Countering Amazon

Microsoft and SAP join forces in the cloud

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Microsoft's Satya Nadella (left) and SAP's Bill McDermott: Feet on the ground, products in the cloud. Source: Julien Faure/Opale/Leemage/laif; Bloomberg

Deliberate or not, Microsoft and software maker SAP crashed a party of Amazon Web Services, the world’s largest provider of cloud computing. Amazon’s subsidiary, known as AWS, was staging its week-long “re:Invent” conference in Las Vegas when the two rival IT firms announced a cooperation deal on Tuesday, challenging the retail giant’s dominance of online computer services.

Microsoft and SAP, the world’s largest maker of business software, have some catching up to do. They hope the combination of SAP’s main product, known as S/4Hana, and Microsoft’s cloud product Azure will convince more customers to buy these services instead of choosing those of Amazon or rivals, which include Oracle, Alibaba and Google.

Microsoft and SAP, both founded in the early 1970s, have for decades relied on selling software installed on computers located at home or in the office, but that market is at risk of shrinking. Cloud computing has been booming, as consumers access internet services via their mobile phones and companies want real-time access to data and analytic capabilities without having to spend lots of money on their own computer infrastructure or programs.

Amazon Web Services, founded in 2006 by the Seattle-based firm, jumped into this market early, offering its customers the use of software or storage space via its remote servers. It became the industry’s largest within a decade.

SAP's software already runs on IBM mainframes and cloud computers from Amazon and Google.

SAP, co-founded by a former IBM employee, was relatively late to the cloud computing game and started changing its business model back in 2010, when American Bill McDermott became its co-chief executive. The Walldorf-based company embarked on a takeover spree, spending more than $20 billion on acquisitions, including the American travel-cost software specialist Concur in 2014 for $7.4 billion. Microsoft rolled out its cloud platform Azure in 2010 and Satya Nadella, CEO since 2014, has been credited with expanding the service successfully.

Although Microsoft and SAP are rivals in some businesses, they said they would work closely together to sell their combined product. From Microsoft’s point of view, the partnership amounts to a “strategic positioning against Amazon,” said Axel Oppermann, founder of analysis and consultancy firm Avispador. S/4Hana, whose customers include the New York Yankees and Hewlett Packard Enterprise, is a key software package for many companies and Microsoft is strengthening its own platform by integrating it, he said.

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Microsoft will earn revenues from the sale of cloud services to SAP customers. In addition, it will be able to integrate the German software with its own solutions, for example in data analysis. “That creates additional revenue and customer loyalty will increase,” said Mr. Oppermann.

SAP is keeping its options open, though. Its partnership with Microsoft may be strategic, but it’s not exclusive. S/4Hana software already runs on IBM mainframes and cloud computers from Amazon and Google. SAP wants its customers to be able to use S/4Hana on all platforms. Some 6,900 customers have chosen the program since its launch in 2015, although many of them are likely only introducing it in parts of their organization. The success of the product has prompted analysts to issue “buy” recommendations for the stock and it has helped SAP to become Germany’s most valuable company, in terms of market capitalization.

The deal with Microsoft will likely be the talk of the Re:Invent conference, and Amazon will have to react. Its AWS unit is its biggest source of profit by far and is expanding fast — but not fast enough. Its rivals are catching up, said Daniel Liu, an analyst at market research firm Canalys. In that respect, Microsoft and SAP don’t have their head in the clouds.

Christoph Kerkmann is a correspondent covering software and technology firms for Handelsblatt in Düsseldorf. Axel Postinett is based in New York City and has specialized in consumer electronics, the video game industry, e-commerce and internet corporations. Gilbert Kreijger of Handelsblatt Global contributed to this article. To contact the authors: kerkmann@handelsblatt.com and postinett@handelsblatt.com

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