Oracle ruling highlights complexity of market

The U.S. Justice Department's dramatic defeat in the Oracle antitrust trial underscores the unique character of software: It's a fast-paced, dynamic industry that makes a lousy target for trustbusters.

		Special coverage Oracle's day in court The judge has spoken, but see what comes next and how the case unfolded.

In his voluminous ruling, which clears the way for a hostile takeover of PeopleSoft, U.S. District Court Judge Vaughn Walker blasted the Justice Department's attempts to rope off three key players--Oracle, PeopleSoft and SAP--from other suppliers of "enterprise applications software." Such programs help companies perform common tasks such as order taking, staffing and customer service.

In Walker's view, that market is teeming with competitors, would-be rivals and viable alternatives. They include new entrants, such as Microsoft, small but thriving rivals, including Lawson Software, niche specialists, such as Siebel Systems, business systems outsourcing companies, including Automatic Data Processing, and computer services companies offering custom-built programs. He also deemed the market as truly global, making it open to competition from all corners of the world.

That interpretation of the market resonated with many who track and compete in it. They were impressed by what they saw as Walker's sophisticated grasp of the industry.

"The market is incredibly complex," said Christopher Lochhead, chief marketing officer of software maker Mercury Interactive. "You have a lot of custom software development going; there are lots of niche players; and then you have giant question marks about what Microsoft and IBM are going to do."

Mercury doesn't compete directly with Oracle and PeopleSoft but specializes in an adjacent market for software that helps companies tune and monitor their business systems.

Antitrust experts drew parallels to the Microsoft antitrust case and said plaintiffs will face a high bar for challenging software mergers for some time to come. "There's so much opportunity in these markets for substitute products that it's very difficult to show anticompetitive effects," said Hillard Sterling, a lawyer at Freeborn & Peters in Chicago.

"This continues the theme of the Microsoft case and its progeny," Sterling continued. "Judges are reluctant to intervene in these markets; there's too much evidence of competitive forces doing the job."

		Expanded coverage Read the full ruling Judge Vaughn Walker blasts the Justice Department's attempt to derail the PeopleSoft merger.

Observers praised Walker for a ruling they said was well-reasoned and practically appeal-proof. "I think it's one of the most comprehensive and thorough merger decisions ever," said Paul Griffin, an antitrust litigator and partner at Thelen Reid & Priest. "I think it will be difficult to appeal."

Part of what makes Walker's decision so airtight is its attack on the credibility of the government's witnesses. Appellate courts aren't generally allowed to question credibility findings, only errors in the application of the law, lawyers said.

For example, Walker dismissed the testimony of Microsoft Senior Vice President Doug Burgum--a key government witness. Microsoft and its business plans became central to the case after the software giant's secret merger talks with SAP came to light. Oracle argued during the trial that the talks proved Microsoft intended to compete more aggressively in the enterprise applications market. The government trotted out Burgum, who testified about the company's diminished aspirations in the wake of the abandoned SAP negotiations.

Walker didn't buy it, stating in the ruling: "The court accords little weight to Burgum's testimony attempting to prove Microsoft's absence from the so-called high function (business applications) product market. Burgum's Uriah Heep-like humility about Microsoft's intentions regarding the failed SAP alliance and the successful BearingPoint alliance was unconvincing. It strains credulity to believe that Microsoft would offer billions of dollars to acquire SAP merely to make data processing easier for customers who use both Microsoft Office and SAP (software)."

Walker also discounted testimony from the government's impressive lineup of customer witnesses, which included executives from DaimlerChrysler, Pepsi Americas, the Neiman Marcus Group, and Verizon Communications. That was a major blow to the government, considering customer testimony was supposed to be the centerpiece of its case.

He explained why here: "The issue is not what solutions the customer would like or prefer for their data processing needs; the issue is what they could do in the event of an anticompetitive price increase by a postmerger Oracle. Although these witnesses speculated on that subject, their speculation was not backed up by serious analysis that they had themselves performed or evidence they presented...Each testified, with a kind of rote, that they would have no choice but to accept a 10 percent price increase by a merged Oracle/PeopleSoft."

The lack of weight the judge accorded these witnesses came as a surprise to one analyst. "One of the questions all along was to what extent Walker would take into account users' concerns and desires," said AMR Research analyst Jim Shepherd. "I guess I was surprised at how blunt he was that it wasn't pertinent to the legal case."

On a broader level, the Oracle ruling could have a ripple effect across the industry, accelerating consolidation, encouraging bigger mergers and causing companies to re-assess their positions, observers said. "In this game of musical chairs, the music has gone from a waltz to a punk rock concert," Mercury's Lochhead said.

Analysts were divided, however, about whether Oracle's court victory would invite other hostile takeovers. Some said it legitimized such deals, while others said they'd remain a rarity. "People will be very hesitant about launching hostile takeover attempts; it's a very expensive and long process," said AMR's Shepherd. "We haven't seen very many, and we won't see many others."