What This Article Covers
- What is Indirect Access?
- When Do SAP Customers Learn of Indirect Access Exposure?
- Is Indirect Access Really About Copyright Protection?
- Is SAP’s Version of Indirect Access About Account Control?
- How SAP Has Traditionally Sold Software
- How Software Works
- The Tying Agreement or Tying Arrangement
- How SAP Uses Barriers to Sell More Software Than it Ordinarily Could
- Apple and Microsoft and Tying Agreements
- The Tying Arrangement, Tying Agreement, and US Law
- Tying Agreement and The Rule of Reason
- What is SAP ERP’s Marketshare?
- How Much do You Know About SAP’s Practices?
There has been quite a lot of discussion about indirect access due to a case of Diageo v. SAP. In this previous article, I covered the Diageo v. SAP case and stated that I disagreed with the UK judge in this case. The proponents of SAP’s position on the case have pointed to language in SAP’s contracts that state the following:
- “Only named users are authorized to use or access the mySAP ERP software directly or indirectly (emphasis added)
- Named user pricing is the only basis on which the mySAP ERP software was licensed to Diageo.”
There are several problems with this clause. First, SAP has imposed its expansive version of the definition of indirect access that does not have any historical basis. That is one of the most critical points. However, I won’t get into that topic in this article. In this article, I would like to cover a different issue.
What if this clause or at least one dimension of the clause, related to indirect access is inconsistent with US law?
Companies enjoy placing items into contracts that are in contradiction to the laws of a country.
- One of the problem, with combating indirect access is the few entities that help companies defend it, keep their information private. Their main approach seems to be to focus on one contract at a time rather than develop and published overarching strategy.
- SAP, on the other hand, can internally coordinate and then share its information internally. This puts every customer at a disadvantage. While customers can coordinate through user groups, this has not yet lead to a coordinated approach on indirect access.
In this article, we will discuss this issue and look into the history of something called a tying arrangement or tying agreement.
What is Indirect Access?
This will be a brief review for those initiated, but I do need to level set for those that are new to this topic.
Indirect access is when a software vendor charges to access the data that is stored in their system. The concept is still relatively new and tends to only apply to very large software companies that have products already installed at companies.
When Do SAP Customers Learn of Indirect Access Exposure?
SAP customers do not typically learn about indirect access restrictions during the sales process. But they may learn of it from a SAP audit, or when SAP believes that a sale of a competing product is imminent, which I will cover a little further into this article.
Is Indirect Access Really About Copyright Protection?
Indirect access is presented as if it is copyright protection, but the way it is often treated by SAP, it is more accurately defined as an enlargement of copyright protection. And it is an imperative question as to who is accepts SAP’s definition of indirect access. Clearly, the judge in the UK court did accept SAP’s definition. If I were to take a poll of software vendors, and I have in a way taken an informal poll as I have spoken to so many about the topic, I can’t find other software vendors that accept SAP’s definition. And it goes beyond simply not being amenable to SAP’s definition of indirect access. Nearly all the vendors I have spoken to seem to think it is illogical. One representative from Sage (predominantly an ERP vendor) commented very enthusiastically in support of SAP’s definition. Many pro-SAP commenters on the last article stated that either most or all the other software vendors use SAP’s definition of indirect access as well. I have found no evidence that that is true, and no SAP source brought forward any evidence to support that claim.
Is SAP’s Version of Indirect Access About Account Control?
