SAP doubles down on the mid-market

Summary:SAP is going to spend roughly $400 million to $500 million over the next eight quarters over what amounts to be a big bet on mid-market customers. SAP's fourth quarter results offered few surprises since the company had already flagged weaker-than-expected growth, but the outlook was telling.

SAP is going to spend roughly $400 million to $500 million over the next eight quarters over what amounts to be a big bet on mid-market customers.

SAP's fourth quarter results offered few surprises since the company had already flagged weaker-than-expected growth, but the outlook was telling.

In short, SAP sees 2007 software and software related services revenue--a rejiggered category that includes software, software support and subscription sales--growing 12 percent to 14 percent.

The company also said it will invest 300 million to 400 million euros (or about $400 million to $500 million at current exchange rates) on "growth opportunities in new, untapped segments in the mid-market." Specifically, SAP is investing in its mid-market product. SAP's focus on the mid-market isn't new, but this is the first time the company detailed the costs. The price for that investment is a about a point of operating margin.

So what's this development mean? SAP is finding application market for large enterprises saturated. To continue growing it is moving downstream. 

Says William Blair analyst Laura Lederman:

"According to our SAP contacts, management has told employees that the company's future is in the middle market since the high end is relatively saturated. These costs signal to us that growing in the middle market will cost more than targeting SAP's current enterprise market."

The move makes sense since SAP says the mid-market represents a $15 billion market. SAP defines the mid-market as companies with up to 2,500 employees and $1 billion in revenue.

By 2010 SAP reiterated that it wants to get 50 percent of its orders from new products, have two thirds of its installed base on enterprise SOA and have 100,000 customers, up from 38,000. Smaller customers, who in theory would have an easier time implementing SAP, would quickly pad the company's customer count.

If successful, SAP's bet could redefine the company and give it a springboard into an even bigger opportunity--smaller businesses. Strategically, SAP's move works out.

Among other key takeaways:

--Lederman estimates that 85 customers in the fourth quarter migrated off Oracle software and services to SAP under its "Safe Passage" program. Lederman estimates SAP has landed about 485 customers under the program.

--SAP's move toward the mid-market could pose risks. Susquehanna Financial analyst Jason Kraft opines:

"Unlike SAP's traditional dominance in ERP, which was driven in large measure by partner dynamics with system integrators (such as IBM and Accenture), we believe that NetWeaver and the mid-market will be trickier to navigate, as these efforts complicate partner relationships."

Goldman Sachs analyst Rick Sherlund says:

"The mid market has traditionally been less profitable given higher selling costs and smaller deals."

In the end, SAP has outlined its 2007 plans, which largely consist of reloading for new initiatives. If SAP can win with the mid-market and be a SOA player the current worries about the company will seem shortsighted.

Topics: SAP

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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