Antitrust Is in the Eyes of the Beholder

By Lisa Vaas  |  Posted 2004-03-01

Antitrust Is in the Eyes of the Beholder

The nub of the Oracle-PeopleSoft fight is whether the market for back-office applications will shrink. Thats a vitally important question, and it bears a closer look.

Ironically, the Justice Department, in a 17-page civil antitrust lawsuit filed last week in U.S. District Court in San Francisco, used Oracle Co-President Chuck Phillips own words against the company. Citing a Phillips report that hailed from his days as an industry analyst for Morgan Stanley in 2002, the DoJ suit reads, "He issued a report that stated, The back-office applications market for global companies is dominated by an oligopoly comprised of SAP, PeopleSoft and Oracle. The market is down to three viable suppliers who will help re-automate the back-office business processes for global enterprises for years to come."

The lawsuit went on to assert that the elimination of one of those three vendors would harm current customers, likely resulting in higher prices and a lessening of competition between Oracle and PeopleSoft, which has up until now led to a "high level of innovation and upgrades to each companys products," the lawsuit said. "Oracle will no longer have the incentive to innovate in order to differentiate itself from PeopleSoft," it said.

As ironic as it is that Phillips himself saw the market as an oligopoly, it bears noting that there are industry experts who disagree with that assessment. For example, Mike Dominy, analyst of Business Applications & Commerce for The Yankee Group, in Boston, is of the opinion that Oracle would hardly hang onto all divisions following a successful takeover and would instead likely spin off J.D. Edwards.

Next page: Why a combined Oracle/PeopleSoft would and should shed J.D. Edwards.

Why Oracle

/PeopleSoft would ditch J.D. Edwards"> After all, J.D. Edwards is a late and, in Oracles eyes, unwelcome addition to the PeopleSoft trophy. Such a move would obviously help to maintain the competitive marketplace. In addition, there are reasons why Oracle has no interest in supporting J.D. Edwards customers, some 60 percent of which run their applications on IBM databases. Oracles not interested in supporting a population of customers running on its competitors databases. Hence, spinning off J.D. Edwards to a company thats more IBM-centric would both satisfy the DoJs antitrust concerns and get a bunch of IBM loyalists off Oracles hands.

Dominy suggested imagining a company such as SSA as a potential acquirer. As an ERP software maker for manufacturing and the public sector, it has robust assets in the ERP landscape, from manufacturing to procurement. Its also obviously on a buying spree. In July it closed its acquisition of Baan, a division of Invensys. Before that, in 2002, it purchased the supply chain management, financial management and human resource management product lines of InterBiz, the e-business applications division of Computer Associates International Inc.

For its part, J.D. Edwards, when it was acquired by PeopleSoft, had some $700 million to $900 million in revenue. Take that amount of revenue and put it together with SSA/Baan, which has some 16,500 customers. That scenario alone creates a third power in the ERP space. Then theres Microsoft, already in the ring with its acquisitions of Great Plains Software and Navision.

With Microsoft gaining momentum, with SAP remaining the top gun in the marketplace, and with Oracle/PeopleSoft as a clear No. 2, the SSA/Baan/J.D. Edwards/InterBiz entity would be a $1.4 billion to $1.7 billion company and a clear player in a marketplace that wouldnt be overly consolidated.

Next page: The DoJs wrong about innovation.

DoJs wrong on innovation

The DoJ also has some debatable opinions about the nature of innovation in this market. In contrast to the DoJs assertions about Oracle and PeopleSoft egging each other on to innovate, the ERP market is now actually flat and stagnant. Whatever innovation is going on isnt serving to win new customers. Rather, revenues are coming mostly from maintenance. Thats because most businesses likely to buy back-room applications have already done so. The game now comes down to having the most customers to sell bolt-on, incremental applications to, such as supply chain, CRM, portal, data warehousing applications and the like.

Dominys of the opinion that the next battleground for IT will be beyond the edge of the enterprise, as companies figure out how to connect, synchronize and coordinate their operations with an extended supply chain. He points to SAPs strategy around NetWeaver—SAPs answer to infrastructure, application and business process integration—as evidence that the action is in the infrastructure layer, focusing on integration—not just application to application, but into the database.

"They know the future is delivering composite applications or integrated Web applications, which are these specialty applications that deal with business processes that cross enterprise boundaries and work with external business partners," he said. As such, the way companies will gain revenue in the future is by having a customer base and selling such composite applications to those customers.

After all, at this point, after such a long period of famine in IT budgets, pretty much all billion-dollar+ companies have already squeezed internal costs out. Their real opportunities lie in improving the extended supply chain and how information and goods flow through the networks of their business partners. This is why the market no longer depends on how the sale of HR applications goes. The market for enterprise applications is mature, and the real opportunity for growth lies in expanding the footprint of where those enterprise applications extend.

At any rate, thats one view of the marketplace that contrasts to the DoJs take. Its a view of the marketplace that Oracle is likely pushing in its fight against the DoJ lawsuit. PeopleSoft is assuredly pushing its complete opposite. Both companies are finding experts to back them up, and, obviously, in the end, it will all boil down to which view of the market is more coherently articulated.

Whats your take on what comprises the market, both as it currently stands and the direction in which its evolving? Write me at Database Center Editor Lisa Vaas has written about enterprise applications since 1997.

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