Indirect access is, also, a kind of account control. Moreover, like any technique of account, control, indirect access is designed to point as many IT expenditures as possible back to the large IT vendor. Moreover, almost undiscussed in a published form, indirect access is used by SAP to block out smaller vendors from sales that they would ordinarily receive. I know of many examples where a non-SAP software vendor begins getting close to getting a sale, and when the SAP account manager learns of it, they will inform the customer that if they make the purchase, they will need to purchase licenses from SAP as well. If the customer agrees
I know of many examples where a non-SAP software vendor begins getting close to getting a sale, and when the SAP account manager learns of it, they will inform the customer that if they make the purchase, they will need to purchase licenses from SAP as well. If the customer agrees
If the customer agrees to purchase and SAP product, the customer will not be charged the indirect access licenses. In many cases, the customer will not buy the completing application or SAP’s application. But that is still a win for SAP. This not only preserves the budget of the IT department to spend on other SAP products in the future, but it prevents another software vendor from getting into the account. And the more SAP can stop other software vendors from makes sales into their accounts, the lower the probability that the customer will observe benefits from non-SAP applications that it purchases.
For those that doubt that SAP performs “strategic control” over its accounts in the manner need only review the history of SAP HANA. SAP HANA is sold on inflated performance claims, but a primary driver for the introduction of HANA has been that SAP thinks that Oracle has too much of the database market on what are really “SAP’s accounts.” The real business problem HANA is solving is SAP’s business problem of not having more database market share. And I say this as the analyst who has in my estimation performed the most analysis of HANA (although I am open to taking second place if someone can recommend another analyst who has performed more).
I cover some of these details about HANA in the article How to Deflect That You Were Wrong About HANA.
Wrapping up this section, it should also be pointed out that in the many examples that I have of this occurring are with software vendors that are in fact SAP partners.
How SAP Has Traditionally Sold Software
It should be easy to establish a foundational principle of a competitive market that no software company should be permitted to direct customers to do the following:
- To purchase other software from a software vendor that is unwanted.
- Or to be required to pay the penalty for buying software from a competing software vendor.
Before the issue of indirect access ever reared it’s ugly head from SAP, for decades customers have purchased low capability SAP applications because they used the SAP ERP system and they wanted easier connectivity, etc. SAP sold all of the following post-ERP applications.
Here is my evaluation of these applications that SAP brought out. This list is copied from my previous article. However, it is important to include this to establish this point for those readers who did not read this previous article.
- SAP BW – Business Warehouse: A lagging BI application with famously high operating and maintenance costs.
- SAP CRM: Very close to a dead application.
- SAP PLM – Product Life Cycle Management: Never actually existed.
- SAP Netweaver: Never actually existed (a container or marketing construct for a hodgepodge of mostly infrastructure tools)
- SAP SRM – Supplier Relationship Management: A dead application (supposedly replaced with Ariba)
- SAP APO – Advanced Planner and Optimizer: A lagging set of supply chain planning applications.
- SAP MDM – Master Data Management: A dead application.
- SAP Solution Manager: A dead application.
SAP and the consulting partners (IBM, Deloitte, etc..) mislead many companies about the benefits of how their systems being integrated would lower costs. They still do this to this day. It is not only the US but globally.
As a consequence SAP customers ended up wasting enormous amounts of money implementing both the applications above as well as many other non-ERP applications.
- However, none of this was illegal because while based upon false pretenses, companies willingly made these purchases.
- It is perfectly legal for consulting companies to lie to their prospects and it is legal for software companies to promote consulting companies to do this by offering them the consulting business. So there is nothing unusual here this is considered standard practice in the IT industry.
Quite the contrary. The unusual IT consulting company is one that puts its clients ahead of its interests.
Now that we have reviewed this history, we can now jump into the non-willful purchase of software, which is a different subject legally. But before we get into that, let us first expand into how software works.
How Software Works
First, technically speaking, all software is stand alone.
- It can be used with other applications from the same vendor, or be combined with applications from another vendor.
- It can be connected to other applications with an adapter sold by the same software company or by a different software company.
- Any application can be connected to any database, and any database can be connected to any other database.
None of this to propose that any specific application should be connected to a specific application, or a specific application should be connected to another specific database, etc… It is only to say that it is all possible and just requires integration work to be performed.
