The U.S. Justice department is taking Oracle Corp. to court to block its hostile takeover of PeopleSoft Inc., on the grounds the merger would result in higher prices and less choice. For industry observers, the trial promises to be both fun and instructive.
Part of the fun will be to see these
companies forced to reveal details of their sales and pricing tactics. Apparently, neither firm wants to see this happen, for reasons one can only speculate.
The trial will be instructive because of what it will show us about the strategic assumptions of a major software player. Oracle claims in its filing that the global software industry will end up being dominated by a handful of major players (IBM, Microsoft, SAP and a few others), and unless the merger is allowed to go through, both Oracle and PeopleSoft — lacking the scale to compete — would disappear. This is a complete misreading of the economics of the software market segments they are in.
In reality, Oracle and PeopleSoft are fighting over what will be a dwindling market share. The ERP market is growing at about five per cent per year, compared to double-digit growth in the run-up to Y2K. The relational database management system market is essentially flat. Consolidation is a natural consequence of a slowdown in market growth in any industry, as shrinking margins and the need to achieve a certain minimum efficient scale of operation drives out the smaller players. Oracle, SAP, Siebel and a number of other large corporate application vendors will, perhaps, be the only ones left standing, but theirs will be a hollow victory.
The reasons are structural and technological. The structural reason is that in the long run “”skimming”” strategies for achieving market dominance (that is, targeting the top end of the market first) always fail. Competitors who target the low end hone their production-distribution systems on high-volume/low-margin sales, and are then much better able to compete at the high end.
The Japanese car manufacturers, initially derided for their funny little cars, are the best example of this effect. The Oracles of this world, having run out of large companies to target, now have to slug it out in the SME market, where the economics of sales, implementation and maintenance are quite different.
The technological reason these companies’ victories will be short-lived is the rapid maturation of Web services. Not so far into the future, the building blocks for an ERP will be available in an open market, just waiting for a Dell-like operation to assemble and sell them, in competition with established vendors. No obvious economies of scale exist for a factory that builds software modules, so this argument for size disappears. The only barriers to entry to the global software industry will be the cost of establishing a trusted brand.
The shift to Web services will also see increased emphasis on business process standards that allow plug-and-play at the level of business objects, and a replay of the closed versus open architecture battle that has been the hallmark of our industry in so many domains. Open always wins, of course, eventually, to the detriment of companies such as Oracle.
The Oracle-PeopleSoft battle — or mating dance as it might be called — can only, therefore, be likened to a couple of dinosaurs ripping away at one another in the primeval swamp, oblivious to their impending fate.