A Deal to Watch

By Larry Dignan  |  Posted 2004-05-28 Print this article Print

The expansion of efforts between Microsoft and SAP to make their desktop, server and Web software work together smoothly may make your life easier. But it also could affect your budget.

Autumn Bayles, chief information officer for Tasty Baking Co., expects the May 11 Web services alliance between SAP and Microsoft to make it easier for the $250-million-a-year Philadelphia snack cake company to become more efficient. "It's definitely good for the future," says Bayles, whose widely dispersed users operate SAP software, using Windows computers on their desktop—as do two-thirds of SAP's customers. "I expect there will be some future benefit, but it's intangible right now."

Along with other customers of the two companies, Bayles is waiting to see how SAP's tango with Microsoft works out. Under the agreement announced last month, the two companies said they would work together to "deeply integrate" their software for creating enterprise applications that run over the World Wide Web. That includes Microsoft 's Web services platform, called .NET, and SAP's NetWeaver integration framework.

The alliance promises to make it easier for developers who use Microsoft tools such as Visual Studio .NET to create programs that run on Windows machines and access functions and data from SAP applications over the Web. SAP applications and the Microsoft Office suite of word, number and image processing programs will also be able to work together more easily.

Which raises some potentially strategic questions: Who will get the better of the partnership? Will Microsoft use the ability of its developers to access SAP applications and data to grow its base of customers among large corporations, in competition with SAP itself? Will SAP get stronger because its applications will be easier for Windows computer users to operate? Could these two titans even merge someday—assuming antitrust regulators would allow it?

There are no quick or easy answers. How this partnership plays out is worth watching, if only because one of these important suppliers—or both—may wind up with more of your budget dollars.

According to Microsoft Chairman Bill Gates, the alliance will "give our mutual customers a key competitive edge."

For instance, corporate customers could mix and match portal products and development tools from the two software giants. A customer could use Visual Studio .NET to create portal components that run on SAP's enterprise software. Products that integrate services available through Microsoft .NET and SAP NetWeaver are expected to arrive beginning in August and stretch into 2005.

According to Pacific Growth Equities analyst Brendan Barnicle, Microsoft's pact with SAP could allow the Redmond software company to sell more servers in the very large enterprise arena, where companies count their revenue in billions of dollars a year. So far, Microsoft has been strongest with companies whose revenues are tens or hundreds of millions of dollars a year, says Barnicle.

AMR analyst Eric Austvold says the move could undercut Microsoft. He sees the buddy routine with SAP as a bow to the open source movement. "This relationship is definitely good for SAP and its customers, but it's a potentially tricky one for Microsoft, which has the most to lose if it doesn't work out," says Austvold. "Microsoft unknowingly may have let the fox into the henhouse."

SAP could use Microsoft to put more of its applications on employee desktops, says Austvold. That would make it hard for Microsoft to put its own enterprise-class applications there, or gain adherents.

Then, if Linux or another "free" operating system gains ground, SAP stays in place—while Microsoft's importance diminishes.

SAP applications reside on 10 to 15 percent of desktops during a deployment, says Austvold, adding that SAP could conceivably use Microsoft to boost that share to 50% in a few years. If Linux and other open source software gain more momentum, SAP's NetWeaver platform, based on Java 2 Enterprise Edition architecture, could boot Microsoft in some places.

For now, the companies don't expect any conflicts. "Whether they use Microsoft or extrasensory capabilities [to access SAP data], I don't care," says Shai Agassi, a member of the SAP executive board.

When asked whether there could be future deals between SAP and Microsoft—including a merger that would lock down the enterprise and the desktop—Agassi admitted there would be synergies, but noted a deal would never pass regulator scrutiny. "Let's make the case that we're not stupid," says Agassi. " We couldn't go out and buy J.D. Edwards or PeopleSoft either."

Instead, SAP and Microsoft appear to be headed to a state of "co-opetition" where the customers push vendors together.

"We don't control the customer, the customer controls us," says Agassi, who adds he's not worried if Microsoft gains extra sales. "It's ludicrous to think Chevron [an SAP customer] would buy a word processor from me. It's also ludicrous to think Chevron would buy its enterprise software from Microsoft."

—Tom Steinert-Threlkeld contributed to this report.

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.

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