SAP Could be ‘In a World of Trouble’

Analysis: The lawsuit that Oracle  filed against its rival in the enterprise software market yesterday is going to get even worse. When all is said and done, SAP’s  conduct, if proved true, could cost it hundreds of millions of dollars in penalties, untold points of market share and even, perhaps, jail time for some executives.

In the complaint, Oracle said it plans to
register thousands of new copyright claims for its software and then “amend
its Complaint to add further copyright allegations and causes of action when
the registrations for these copyrights” are granted by the United States
Copyright Office.

Oracle alleged that SAP engaged in “corporate theft on a grand scale” by engaging in “systematic, illegal access to –- and taking from –- Oracle’s computerized customer support systems.”

The lawsuit alleges that TomorrowNow (TN), an SAP subsidiary that provides
maintenance and support for Oracle-owned PeopleSoft and J.D. Edwards
products, gained access to Oracle’s knowledge bases in November and December
2006 and January 2007. SAP acquired
TomorrowNow in January 2005.

The complaint details how SAP TN employees accessed the database by using
current and expiring Oracle customer user names and passwords, specifically naming companies, such as Honeywell.

Eric Goldman, director of the High Tech Law Institute at the Santa Clara
University School of Law, said that if allegations in the complaint are
true, “then SAP is in a world of trouble.”

According to Goldman, by law, each instance of copyright infringement costs
the guilty party $150,000; Oracle has claimed that there are 10,000 such
instances, but even if it can only prove 500 instances, that still amounts
to $75 million.

And that’s only the beginning. If found guilty, SAP would not only have to
disgorge all of its “ill-gotten gains,” but reimburse Oracle for its losses.

Given the extent of these claims, if true, the U.S. Department of Justice
could step in as well and begin criminal proceedings. In a similar case, between Cadence and Avant, executives at Avant acknowledged they
were guilty of stealing source code that belonged to Cadence and faced
criminal penalties.

Competition in enterprise software may well be fierce, but “there are rules
of competition,” said Goldman. “When those rules are broken, it can cost
hundreds of millions of dollars and in the most egregious case can result in
people going to jail. This is not your garden-variety lawsuit between
competitors.”

SAP will have to respond to the complaint, probably within a month, with
either an answer or a procedural motion, such as a motion to dismiss. If SAP
decides to defend itself vigorously, Goldman said that it may take years for
this case to wind its way through the courts.

In a statement released this afternoon, SAP said it “will aggressively
defend against the claims made by Oracle in the lawsuit.”

And that may be exactly what Oracle is hoping for.

SAP’s reputation on the line

Not that there’s ever a good time to be sued, but the timing of
this one against SAP could be quite damaging.

First of all, it comes at the end of the quarter, when most
enterprise software companies are trying to wrap up big deals so they can
make their numbers for Wall Street. And second, as long as it lingers, the suit against SAP will result in significant “damage for SAP’s reputation,” according to Raimo Lenschow, who covers SAP for Merrill Lynch in Germany.

Other analysts say that Oracle hopes the suit will convince customers that SAP can’t be trusted with their business. Martin Schneider, a senior analyst with the 451Group, said that Oracle is “doing its best to paint SAP in a negative light.”

And according to Goldman, the very language of the lawsuit reads as much as a
marketing document as a legal one. “There is no doubt in my mind that the document is intended to be circulated to potential and current SAP customers,” he said.

Goldman pointed to several instances in the complaint, such as where Oracle
refers to its “broader, deeper product line,” showing that Oracle intends to
use this case to seed doubt in the minds of SAP’s current and potential
customers.


The stakes are clearly high for Oracle, which derives almost half its
revenues from support. With gross margins of between 85 percent and 90 percent,
“support is a very valuable recurring revenue stream for Oracle,” wrote
U.S.-based Merrill Lynch analyst Kash Rangan.


No wonder then that Oracle has struck against SAP TN, which was trying to
lure PeopleSoft and J.D. Edwards customers away from Oracle with its “Safe
Passage” migration program. “It makes sense that Oracle is simply defending
against a company looking to undercut a major revenue stream by offering
half-rate support,” noted Schneider.

Goldman noted that Oracle may have done the math and decided that a
protracted lawsuit might be a cheaper way of defending its market share than
by matching SAP TN on a dollar-for-dollar basis. “This looks as much about
pricing and market share as winning the legal battle, although Oracle may
expect to do both,” he said.

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