Steep Discounts

By John Pallatto  |  Posted 2004-06-18 Print this article Print

If the smaller ERP vendors cant mount a serious competitive challenge, the question becomes whether Oracle and SAP together would have so much market power that they would be able to control prices to the detriment of their corporate customers.

Thats not likely if Oracle and SAP engage in the kind of cutthroat price discounting that apparently prevails in the market right now. The testimony shows that both Oracle and PeopleSoft were prepared to offer discounts of 40 percent to 60 percent off list prices if thats what it took to win a deal.

Click here to read about the steep discounts PeopleSoft offered to win sales from Oracle.
During the trial this week, Judge Walker questioned Phil Wilmington, PeopleSofts executive vice president, Americas, about how his company could offer such steep discounts and still turn a profit. Wilmington said the factors were lower fixed costs, high margins that prevail in the software industry, continuing maintenance fees and the opportunity to sell additional software after the initial sale.

The testimony also showed that customers were highly skilled in playing one vendor off against the other to get them to cut prices to the bone. All they had to do to get a still better discount was to hint that a competitor had the upper hand in the negotiations.

The discount offers would come even when customers were negotiating to expand or upgrade an existing ERP installation. They just had to suggest that they were prepared to shift to a new vendor to keep the discounts coming.

These factors suggest that it would still be hard for Oracle to control prices even if SAP were the only large competitor left in the market. But it also shows that by eliminating its fiercest competitor, Oracle would win more deals and certainly reduce the discount rates it had to offer customers.

Click here to read about PeopleSofts assertion that Oracles takeover bid violates antitrust law because it is predatory. Then there is the question of whether the Oracle buyout would be predatory because it wants to buy PeopleSoft to get access to its customers and eliminate it as a competitor. This is the easier case to argue.

Oracle made it clear when it announced its $7.7 billion tender offer for PeopleSoft that it wasnt interested in PeopleSofts ERP technology. Instead, Oracle would seek to migrate customers to Oracle applications. This is naturally alarming to a customer who may have spent millions of dollars over the past 10 years to install PeopleSoft applications.

Oracle has tried to assuage such customers fears with promises that it would continue to maintain the PeopleSoft code for 10 years after the buyout. PeopleSoft has argued that that the offer alone is predatory because as long as the deal is on the table, it sows fear and uncertainty that make it harder for PeopleSoft to sell software.

This certainly looks like a predatory buyout to reduce market competition. But whether its predatory to the point of violating federal antitrust law is the ultimate question that Judge Walker will have to answer.

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John Pallatto John Pallatto is's Managing Editor News/West Coast. He directs eWEEK's news coverage in Silicon Valley and throughout the West Coast region. He has more than 35 years of experience as a professional journalist, which began as a report with the Hartford Courant daily newspaper in Connecticut. He was also a member of the founding staff of PC Week in March 1984. Pallatto was PC Week's West Coast bureau chief, a senior editor at Ziff Davis' Internet Computing magazine and the West Coast bureau chief at Internet World magazine.

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