Economics Professor Warns Of U.S. Monopoly If Oracle Acquires PeopleSoft

The only players in the high-functionality enterprise software market are Oracle, PeopleSoft and SAP, University of Virginia professor economics Kenneth Elzinga testified Friday at the Oracle antitrust trial. And based on SAP's lack of influence on U.S. pricing due to its varying global pricing structure, he added, the only real players in the U.S. market are Oracle and PeopleSoft. Elzinga, testifying as a witness for the Justice Department, said an Oracle-PeopleSoft merger would result in a monopoly in the United States. He held to that contention during cross-examination Friday afternoon, when Oracle attorney Daniel Wall tried to shoot holes in his testimony by casting doubt over his research methodology, questioning his credibility, and accusing him of not keeping up with the witness testimony to confirm whether statements were consistent with his research.

Elzinga was questioned on why he narrowed his economic research of the ramifications of an Oracle-PeopleSoft merger to the United States only and didn't include global markets. "How do the buyers based in the U.S. differ from those not based in the U.S.?'' Wall asked, indicating that when looked at from a global perspective, there are more than three players in the ERP market beyond Oracle, PeopleSoft, and SAP. But despite being asked that question several times in different forms, Elzinga held firm on his reasoning for studying the United States market only, stating that he sees it as a place that can become monopolized. "If Oracle, PeopleSoft, and SAP were to merge and they sold in the U.S., they would be able to extract from monopoly ranks to the customers in the U.S., and anything happening in Europe or Australia would not undercut that,'' he said, meaning the second-tier players elsewhere would not offset the effects of a monopoly. Wall displayed on screens throughout the courtroom a number of documents provided by IDC that showed worldwide ERP application revenue by top 10 vendors and didn't always show Oracle, SAP, and PeopleSoft as being the top players. One document showed SAP as having 20% market share, PeopleSoft with 7%, Oracle with 5.5%, and Microsoft with 2.6%. Wall displayed another IDC table showing worldwide human-resources management and payroll-processing applications license revenue, listing SAP as having 11.86%, PeopleSoft with 11.29%, Automatic Data Processing with 8.56%, and Kronos with 4.21%, with Oracle trailing behind. "Sure, if you see enough of these documents, whatever is the metric, SAP will come out as No. 1,'' Elzinga said. He called the IDC documents a "`slicing and dicing" of third-party sales figures that might represent slices of sales, but don't necessarily represent correct market share. He remained unflustered during his three hours and 15 minutes of cross-examination, following about three hours on the stand with the government. Wall also attacked Elzinga's credibility, making reference to a number of economic methods used to determine monopolistic characteristics that Elzinga neglected to include. He established that Elzinga didn't conduct a critical loss analysis"a price discrimination methodology, nor did he calculate an own-price elasticity, nor did he conduct any interviews pertaining to this case.

The soft-spoken professor's morning testimony in behalf of the government often played out like an economics lecture in the U.S. District Court in San Francisco and was based on research from Gartner and the Big Five consulting firms, as well as his analysis of Oracle and PeopleSoft documents.

"What's driving the discounts for Oracle--where salespeople are saying 'I need to be more aggressive on price to get the account'--it's not midmarket, it's not legacy systems, not in-house systems, it's not outsourcers,'' but fierce competition from PeopleSoft and SAP, he said. Elzinga was referring to the tabulation of discount approval form, an internal Oracle sales document, which showed that overwhelmingly, forms were filled out when PeopleSoft and SAP were named as justification for discounts.

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"There's so much price discrimination in this market. Think about the implementations of this merger, and recognize that price discrimination is an operating (tool) used in this market, and see how often these two firms are in head-to-head competition," he said. "Economics teaches us that based on the inverse elasticity rule, customers not price-sensitive will pay higher prices facing only two alternatives rather than three."

Elzinga cited Gartner research that showed Oracle, PeopleSoft, and SAP as the only companies offering high-functional and highly scalable enterprise software to upper-market customers, with second-tier players offering solutions only a fraction of the time.

He went on to downplay the importance of SAP's importance in the market, supporting the Justice Department's case that Oracle and SAP are the only players. "You can't go to SAP and get into a bidding match (referencing prices being charged from one country to another). Prices are not affected by prices charged (by SAP) outside the United States or inside the U.S. For those reasons, I see the United States as a geographic market that's capable of being monopolized,'' if Oracle were the only U.S.-based vendor, he said.

As the Justice Department delivers its final punches to Oracle, which is looking to buy PeopleSoft in a hostile takeover, a government attorney told InformationWeek she feels confident the government has presented a solid case.

Renata Hesse said the core points made by the government haven't been effectively rebutted by Oracle's defense. In regards to the PeopleSoft internal memo Oracle introduced into evidence on Thursday, in which a PeopleSoft product manager said she felt very fearful that Microsoft was entering its ERP space, Hesse said, "There's not much significance at all.

"What this (PeopleSoft) person was trying to do was pay attention to the midmarket and make sure she (secured) some funding" in her product area, Hesse said. She added that the product manager writing the 2-year-old memo was also trying to encourage PeopleSoft to buy another midmarket company, which it did last year when it acquired J.D. Edwards.

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