The government's decision to try to block Oracle's bid for PeopleSoft dismissed a potentially dangerous competitor, analysts say: Microsoft.
The U.S. Justice Department filed suit last week to block an Oracle purchase of PeopleSoft on the grounds that such consolidation of the market would likely "result in higher prices, less innovation and decreased support for these high function integrated software applications."
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The Justice Department is suing to stop Oracle's PeopleSoft buyout and preserve competition in the market for high-end business apps. But analysts say the Justice Department's take on Microsoft as a nonplayer, confined to the midtier market, may be naive.
Microsoft has ambitious plans to grow its applications business, making increased competition on the high end a distinct possibility, according to analysts. An Oracle-PeopleSoft merger could actually provide the software giant with an inroad, with Oracle distracted by efforts to accommodate former PeopleSoft customers.
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The Justice Department dismissed Microsoft as a near-term competitor in its evaluation of Oracle's bid, Assistant Attorney General Hewitt Pate said in a conference call with the media last week.
Analysts question the Justice Department's assertion that the merging of PeopleSoft and Oracle would leave just two competing companies in the arena for high-end applications software: Oracle and Germany-based SAP. That view doesn't take into account the impact that Microsoft, which recently entered the field, is likely to have in the future, given its vast resources and competitive nature, analysts say.
"Microsoft is definitely a wild card," Yankee Group analyst Mike Dominy said. "I think (the Department of Justice) defined the competitive landscape too narrowly."
That opinion also supports Oracle's assertion that the business application market is more competitive than the Justice Department claims. Oracle plans to challenge the antitrust agency's lawsuit in a federal court in San Francisco.
Oracle intends to make many of the same points these analysts make in its defense against
the antitrust suit, said Oracle attorney Daniel Wall of law firm Latham & Watkins. Specifically, Wall said, Oracle will argue that it considers Microsoft to be a serious challenge, that prices would remain stable should Oracle acquire PeopleSoft, and that barriers to entry for a "strong third" player looking to fill PeopleSoft shoes are few.
"One of the things that strikes me is that the (Justice Department's) lawsuit bets against a market which is one of the most dynamic in the world," Wall said. "The market will adjust in a nanosecond. Nothing about the deal is going to change that."
Oracle said on Monday that it will request that Microsoft furnish insight into its plans to expand its share of the business applications software market. The company now mostly targets businesses with less than $1 billion in annual revenue. However, the general wisdom is that the company will eventually target larger global companies and compete directly with SAP, PeopleSoft and Oracle.
"I wouldn't say the Justice Department has ruled incorrectly, but some of the assumptions that they cite about this industry I don't buy into," said AMR Research analyst Jim Shepherd.
For instance, analysts take issue with the Justice Department's conclusion that prices would rise if Oracle and PeopleSoft merged. Competition from SAP, far and away the largest competitor in the market for software systems that automate corporate accounting and human resources activities, would likely keep prices stable, analysts said.
"Two big companies would still be going head-to-head," Dominy said. "With Oracle competing against SAP, I don't see pricing going up. To me, it doesn't seem to make sense."
However, competition may suffer in some cases should Oracle acquire PeopleSoft, said Forrester Research analyst Byron Miller. For instance, SAP may be the only real choice, in the short term, for companies that want to run their business systems on database software from IBM, Microsoft and other makers.
As it stands, Oracle applications run only on Oracle databases. The company says it would support PeopleSoft's database-agnostic technology, but many believe Oracle would push PeopleSoft customers toward its own database programs over time.
Wall dismissed the idea that companies using database programs that compete with Oracle's would be left with only one supplier: SAP. "There is always a period of dislocation" for some customers, Wall said. "If that worked to stop mergers, then there wouldn't be any other mergers."
Microsoft's big plans
With Oracle promising to support PeopleSoft's products for the next decade, would-be competitors such as Microsoft have time to rise to the occasion. Miller predicted that's just what would happen. Microsoft "would move up more quickly if there were only two players," he said. The acquisition of PeopleSoft "would certainly make a path for them."