The Tying Agreement or Tying Arrangement
Under US anti-trust law there is something called a tying agreement or tying arrangement. A tying arrangement or tying agreement is a technique employed by those that seek to erect anti-competitive barriers, and they are extremely well understood as they are part of US anti-trust law and have a vast amount of case law around them that goes back in time in the US courts for over 100 years.
If a SAP customer is compelled to purchase a SAP application because it already owns another SAP application, this should be considered under US law as a tying agreement or tying arrangement.
This is the first time that I can tell that this proposal has ever been proposed in a published form.
Indirect access pushes the boundaries into a tying arrangement or tying agreement. Under indirect access, SAP will often ask for a customer that purchase ERP licenses when a non-SAP system is connected to the system. Let us review an example.
Let us take a look at say the workflow involved in production planning and scheduling. Production planning and scheduling is cannot efficiently be performed in any ERP system, as covered in my article, Why do Companies Keep Using ERP/MRP Systems for Production Planning and Scheduling? Therefore it is a common application to connect to ERP systems.
- If a non-SAP production planning system were connected to SAP ERP, then planned production orders would be sent back to SAP ERP. Then the planned production order could become an actual production order in SAP ERP. So is the external system leveraging the functionality in SAP ERP? Well sort of, it depends on what we mean.
- One person may have a license to create planned production orders in the non-SAP system.
- Another person may have a license to adjusted production orders in SAP ERP.
- The production order may be changed ten times by the person with the SAP ERP license. However, it was created in SAP ERP using the external production planning system.
- Both the ERP system and the production planning and scheduling system are kept in sync. That means that the updates to the production order, have to be sent back to the production planning and scheduling system. In this case, a change or update was made in SAP ERP, that was then reflected in the date (say for instance) on the production order.
- By doing that in SAP ERP, and having the change reflected in the production planning system, didn’t the customer just cheat the production planning vendor by not buying an extra license for the person in the ERP system? Under this logic, every system must be paid on licenses for transactions that are created by any other system that eventually finds their way into a different system. That means that every adapter must be evaluated to see what data is coming across to the application.
If that is the new standard for the industry, then I guess it is not for me to oppose it. But imagine the implications.
“40 percent of SAP shops have 20-50 systems interfacing with their ERP (emphasis added). Of these, less than 10 are SAP systems. Each of these systems have dozens of interfaces to the ERP system. This amounts to hundreds of integration points!” – Panaya
And the problem is that only SAP is proposing this new reality.
Moreover, SAP has demonstrated that they will drop all indirect access concerns if you just purchase more of their software.
The Tying Arrangement and Tying Agreement and US Law
Now let us review some important history around the tying arrangement or the tying agreement.
A tying arrangement occurs when, through a contractual or technological requirement, a seller conditions the sale or lease of one product or service on the customer’s agreement to take a second product or service.(2) The term “tying” is most often used by economists when the proportion in which the customer purchases the two products is not fixed or specified at the time of purchase, as in a “requirements tie-in” sale.(3) A bundled sale typically refers to a sale in which the products are sold only in fixed proportions (e.g., one pair of shoes and one pair of shoe laces or a newspaper, which can be viewed as a bundle of sections, some of which may not be read at all by the customers). Bundling may also be referred to as a “package tie-in.”(4) Case law in the United States sometimes uses the terms “tying” and “bundling” interchangeably.(5)
Ever since the late 1940s, when the Supreme Court stated in International Salt Co. v. The United States that
“it is unreasonable, per se, to foreclose competitors from any substantial market,”(15) and in Standard Oil Co. v. The United States that “[t]ying agreements serve hardly any purpose beyond the suppression of competition,”(16) U.S. courts have found tying to be per se unlawful.(17) Although the Court’s 1984 Jefferson Parish opinion confirmed the continued role of a per se analysis,(18) it emphasized that market power in the tying product be a requirement for per se illegality.(19) “
What that means, that is what tying arrangements are illegal per se, is that they are inherently illegal. No other proof needs to be presented. The argument for per se illegality can be found at this article.
