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JUNE 10, 2004
By Jay Greene and Jim Kerstetter Oracle, PeopleSoft -- and Microsoft Here are the key points of Justice's case against the enterprise software makers' merger and why Redmond plays a crucial role The trial is supposed to be about Oracle's (ORCL ) $7.7 billion hostile takeover bid of PeopleSoft (PSFT ) -- they're two makers of software used for big corporate jobs like managing a sales force or handling the needs of a human-resources department. But as happens so often in the tech world, somehow Microsoft (MSFT ) has found a way to loom large even if it's not a party to the Justice Dept.'s case. Trustbusters are arguing that Oracle shouldn't be allowed to buy PeopleSoft because it would concentrate too much power in one set of hands, limiting competition in the enterprise software market. In its defense, Oracle contends that the market is so dynamic that new rivals are eyeing it all the time, including its long-time nemesis Microsoft. Here's what's at stake and why Microsoft has managed to influence the trial without ever setting foot in the courtroom: What's at the heart of the trial? Justice's case hinges on a basic assumption that customers should have at least three legitimate choices when buying a product. If Oracle were to acquire PeopleSoft, the trustbusters argue, customer choices would be limited. With reduced competition, Oracle and Germany's SAP (SAP ), the other big enterprise software maker, could artificially raise prices. However, Oracle argues that Justice has created an artificial market to plead its case, winnowing a $9 billion business down to a $400 million segment. That's the super-high-end slice of multinational corporations that require support for multiple languages and currency in their financial and workforce software -- the only applications the government believes are the relevant market. Oracle says the feds' argument is bunk, contending that the entire enterprise application market should be considered -- including outfits such as Hyperion Solutions (HYSL ), which specializes in financial-analysis software (see BW Online, 6/10/04, "Trustbusters Are on the Wrong Trail"). How competitive is the enterprise applications market? What these businesses do may sound boring, but this market is a veritable Wild West of competition. SAP, Oracle, and PeopleSoft dominate an industry populated by hundreds of companies. SAP is the real powerhouse, with nearly a quarter of the entire market. PeopleSoft and Oracle, combined, would have about 15%. The rest is scattered over a second tier that includes Siebel Systems (SEBL ), which specializes in customer-management software; Britain-based Sage, best known for financial-management programs; and Lawson Software (LWSN ), which offers a full business suite. Outsourcing concerns like ADP (ADP ) and Ceridian (CEN ) also compete for a share of those applications dollars. Furthermore, a new generation of companies is biting at the heels of the big players. Consider Salesforce.com, which offers software as a rental service over the Internet. And then there's Microsoft. If you slice the market to include all business application sales, Microsoft, which caters to small and midsize business, has a 5% share. Is this a dynamic market? Without question. Leaders come and go. In the mid-90s, Dun & Bradstreet Software and Baan Co. were as big as PeopleSoft but fell behind because of strategic missteps. Around the same time, SAP was just getting a toehold in the U.S. Today, its license sales in the Americas are twice Oracle's and more than PeopleSoft's worldwide sales. Does Microsoft compete with Oracle or PeopleSoft? While Microsoft competes fiercely with Oracle in the database-software market, it's not much of a player in high-end business applications. Oracle, PeopleSoft, and SAP are the Big Three in selling software to run corporate finance and human-resource departments at large corporations. Microsoft has spent $2.5 billion, acquiring Great Plains Software in 2001 and Navision in 2002, companies that sell business applications. But Microsoft's customers are small to midsize concerns, not the domain of the Big Three. So then why has Microsoft become so central to the case? As with anything in the software industry, it's the 800-pound gorilla everyone worries about. The Redmond giant has publicly said it intends to focus on small and midsize customers, leaving the large corporate business to others. Those public pronouncements serve Justice's case well. Since the courts generally prefer that customers have three choices, if Oracle is allowed to buy PeopleSoft, one of those choices would go away. If Microsoft said it was interested in competing for the high-end dollars within a reasonable period of time -- say, three years -- Justice's case would fall apart. So is Microsoft going to compete for that high-end business? Ever since acquiring Great Plains and Navision, experts have assumed that Microsoft would eventually move upmarket, despite its comments to the contrary. Indeed, just before the Oracle trial started on June 7, Microsoft put out a stunning press release acknowledging that it had been in talks to acquire SAP. It had little choice but to spill these beans. Oracle found out about the talks during the pretrial discovery process and planned to mention it in opening arguments. While Microsoft buying SAP wouldn't have added another option for customers, it certainly speaks to intent. Microsoft wants in and is looking for ways to do it (see BW Online, 6/9/04, "The Message in Microsoft's SAP Quest"). Would trustbusters have stopped Microsoft from buying SAP? Given the arguments Justice is making in the Oracle case, it would be hard for regulators to block a deal between the No. 1 and No. 3 independent software makers in the world. That's because the department's lawyer are arguing that the market is so narrowly defined that Microsoft isn't in the same business as SAP, Oracle, and PeopleSoft. Regulators would have a tough time trying to prevent a Microsoft-SAP marriage on the grounds that it made the market less competitive. Indeed, it's almost an invitation to Microsoft to revisit the SAP deal, though both outfits say they have no intentions to resume the talks. So will Justice prevail, or will Oracle get the green light for a marriage with PeopleSoft? To software experts, Oracle's arguments about market dynamism make some sense. And it has some history on its side. Three years ago, Justice lost a similar antitrust case involving SunGard Data Systems' (SDS ) acquisition of Comdisco in the tech disaster-recovery business. Still, much rides on the shoulders of federal judge Vaughn Walker. During opening arguments, Walker pressed Justice's attorneys about how they arrived at their definition of the market. While it's always dangerous to read too much into a judge's questions, his queries may indicate an uneasiness with the core argument in the government's case.  Greene is BusinessWeek's Seattle bureau chief. Kerstetter is a correspondent for BusinessWeek in San Mateo, Calif.
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