will now likely shift to IBM.
"[That's] a lot of money to help arm someone that competes with you," he said. Unlike Oracle, IBM does not compete with SAP in the business management software market.
Oracle's Burton added that if SAP puts priority on DB2 development with its new Internet-enabled MySAP.com applications, Oracle database users will not be able to get their hands on SAP's latest software first.
"At this point, is this something SAP can afford to do?" Burton said. "They want to try to close Oracle out of their accounts--but what they're missing is that their customers want to run Oracle."
Rossius said that SAP doesn't recommend specific databases to its customers and that SAP will work with whatever database the customer chooses.
"Our vision is that we will have DB2 as the database covering the majority of all of our architectures," he said.
Analysts say a stronger IBM alliance could also provide SAP with the mainframe capacity it needs to compete in the growing hosted applications market. Under a hosting arrangement, customers rent business software and pay a monthly fee to a host to manage it for them.
"SAP is having all kinds of challenges growing market share beyond the global 2,500," said Ted Schadler, analyst at Forrester Research. "SAP can [expand] by selling into a hosted environment. You need to have mainframe quality systems [such as IBM's] to do this."
As part of the deal, both companies have created joint development teams in the areas of integration and sales. About 200 developers between IBM and SAP will work together in Germany, Canada and the United States.
Rossius added that IBM has established dedicated DB2 sales teams around the world that are fully dedicated to SAP products as well.
But don't expect a lot of customers to tear out existing databases when they hear SAP's news, AMR's Richardson said.
"If you already have the whole network in place and the infrastructure to support Oracle [databases], you're really not going to switch now," he said.