German software giant SAP could be the next big headache for Europe’s competition regulators as irritation grows among multinational companies over its market power in widely used corporate planning software.
SAP, Germany’s most valuable company, is the leader in the market for “enterprise resource planning” (ERP) software, tools used by virtually all large businesses to manage core data on everything from cash to supplies to purchasing orders. That makes SAP just the sort of company that EU policymakers want to back as a “European champion” to be a strong competitor globally.
But users are complaining that SAP is abusing its dominance of the market to try to lock in clients and lock out competitors.
That poses a conundrum for European Commission Vice President Margrethe Vestager, who is not only the EU competition czar but also the bloc’s digital chief, charged with boosting the technology sector around the Continent.
At a time when the EU is pushing hard to drive the digital transition of its industry, she must decide how hard to go after antitrust complaints against one of Europe’s rare tech successes. Failure to follow up on the competition concerns also could fan American claims that the EU is unduly picking on U.S. technology companies.
The European Commission and the German competition authority are looking into concerns that SAP is hindering users of its ERP software from switching to other vendors or connecting to competitors’ applications. Many of the world’s largest companies rely on SAP’s ERP tool, which integrates applications for managing and connecting key business processes.
The criticism in Germany is channeled through Voice, an association of IT users whose 400 members include companies such as Siemens, Adidas and Volkswagen.
SAP says it follows normal industry practices.
Voice and its French, Dutch and Belgian counterparts have also called broadly for EU action “to address the negative sides of the dominance of a limited group of suppliers” of corporate software applications.
But SAP is not just any firm. The German giant is well-connected in Berlin and in Brussels and is earmarked as one of the champions that could help Europe fight back in the digital space.
“There is a political dimension to this, obviously, but the law is the law and the authorities need to defend it,” said Ulrich Bäumer, an IT lawyer at Osborne Clarke who advises Voice in the case.
According to Voice, when SAP sells an ERP software license, it gives a narrow definition of the “use case”: the circumstances under which its software can be used. Any additional or “indirect use” through third-party software connecting with the ERP backbone requires another license.
“We argued that SAP abuses its market power to coerce customers into accepting excessive licensing fees,” Voice spokesperson Christoph Witte said about the complaint in Germany, filed in 2018.
SAP counters that it is its “right to charge for the use of a software and that it cannot make a difference whether the use is direct or through another software.”
A spokesperson for the German Bundeskartellamt confirmed that its “proceeding into SAP’s licensing practices” is ongoing.
Following grievances that did not come from Voice, the European Commission last year started looking into concerns that SAP uses its power over clients that want a license for its popular ERP tool to add in the purchase of other licenses, two people familiar with the matter said. One of the people said there had not been a formal complaint, which triggers a specific procedure but is not the only way to raise concerns with the competition authority.
A European Commission spokesperson said that “in general, we monitor these markets,” but declined to comment on any investigation into SAP.
Voice’s Witte said the majority of its 400 members reported “some sort of an issue with SAP.” Another more classical restriction of competition that SAP is accused of is the bundling of its products.
Shaun Snapp, a U.S.-based researcher and consultant who writes critically about SAP on his website “Brightwork Research & Analysis,” described how SAP ties its products by offering discounts of up to 90 percent to companies buying its entire suite of applications.
“When customers combine all of SAP’s products, they get a discount. If they leave one product out, they suddenly have to pay more. But the procurement team [which chooses the vendor] only cares about getting the price down,” Snapp said.
An executive at a medium-sized European provider of rival business planning software described how many potential clients did not buy his product because of SAP’s strategy. That happened although the clients told him that his firm’s software was more adapted to their needs, according to the executive.
In the process, customers are allegedly being denied interoperability between different IT applications.
Locked into the ecosystem
In theory, companies could turn to alternative ERP providers such as Oracle or Microsoft, but in practice, they are locked into SAP’s ecosystem, as the IT department and users at the client firm grew accustomed to its workings, according to the complaints.
“The problem is that most of our members already have been using these software packages for a long time and switching is too costly, too time-consuming and too disruptive,” said Ronald Verbeek of Dutch IT user association CIO Platform. “Suppliers know that and act accordingly,” he added.
“The cost of moving away from SAP would be so expensive that no [chief information officer] would survive. Plus they would end up with Oracle or others who are equally complicated,” said Voice lawyer Bäumer.
That sentiment is shared by Denis Myagkov, a senior developer at German company FlixBus who worked with SAP’s technology for over a decade. “By the time users understand how the system works — after about four to six months of set-up — it is already too late to change because 40 to 60 percent of the payments [for the implementation] have been made,” Myagkov said.
“Customers get easily tricked by SAP,” said Snapp, the consultant and blogger. “They take a contract written by specialized software lawyers at SAP or Oracle, and have general counsels look at it. But these have no clue.”
SAP spokesperson Marcus Winkler said about the alleged lock-in of its customers that “of course, you can’t throw out this kind of business-critical software in no time. That is the same with Oracle and all the other companies,” he added.
“Given the mixed landscapes, all ERP solution providers need to maintain interoperability with other solutions, because customers need and demand it,” Winkler said. “It has always been SAP’s policy to allow customers to combine SAP solutions with non-SAP solutions.”
To charge or not to charge
Voice’s French, Dutch and Belgian counterparts also raised problems, but more in general with large software vendors and cloud providers. That includes SAP, but also Microsoft, Oracle, IBM, Google Cloud, Amazon Web Services and Salesforce.
“Most users choose not to file competition complaints because that could cost them dearly in future negotiations with the providers,” said Verbeek at the Dutch IT user association.
Instead, the French, Dutch and Belgian associations focus on efforts to rebalance the negotiating power between their members and the major IT vendors through collective bargaining and new rules.
In a joint letter to the European Commission’s competition department dated September 8, the four IT users’ associations called for “a broader scope and new tooling for authorities to better understand and redress unfair and unwanted behavior by dominant actors in the digital technology markets.”
One EU official said that the rules the associations were lobbying for, which are still being developed by the Commission, were unlikely to apply to SAP and that the problematic practices may be better handled by antitrust enforcers.
But a decision to single out SAP with a competition probe would be politically sensitive. Not only does the company have strong ties with the German government, it is also a key player in Europe’s industrial plans.
In November 2018, the entire German government, including Chancellor Angela Merkel and then-Defense Minister — now European Commission President — Ursula von der Leyen, chose the institute of SAP co-founder Hasso Plattner for a retreat to prepare Germany’s new digital strategy.
SAP is also one of the 22 founding members of Gaia-X, a government-supported alliance of French and German businesses aiming to take on U.S. tech giants in the ultra-competitive field of cloud computing. SAP co-developed Germany’s contact-tracing app for the coronavirus along with Deutsche Telekom, and the two companies are now working on an EU-wide gateway service to link national contact-tracing apps across the Continent.
CORRECTION: This article was updated to indicate that Denis Myagkov was speaking about payments for implementation of the software, and to give the full name of Shaun Snapp’s website.
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