Oracle Files Suit Against SAP
When Oracle (ORCL) reported knockout fiscal third-quarter results, Chief Executive Larry Ellison took relish in contrasting his company's growth with that of archrival SAP (SAP). "We're gaining on them consistently and rapidly," Ellison told analysts on Mar. 20. But SAP has an ace in the hole when it comes to battling Oracle for market share. The German company collects revenue for providing support for products used by almost 500 of Oracle's own customers.
SAP is using that card to cheat, Oracle says. The company made the allegation in a lawsuit filed in federal court on Mar. 22 that claims SAP unlawfully used Oracle's property, computer files stored on a technical support system, to build its business for supporting products sold by companies now within Oracle's fold. SAP executives in Germany and the U.S. orchestrated the "download scheme" to unfairly compete and "artificially inflate its market share," Oracle alleges.
Alleged Posing as Customers
According to the suit, filed in U.S. Federal District Court in the Northern District of California, employees at SAP logged on to Oracle's system by posing as customers at companies including Honeywell International (HON) and Merck (MRK) and illegally downloaded thousands of files. In some instances, the employees used "phony" e-mail addresses and fabricated credentials, according to the suit. By compiling a library of more than 10,000 files, SAP gained intelligence it could use to convert Oracle customers to its own products, and may also have improved its software using information gleaned from Oracle's support documents, the suit says. Oracle names names, charging SAP employee Wade Walden with conducting many of the downloads. It also alleges that SAP America President and CEO Bill McDermott sanctioned the moves by publicly vowing to poach Oracle customers.
SAP spokesman Richard Knowles confirmed that Walden is an employee of SAP's TomorrowNow subsidiary in Bryan, Tex., but declined to comment on the allegations. Knowles says Oracle likely pulled McDermott's comments from "press clippings" and declined to make him available for comment. "There's no reason for him to be commenting on something that's alleged," Knowles says.
TomorrowNow was acquired by SAP in January, 2005, and sells tech support for products sold by PeopleSoft, J.D. Edwards, and Siebel, all of which have been acquired by Oracle in recent years. It sells those contracts at half the price charged by Oracle and has thrived under SAP's ownership, having signed up 485 customers for such deals and more than doubling the number of accounts in 2006 (see BusinessWeek.com, 10/24/05, "SAP's End Run Around Oracle"). That means SAP—not Oracle—collects "maintenance" revenues for tasks such as repairing software bugs and keeping human-resources software up to date with the latest tax laws.
Rich Revenue Streams
Oracle, SAP, and other large software companies typically classify revenue from software sales in two categories: fees from ongoing maintenance and sales of new licenses. In Oracle's case, maintenance contracts accounted for $2.1 billion, or almost half, of the third-quarter total. And whereas Oracle typically charges 22% of a product's license price for annual maintenance, SAP was offering the service for 11% of the license cost.
The competition threatens an important revenue stream as Oracle tries to keep hold of accounts already sold by acquired companies while it develops a new family of products that combine aspects of software from several of those companies. "Oracle is starting to feel the hurt of having TomorrowNow take its customers off its hands," says Joshua Greenbaum, principal at Enterprise Applications Consulting. "They cannot fund their business without that 22%."
Greenbaum says SAP took pains to prevent unauthorized access to Oracle property, physically separating TomorrowNow employees from other workers. "There's always been the intention by SAP and TomorrowNow to avoid exactly this type of situation," he says. "Everybody at SAP and TomorrowNow always believed that Oracle would be watching for this kind of activity. So it kind of beggars belief to think that anyone would be stupid enough to go ahead and actually do it."
Following the Trail
Oracle says that's precisely what happened. It alleges that an SAP staffer logged onto Oracle's tech support system by posing as a Honeywell employee in January, then downloaded more than 7,000 support files in less than two weeks—most of them in four days. In late 2006, users purporting to work for J.D. Edwards customer Merck accessed Oracle's system to download more than 9,000 files—more than 5,000 of which didn't relate to software Merck had licensed. Oracle says it traced the downloads to SAP computers using Internet Protocol addresses, and adds that illegal downloads occurred on behalf of companies including Bear Stearns (BSC), Caterpillar (CAT), and Smithfield Foods (SFD). Oracle declined to comment on the suit.
As the case proceeds, a key question will likely be whether TomorrowNow employees acted legally on behalf of customers by downloading the files. TomorrowNow typically recommends that new customers download all of the bug-fixes and other software updates they're entitled to, whether they intend to use them or not, Greenbaum says. But Oracle says SAP's activities fall outside those contractual bounds, alleging that users downloaded files after contracts had ended, and for products they hadn't licensed. Steve Bauer, a spokesman for SAP, says a main issue is whether the tech support materials were downloaded by an SAP employee or a customer. "That's at the crux of this," he says. He declined to elaborate.
SAP is the No. 1 supplier of corporate software used for managing inventory, payroll, and manufacturing schedules, but Oracle is gaining share amid an acquisition spree (see BusinessWeek.com, 3/21/07, "Oracle: Beating Indigestion"). It's now looking to take some ground through the legal arena as well.