For years, traditional enterprise IT systems like Oracle (ORCL) and SAP were losing to a new class of enterprise systems, mainly form Salesforce (CRM). This growth seemed to be unstoppable. Salesforce earnings calls turned into sales pitches outlining how Salesforce was taking customers from major competitors: SAP, Oracle and Microsoft (MSFT).
Industry insiders, however, saw something different. A rapid slowdown of Salesforce deals where, at least in Europe, much smaller outsiders like Pega Systems started to score some major deals. Another problem was the launch of Microsoft Dynamics 365, which used the power of Azure and Office 365 to acquire new customers. However, what is much more significant were developments related to a legal dispute between Oracle and Google.
Not since Trading Technologies was awarded a patent for its static ladder has the fintech space faced a legal dispute that had the potential to massively disrupt markets. This time the players are SAP and Salesforce, but it will affect others. Here is how it breaks down.
When API matters
Application Programming Interface (API) is the primary component feeding the current developer-driven economy. Every company in any industry now builds web and mobile apps to keep up with the ever increasing disruption of new companies. Salesforce, together with Amazon (AMZN), thanks to their AWS platform, are the two major winners. This ideal world of start-ups runs on something called MEAN stack (Mongo, Express, Angular.JS, Node.JS). You don’t need to know what these components are; what you need to understand is that if you take AWS and build services using MEAN stack you pay no license fees to Oracle, SAP or others. This allows new fast growing companies to move much faster than traditional companies.
Salesforce was for many years a solution to this problem. Look at Coca-Cola (KO) as an example. Instead of building services from a SAP back end, they took Salesforce and placed it as a layer on top of SAP. This allowed them to service clients faster and improve sales rep productivity. However, in this game there is one loser, SAP. So someone in Walldorf, Germany — where SAP is based — quickly realized that if SAP continues to be just a backend and the major user interface used is Salesforce, it will be arbitraged out. Oracle also realized that if Mongo and other databases like Aurora from AWS go mainstream, it will lead to a loss of revenue from database licenses. Then a team of lawyers found out who actually holds the silver bullet and it was not Salesforce.
Winners and losers of API wars
The major cause of the dispute is whether a user accessing SAP via a Salesforce interface is a SAP user, in which case they must pay for a license, or is just a Salesforce user, so they don’t need a license. You may ask how is it possible to use SAP without a license. Same as it’s possible to use Oracle’s Siebel without a licence. Instead of giving access to named users (one access = one user,) you give access to API (one access to API = many users can then access data). And here is where the problem lies, as legal terminology has no understanding of an API user. In a licensing agreement a company bought SAP as their enterprise resource planning (ERP) software and they agreed to pay for each user to access it. What happened with Salesforce is that they gave access to users without SAP licenses. It looks good on paper because the main Salesforce thesis was that you can save money on SAP because your users will only use Salesforce licences and all data to Salesforce will be loaded via an API, which allowed thousands of users to use one license.
However, The High Court in London has ruled in favor of SAP and against Diageo in an indirect licensing case concerning the use of mySAP ERP software on a Salesforce platform. This creates a legal precedent for SAP, and also for Oracle, that there is no legal ground that allows a Salesforce user to use SAP or Oracle systems only via a Salesforce license. Given that the expected damage that SAP client Diageo will have to pay for licenses is in the range of £59 million ($72.4 million), this will very likely become grounds for new lawsuits. There are thousands of Salesforce customers using this system as an “overlay over ugly SAP screens.” Who will be the more likely winner in this case? Salesforce, the reason for the lawsuit or SAP, which will simply offer customers to replace Salesforce with SAP S/4 HANA. There is no doubt that Oracle will use this opportunity as well. They have already started their war with Amazon by increasing license costs when running Oracle products on AWS compared to their own cloud. Both SAP and Oracle may look like outsiders, but don’t underestimate the power of their legal team.