Indeed, Microsoft has ambitious plans to grow its applications business over the next five years or so. As the result of two acquisitions totaling $2 billion since 2000, Microsoft has an almost $600 million foothold in the market. The company expects to grow the unit to $10 billion in yearly revenue by 2010. That's an ambitious target, given that SAP, the market leader, reported $7.8 billion in sales last year.
Although Microsoft mostly targets businesses with less than $1 billion in annual revenue today, many industry watchers expect the company to target larger companies in the future. It's already clashing with SAP in the so-called midmarket. Even PeopleSoft Executive Vice President Ram Gupta predicted in 2002 that competition among Microsoft and the three big application companies would reach "biblical proportions" one day.
The Justice Department also overstates the barriers of entry in the market for applications software designed for the world's largest companies, analysts said. "The barriers include the high cost to research and develop competing products, the time needed to develop these products and the need for a direct sales and marketing force," the Justice Department's suit states.
AMR Research's Shepherd argues that midsize companies, served by software makers such as Microsoft, Lawson Software and numerous others, can have very complex operations and that the software they use is quite sophisticated. Thus, a software supplier like Lawson could more easily fill any void left by PeopleSoft's exit from the higher-end market than the department claims, he said.
"They make a big case about the design of the applications, that the functionality is really specialized and different, and it's kind of a rarefied pool of knowledge," Shepherd said. "I question whether that's a real barrier to entry, but they seem to think it is."
In addition, the most contested competitive battles for SAP, PeopleSoft and Oracle are not in the markets for human resource systems and accounting applications--the areas over which the Justice Department is most concerned, Yankee's Dominy said. Those markets are relatively stagnant, especially at the high end, and will grow only a fraction of a percent in 2004, he said.
The fronts that will determine who wins and who loses in the applications business involve newer programs that enable companies to coordinate with suppliers and customers online, Dominy said. Those markets are expected to grow about 7 percent this year and include many other large and small competitors, including IBM and Microsoft, he said.
Analysts said a combination of politics and high emotions may have influenced the agency's decision to file the suit in the first place. In terms of politics, state agencies across the country that protested the deal because they fear losing investments in their PeopleSoft systems may have held undue sway over the Justice Department, analysts said. In addition, the seven attorneys general who joined the department's suit may succeed in raising their profiles and advancing their careers as a result, according to one analyst.
"I think state attorneys general certainly have influence with the Justice Department, and a lot of them got a taste for the visibility these cases bring around the Microsoft (antitrust case)," Shepherd said.
To be fair, PeopleSoft customers would experience, in all likelihood, some inconvenience or uncertainty and could lose some money if Oracle were to swallow their business systems supplier, analysts said. But whether such effects warrant an antitrust suit is an open question as far as some analysts are concerned. "The basic logic that this harms the PeopleSoft customer base in some way is perfectly valid," Shepherd said. "I just don't know whether that's illegal or not."
Shepherd said Oracle Chief Executive Larry Ellison may have only himself to blame for the high emotions that have characterized the bid from the beginning. In the days following Oracle's announcement of the hostile bid, Ellison appeared on TV and in print saying he planned to stop marketing PeopleSoft's products and would fire thousands of employees. Later, Oracle executives said they planned to support PeopleSoft products for years, but the panic wave had already started.
"I think (Ellison) mishandled it terribly," Shepherd said. Those initial comments "just really poisoned this thing from the beginning."
Mixed with Ellison's bad-guy reputation, the incendiary comments were a lethal blow to the bid, he said. "It allowed PeopleSoft to cast themselves as the nice, friendly, concerned-about-the-customer, wouldn't-hurt-a-bunny kind of company," Shepherd said. "It really became this sort of medieval passion play between two diametrically opposed forces of good and evil, which isn't accurate at all but is a result of the way Larry handled those first few days."