SAP Thinks Small

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But the ground shifted. Oracle capitalized on the growth of the Internet by making its products Web-compatible while SAP continued to use Net-unfriendly proprietary software. Oracle cashed in on SAP's mistakes, especially in the key U.S. market. The upshot: while the tech market was white hot, SAP's share of new enterprise-software license sales slipped from a commanding 58% in 1996 to 34% in 2000. "We used to sell R/3," Apotheker quips, "and that was enough."

The company fought back. In 2000, it began a massive campaign to get its 20,000 customers to switch to an Internet platform called MySAP.com. And it began churning out specialized applications for supply-chain and customer-relations management. By the fourth quarter of 2003, its share of new software licenses was back up to 56%, according to independent analysts. SAP expects software-license revenue to increase 10% this year to nearly €2.4 billion, largely driven by sales to small and medium-sized businesses. The strategy is simple: take SAP's basic product, strip it down to small-business size, and sell it for a lot less to companies like Steinberger High-Tech Products GmbH, a Vienna-based maker of networking products with 25 employees and €4.5 million in annual sales. About 18 months ago, Steinberger installed SAP's Business One package, a scaled-down system for small businesses. Steinberger owner Hubert Suchy says the installation cost him €30,000, was up and running in a week, and involved no outside consultants. "This is not the SAP that most people think of," he says.

But SAP is not alone: Microsoft also has its eye on small business. In 2002, Microsoft bought Navision, a Danish maker of small and medium-sized business management software, allowing Microsoft for the first time to challenge SAP in its core business. It is also developing a proprietary customer-relationship management product, and investing some $2 billion a year in services for small and medium-sized businesses. SAP continues to play down the competition with Microsoft. "Microsoft is a player in this market, by far not the largest. But we keep an eye on them," says Apotheker.

The battle is not merely between behemoths like Microsoft and SAP. Smaller, more fleet-footed creatures have entered the game. By far the fastest growing is Salesforce.com, a San Francisco-based firm founded in 1999 by a former Oracle executive. The company says it offers comparable services to SAP's or others', with a twist: there's no software to buy or maintain. Everything is done over the Web. Salesforce.com argues that software should be thought of as a commodity, like electricity, accessed over the Internet on a pay-as-you-go basis. "Software is dead," says Marc Benioff, founder and CEO of Salesforce.com. "These companies need to change and evolve. In 10 years they need to become utilities or die."

The talk is tough, but even those who appreciate what enterprise software does often agree that it is expensive and hard to use. The trend is clearly toward greater use of the Internet to deliver enterprise services. Even SAP cannot fight it. "At the end of the day, it's all based on Web services," concedes SAP CEO Henning Kagermann.

At least one thing is swinging SAP's way. Folks back at the Ditsch pretzel factories know that when it comes to software, size matters. "I know we're never going to grow out of SAP," says Roche. "Smaller suppliers may go out of business. That's not a risk with SAP." The pretzelmaker also offers a twist for SAP: small is beautiful.