Antitrust Dogs Turn on Oracle

Published March 1, 2004

It was only a couple of years ago that Oracle was leading the dogs of antitrust in hot pursuit of Bill Gates and Microsoft. How things have changed. Somewhere along the way, the pups got loose. Oracle itself may feel the antitrust bite.

The issue is Oracle’s efforts to acquire PeopleSoft, a competing supplier of enterprise application software. Last June, Oracle put in a $5.1 billion bid for the company (since rising to $9.4 billion at the time this was written). The PeopleSoft board rejected the offer, setting off a classic takeover battle. The storyline was a familiar one: a large, octopus-like software company versus a plucky rival fighting to survive.

A climatic PeopleSoft shareholder meeting is set for March, at which Oracle’s offer will be voted on. But the deal must also get past a pack of antitrust authorities, with state, federal, European, and even Canadian regulators investigating the acquisition. Except for Connecticut, none has filed suit yet, but things don’t look good for Oracle. News reports say the U.S. Justice Department is preparing to file a case.

To make that case, U.S. authorities must show that the merger would lessen competition in the market. But what exactly is the market here? The bulk of Oracle’s business is in databases, but PeopleSoft doesn’t play in that field. The two do, however, go head-to-head in a lower-profile market known as “ERP,” “enterprise resource planning.” This is the provision of software to help businesses with such things as inventory, customer service, and human resources.

As it turns out, neither Oracle nor PeopleSoft is dominant in the ERP market. The leader is a German firm, SAP, which by one measure has 25 percent of that market. Oracle and PeopleSoft have around 7 percent each. Rather than reduce competition, combining the latter two could actually increase competition to SAP (a point European regulators will not likely miss).

To get around this, merger critics have proposed a bit of market definition gerrymandering. Instead of one ERP market, individual markets would be defined for inventory software, human resource software, and such. Then, looking specifically at parts of those markets serving the largest firms–those in the Fortune 1000–Oracle and PeopleSoft look dominant.

It seems pretty unlikely, though, that such an artificially defined market would tell you anything about competition. After all, ERP sub-markets such as finance or inventory involve similar expertise and resources. Dominating one may not mean much since providers in one can fairly easily offer others.

At the same time, the customers in this market are by its own definition the very largest in the country. We’re talking General Electric and General Motors: hardly firms likely to be pushed around.

However the market is defined, it is unlikely competition will be threatened. For one thing, the whole business of selling enterprise software is being challenged. Companies such as are providing businesses with on-line services instead of software. Other companies simply provide the services on an outsource basis.

There is also an elephant in the living room that’s been overlooked: Microsoft. Microsoft has announced plans to pour billions into enterprise application software. So customers may witness a head-to-head battle between Microsoft and Oracle. Rather than diminished, the competition promises to be intense.

Nevertheless, the PeopleSoft acquisition may still be stopped by antitrust regulators. Some might not feel too sorry for Oracle, as it helped set the antitrust hounds loose in its battle with Microsoft. But the real losers would be consumers, who would enjoy a slightly less efficient, slightly less vibrant, software industry.

James Gattuso ([email protected]) is research fellow in regulatory policy at The Heritage Foundation, a Washington DC-based nonprofit research organization. This essay was originally distributed by the Competitive Enterprise Institute on February 6, 2004.