Oracle Files Suit Against SAP

The business software maker accuses its rival of using illegally acquired files to gain advantage in the crucial tech support market

by Aaron Ricadela

When Oracle (ORCL) reported knockout fiscal third-quarter results, Chief Executive Larry Ellison took relish in contrasting his company's growth with that of archrival SAP (SAP). "We're gaining on them consistently and rapidly," Ellison told analysts on Mar. 20. But SAP has an ace in the hole when it comes to battling Oracle for market share. The German company collects revenue for providing support for products used by almost 500 of Oracle's own customers.

SAP is using that card to cheat, Oracle says. The company made the allegation in a lawsuit filed in federal court on Mar. 22 that claims SAP unlawfully used Oracle's property, computer files stored on a technical support system, to build its business for supporting products sold by companies now within Oracle's fold. SAP executives in Germany and the U.S. orchestrated the "download scheme" to unfairly compete and "artificially inflate its market share," Oracle alleges.

Alleged Posing as Customers

According to the suit, filed in U.S. Federal District Court in the Northern District of California, employees at SAP logged on to Oracle's system by posing as customers at companies including Honeywell International (HON) and Merck (MRK) and illegally downloaded thousands of files. In some instances, the employees used "phony" e-mail addresses and fabricated credentials, according to the suit. By compiling a library of more than 10,000 files, SAP gained intelligence it could use to convert Oracle customers to its own products, and may also have improved its software using information gleaned from Oracle's support documents, the suit says. Oracle names names, charging SAP employee Wade Walden with conducting many of the downloads. It also alleges that SAP America President and CEO Bill McDermott sanctioned the moves by publicly vowing to poach Oracle customers.

SAP spokesman Richard Knowles confirmed that Walden is an employee of SAP's TomorrowNow subsidiary in Bryan, Tex., but declined to comment on the allegations. Knowles says Oracle likely pulled McDermott's comments from "press clippings" and declined to make him available for comment. "There's no reason for him to be commenting on something that's alleged," Knowles says.

TomorrowNow was acquired by SAP in January, 2005, and sells tech support for products sold by PeopleSoft, J.D. Edwards, and Siebel, all of which have been acquired by Oracle in recent years. It sells those contracts at half the price charged by Oracle and has thrived under SAP's ownership, having signed up 485 customers for such deals and more than doubling the number of accounts in 2006 (see BusinessWeek.com, 10/24/05, "SAP's End Run Around Oracle"). That means SAP—not Oracle—collects "maintenance" revenues for tasks such as repairing software bugs and keeping human-resources software up to date with the latest tax laws.

Rich Revenue Streams

Oracle, SAP, and other large software companies typically classify revenue from software sales in two categories: fees from ongoing maintenance and sales of new licenses. In Oracle's case, maintenance contracts accounted for $2.1 billion, or almost half, of the third-quarter total. And whereas Oracle typically charges 22% of a product's license price for annual maintenance, SAP was offering the service for 11% of the license cost.

The competition threatens an important revenue stream as Oracle tries to keep hold of accounts already sold by acquired companies while it develops a new family of products that combine aspects of software from several of those companies. "Oracle is starting to feel the hurt of having TomorrowNow take its customers off its hands," says Joshua Greenbaum, principal at Enterprise Applications Consulting. "They cannot fund their business without that 22%."