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Date Posted: 11:31:07 04/26/05 Tue
Two Gorillas Come Together (Microsoft-Sap)
NEW YORK - Industry titans Microsoft and SAP today announced a partnership that should be giving competitors pause.
The companies will jointly develop and sell a product later this year that will link SAP's (nyse: SAP - news - people ) complex back office applications to Microsoft's (nasdaq: MSFT - news - people ) ubiquitous Office productivity software. The product, code-named Mendocino, is expected to hit the market later this year. As part of the deal, SAP will resell Microsoft Office and Microsoft will resell software licenses to SAP's software.
"Microsoft Office has [hundreds of millions] of users around the world, and nobody doubts that we are the leader in enterprise software, says Shai Agassi, president of the product and technology group at SAP. "We are the two gorillas in the market."
The two have been in discussions at least since they briefly flirted with the idea of a merger, a potentially blockbuster deal that was revealed during Oracle's (nasdaq: ORCL - news - people ) fight to acquire PeopleSoft.
For Microsoft the partnership with SAP provides a way to make Office more relevant to a wider number of business users.
"A big part of our strategy for Office is to move from being a traditional desktop productivity tool to [using it] to connect to business information," says Chris Caren, a general manager at Microsoft. "We want to make Office a lot more valuable to users."
And a lot more valuable to Microsoft. Office is already ubiquitous; it contributes more than one-quarter of overall revenue to the company's top line and accounts for nearly half of its profit annually. The Mendocino product will be sold as a server add-on to Office, which will generate more revenue. Down the road Microsoft could conceivably partner with other enterprise software companies to make their applications accessible through Office.
For SAP the goal is to expose more users to its software, which creates opportunities for more license revenue and adjunct applications. "There are various ways to monetize it," says Agassi.
He describes the partnership as an "industry changing event" (aren't they all?) that will raise customer's expectations.
Indeed, it may change the approach that some of its competitors take. SG Cowen, in a research note, says the deal "should strengthen SAP's leadership in enterprise resource planning [software] against Oracle/PeopleSoft."
The firm also notes the deal suggests Microsoft will stay focused on small and medium-sized businesses for its own enterprise applications. Competitors and some industry analysts have speculated that, despite Microsoft's assertions to the contrary, the company would eventually target large customers.
The companies also say the product will realize their vision for "Web services as the foundation for the next generation of enterprise software." The product will utilize SAP's platform for services-oriented architecture as well as Microsoft's .Net Web services platform.
This provides a way for both companies to compete more effectively with IBM (nyse: IBM - news - people ) for dominance in the new world of Web services. IBM and SAP are already close partners. Just this week they unveiled plans to co-develop a version of IBM's DB2 database for SAP applications.
Still, SAP's partnership with Microsoft can't be sitting well with IBM executives. After all, Office and Windows keep Microsoft's extraordinarily profitable engine humming. And remember that IBM itself came out with a product called Workplace which was intended in part to crimp the dominance of Office.
The SAP/Microsoft partnership provides an opportunity for other software developers to write programs for the NetWeaver and .Net platforms.
The news today will likely drive other enterprise software companies to collaborate and even merge, because they will have to take cover against an increasingly consolidating marketplace.
http://www.forbes.com/technology/2005/04/26/cx_ld_0426msft.html
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Two Gorillas Come Together (Microsoft-Sap)