SAP AG will unveil on Wednesday a line of business management programs to be delivered over the Web, becoming the first major software company to make a big bet on software as a service.
Until now, SAP and other big business software makers like Oracle Corp and Microsoft Corp have focused on developing programs that sit on customers' computers.
SAP is the first of its kind to enter the Web-based software market, known as on-demand software or software as a service, which has been pioneered by much smaller competitors including Salesforce.com Inc and NetSuite Inc.
After spending about two years developing the new software for medium-sized companies, under code-name A1S, SAP will give the public its first glimpse of the product at an event in New York, and provide pricing and marketing plans.
A1S takes SAP much closer to a more purist model of software as a service than it has previously attempted, and is likely to become a very significant part of the SAP portfolio in the years ahead, Ovum researcher David Mitchell wrote in a recent note.
He said SAP, Oracle and Microsoft had previously taken a wider approach to on-demand software, mixing programs that sit on personal computers with programs residing on Web servers.
SAP is the world's top maker of business software, which helps companies manage accounting, inventory control, shipping, sales and marketing. It earns the bulk of revenue from licenses on software installed on its customers' premises.
SAP is now taking a page out of the playbooks of Salesforce and NetSuite, a company majority owned by Oracle Chief Executive Larry Ellison that filed in July to go public.
It will also be competing with software from Workday Inc, a privately held company started in March 2005 by PeopleSoft founder Dave Duffield that offers Web-based accounting and human-resources software. Oracle acquired PeopleSoft in January 2005 for $10 billion.
Fewer than 100 companies have tried the new SAP product as part of the early testing process. SAP has said it would spend about $500 million on A1S through the end of next year.
There's a pretty good chance they can execute well here, said Forrester Research analyst Paul Hamerman.
People familiar with the matter said the software would be rolled out gradually in the United States, Germany, Britain and France. It should be widely available in those countries in the first quarter of 2008 and SAP hopes to have thousands of customers by early 2009, they said.
This isn't for everyone, but I think there is a market for it, Hamerman said.
SAP has been surprised by leaps in the capabilities of Web-delivered services evidenced by the likes of Google Inc, analysts said.
Google provides e-mail, word processing, spreadsheets and presentation software through a growing portfolio of products that it calls Google Apps. SAP felt it had little choice but to enter the market in earnest, analysts said.
SAP, with some 42,000 customers, has traditionally sold its software to companies with at least 500 employees. It is now looking to build its base to 100,000 customers by 2010, using A1S to attract companies with between 100 and 500 employees.
In doing so it will meet a previously stated goal of boosting the size of the market for business applications that it can address to $70 billion by 2010 from $30 billion.
An initial challenge for SAP will be marketing to smaller businesses, which is generally done through independent consultants, or resellers, who advise businesses on which software to buy, then help install it.
Rob Hinchcliffe, vice president of Synergy Plus Solutions Inc, a reseller with operations in Livonia, Michigan, and Windsor, Ontario, said he was skeptical of SAP's new offering.
It's a version one. We generally try to look at those a little more tentatively, Hinchcliffe said. If we recommend it right out of the gate, we could be risking our reputation.