However, this perspective has altered over time.
Once thought to be worthy of per se condemnation(8) without examination of any actual competitive effects, tying currently is deemed per se illegal under U.S. Supreme Court rulings only if specific conditions are met, including proof that the defendant has market power over the tying product.(9)
So the proof is that the defendant has marketing power over a tying product.
As discussed below, panelists generally doubted that tying and bundling involving intellectual property are likely enough to harm consumer welfare to justify per se treatment, and therefore advocated a rule of reason approach that would require proof of likely or actual anticompetitive effects and allow consideration of the efficiencies that such arrangements may generate.(13)
Well, in this case, the anti-competitive effect is clear. SAP will charge a customer for ERP licenses only if the customer selects an application from another vendor. So in the case of a customer purchasing a CRM system, if a company purchases SAP CRM, then they do not charge the customer for SAP ERP licenses.
If the customer purchases Salesforce CRM, then SAP will often request indirect access charges for SAP ERP licenses. This pushes the customer to select SAP CRM rather than an alternative application. And this is entirely based upon a pre-existing application, SAP ERP, being in the customer.
If in the example of Diageo v SAP, Diageo did not use SAP PI before implementing Salesforce, then they implemented SAP PI to alleviate indirect access concerns. However, this required use of SAP PI is a tying arrangement if it was only used for this reason. However, the main observation is that no company should be compelled to purchase more software from a company because it already owns a different software application from that company.
Apple and Microsoft and Tying Agreements
Both Apple and Microsoft have been found guilty of violating tying agreement clauses to US anti-trust law. The famous case against Microsoft for its tying of its Internet Explorer to the Windows operating system was a case that was based upon the laws on tying agreements.
“A tying arrangement is an agreement between a seller and a buyer under which the seller agrees to sell a product or service (the tying product) to the buyer only on the condition that the buyer also purchases a different (or tied) product from the seller or the buyer agrees not to purchase the tied product from any other seller.” – American Bar
This is not that said SAP and CRM are sold together. But that in the case of Diageo v. SAP, indirect access rules require the customer to purchase more SAP ERP licenses, only if the customer purchases a non-SAP CRM system.
“Tying arrangements may be challenged under Section 1 of the Sherman Act, which prohibits “contracts in restraint of trade,” Section 3 of the Clayton Act, which prohibits exclusivity arrangements that may “substantially lessen competition,” and Section 5 of the FTC Act, which prohibits “[u]nfair methods of competition.” Tying may also constitute conduct supporting a monopolization claim under Section 2 of the Sherman Act.” – American Bar
“Thus, the most important factor in determining whether two distinct products are being tied together is whether customers want to purchase the products separately. If customers are not interested in purchasing the products separately, there is little risk the tie could foreclose any separate sales of the products.” – American Bar
This is certainly the case. Many, although not all customers want to purchase different CRM and other systems separate from their ERP system.
“In principle, there are three ways to tie products: (1) Contractual tying, which, as the name implies, takes place when the monopolistic firm requires the buyer in the purchase agreement to purchase the tied product as well; (2) Technical tying, which occurs when the monopolistic firm technically links the tying product and the tied product together so that the consumer is forced to purchase both of them;3 and (3) Tying through “economic coercion,” which takes place when the monopolistic firm offers both products, the tying and the tied, together, at a discount so significant that it negates the consumer’s economic freedom not to purchase the tied product.4” – Seattle Universtiy Law Review
Therefore, SAP’s tying would fall under the third type or tie through economic coercion. In fact, indirect access is a textbook case of this.
“What distinguishes illegal tying from legal bundling is the seller’s exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all or might have preferred to purchase elsewhere on different terms.” – American Bar
“However, the party seeking to defend a tying arrangement on the basis of competitive justifications bears a heavy burden of proof; the defense is difficult to establish and has been successful only under limited circumstances.” – American Bar
“For many years tying arrangements were thought worthy of per se condemnation without examination of any actual competitive effects. But strong disapproval of tying claims has waned over the past few decades, as courts have recognized that tying arrangements may have procompetitive benefits. Tying currently is deemed per se unlawful only if:
- Separate Products: Two separate products or services are involved;
- Coercion: The sale or agreement to sell one product or service is conditioned on the buyer’s agreement to purchase another product or service;
- Market Power: The seller has sufficient power in the market for the tying product to enable it to restrain competition in the market for the tied product; and
- Not Insubstantial Amount of Commerce Affected: The tying arrangement affects a “not insubstantial” amount of commerce.” – American Bar.org
So let us review how this applies to SAP:
- Separate Products: Yes
- Coercion: When SAP demands indirect access fees, this is coercive. Most companies hit with indirect access fee requests are unaware that this was even a possibility and their attorneys do review the contracts.
- Market Power: Yes, obviously SAP has the market power for the tying product (SAP ERP in most cases). However, this point requires elaboration, and I will elaborate below.
- Not Insubstantial Amount of Commerce Affected: Obviously yes
Therefore, SAP’s application of indirect access fees when a customer chooses another non-SAP application, fees that are immediately waived if the customer purchases a SAP product instead meet the four requirements of being a tying arrangement or tying agreement.
On the third point of Market Power, the Supreme Court takes the following position.
“The Supreme Court’s position is that tying arrangements carried out by monopolistic firms, which affect a “not insubstantial” amount of interstate commerce, are illegal per se. The Court requires proof of the existence of market power and rejects the possibility of deducing the existence of market power from the very fact that the tying product is patent protected, or from the very fact that the consumer agreed to the tying arrangement. ” – University of Seattle Law Review
What is SAP ERP’s Marketshare?
If SAP can be demonstrated to be a monopolistic software vendor, then SAP’s indirect access, and how it treats its pricing (not charging for ERP licenses when a SAP product is purchased) would qualify as being illegal “per se.” This means without any other evidence. Let us review the degree to which SAP qualifies.
SAP is the 4rth largest software vendor in the world.
However, that by itself does not prove that SAP has monopoly power. Typically the court would require evidence of monopoly power in the market segment where the indirect access is applied. In most cases, this is the ERP system. But here is the illustration of SAP’s market share in ERP.
*From Apps Run the World
This shows SAP having only 6% of the overall market share of the ERP market. However, this is not an accurate way to represent the SAP’s ERP market share. This is because SAP R/3 – ECC – Business All in One (that is SAP’s ERP that is not the BusinessOne product) has a much higher market share in what is called the Tier 1 ERP market as the following quotation attests.
“While there have been several Tier I vendors earlier, mergers and consolidations have shrunk the list considerably. The list of Tier I ERP vendors is now very small and consists of just two entries – SAP and Oracle.” – Enterprise Innovation
I do not have the exact numbers for SAP’s market concentration in Tier one, but SAP has a higher market share than Oracle, and there are only two competitors. And there is simply no doubt that SAP does have a dominant market share in this category and that it is a monopoly provider in the tier 1 ERP market.
ERP market share concentration is also dependent upon the sector. Here is a comment from a person on my previous article.
“While SAP may be “legacy,” it’s position is so completely & utterly entrenched within the underpinnings of most major Energy & Manufacturing companies.” – Richard Crounse
This is not a specific declaration of market share but is an acknowledgment that SAP is, in fact, dominant in this sector. But it is also dominant in other sectors as well.
Therefore, if SAP uses indirect access as it does in the tier 1 market, it should qualify as a violation of tying agreement or tying arrangement anti-trust law. If SAP uses indirect access in tier 2 or tier 3 ERP market, then more evidence would have to be presented that it limits competition as it is not illegal “per se.”
“The historical concern regarding tying arrangements was that a firm holding monopoly power would charge a monopolistic price for the tied product as well as for the tying product, thus leveraging its power into an additional market.5 Another concern was that the tying arrangement would create a significant barrier to entry into the markets of both products, since potential competitors might, due to the tying, be required to enter both markets in parallel.6”
This is exactly what happened with vendors like Infor, Epicor and Sage engaging in ERP acquisitions to better “compete against SAP.”
Tying Agreement and The Rule of Reason
One last item that I found interesting in my research into the tying agreement and tying arrangement is the “rule of reason.” The rule of reason is described as follows:
“According to the rule of reason, the plaintiff at first must prove that the defendant’s conduct harms competition. For this purpose, the plaintiff must present the theory that shows that competition could be harmed as a result of the tested behavior; demonstrate that the theory suits the circumstances of the case at hand; and prove that the threat to competition is significant. Should the plaintiff succeed in this onus, then in the second stage, the defendant must prove an efficiency justification for its” – University of Seattle Law Review
In all cases of SAP using indirect access, the rule of reason is quite simple to demonstrate. Every time that a SAP redirects a purchase that would go to a non-SAP software vendor back to SAP, the non-SAP software vendor is harmed. Even this standard is typically used under scenario where certain behavior can be beneficial and competitive in certain circumstances. However, there are simply no examples where indirect access is pro-competitive.
If the case of indirect access were marginal, I would bring up this fact. However, the more I read about tying agreement or the tying arrangement, the more I was struck at what a perfect match indirect access is for being a tying arrangement. I am also confused as to why I could not find any articles that specifically linked tying agreements to indirect access. If you perform a search on the two terms, the only match you will find is an earlier version of this same article at Brightwork Research & Analysis, which is my research entity. Therefore, I believe Brightwork is the first to make this connection in a published form.
Tying agreement or tying arrangement law in the US is powerful. Although this source is dated by nearly 40 years the following is stated.
“With the exception of Fortner Enterprises, Inc. v. United States Steel Corp.71 and Times-Picayune Publishing Co. v. United States, 72 the Supreme Court has sustained challenges to tying arrangements in all cases decided by full opinion. 73” – Vanderbilt Law Review
One thing that struck me is the depth and breadth of research that is required for this topic. In includes reviewing the previous tying agreement cases, which go back many decades. I have covered many, but nowhere near all of the topics that are part of this subject. Also, while SAP customers have internal legal departments, these departments are not going to be up to date on tying agreements or anti-trust law.
At one time the tying arrangement or tying agreement were considered illegal per se. However, over time the perspective of the US courts softened to require evidence that the tying arrangement or the tying agreement…
including proof that the defendant has market power over the tying product.
It is clear that SAP does have market power of the tying product. It is clear that SAP uses indirect access to push SAP customers to purchase SAP products. SAP has used its account control over customers to push companies to purchase SAP products based upon false pretenses. But with indirect access, SAP moves into riding the line against competitive markets into directly contradicting an important area of anti-trust law in the US.
How Much do You Know SAP’s Treatment on Indirect Access?
SAP Indirect Access Quiz
Our Work With the New SAP Construct
We are one of the few entities that focus on SAP but also tells the truth about SAP. If you want to be provided biased information on SAP, there are many choices in the market. We can recommend Deloitte, Accenture, KPMG, E&Y, Infosys, IBM and Gartner among others. However, for unbiased information on SAP, the options narrow considerably.
If you are interested in our advice on how to deal with SAP, and how to manage to diversify away from SAP, reach out to us. We offer a wide variety of advisement all focused around getting a better value from your SAP investment.
The University of Chicago and Harvard
I found both UC and Harvard to jointly propose illogical arguments for accepting a tying agreement or tying arrangement. Both UC and Harvard deliberately overestimate the degree of competitiveness in markets. I cover the bias of UC and Harvard in this article.
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