February 12, 2004
"U.S. Antitrust Policy In Need Of Market-Driven Approach "
Oracle's proposed takeover of PeopleSoft, now being reviewed by the Justice Department, will become either a new chapter in the sorry history of U.S. government antitrust actions or represent a welcome dose of common sense.
It is too soon to say what will happen, but the early returns suggest history is a useful guide.
"One possible problem area, according to DOJ staff, involves the provision of business enterprise software sold to the world's largest companies. The agency is collecting affidavits from companies to support this narrow definition of the market," reported The Daily Deal.
"Staff are concerned the merger would leave only Oracle and Germany's SAP AG as major competitors in this market. The Justice Department rarely permits mergers that leave fewer than three rivals in a given market." Here is the crux of the issue: What is "a market"?
A reasonable definition of the word market is "the world," since nearly every product and service today can be produced or purchased anywhere, and barriers to market entry are low.
However, that type of reasoning has not traditionally been the hallmark of U.S. antitrust policy. PeopleSoft argues that the market is defined as essentially Fortune 1000 companies that purchase enterprise application software for managing financial and personnel systems. And the definition of the suppliers to that market is said to be only three -- Oracle, PeopleSoft and SAP (which would remain longer than a combined Oracle and PeopleSoft.)
While members of the Fortune 1000 or another set of large companies represent a lot of business, they hardly constitute the entire market for these types of purchases.
Yet it's not even true that large companies possess only three options for sophisticated software solutions along the lines of Oracle, PeopleSoft and SAP. At least four other companies also sell software or technology solutions that meet large company needs -- Sage, Lawson, ADP and Global/Baan. These companies sell bundled software packages and services that represent a significant option for large companies.
Lawson, for example, boasts on its Web site that it "has more than 2,200 customers today, including 13% of the Fortune 1000."
One need not even look to future start-ups for competition in this area. A couple of fairly well-known companies -- IBM and Microsoft -- are more than capable of entering this market full force if the opportunity presents itself.
It lacks common sense to believe that either of these highly competitive companies would stay out of a lucrative market that -- theoretically -- became so dominated by a few players that customers possessed no viable options.
In fact, IBM is already a player in the market, serving as a systems integrator that offers lower price software solutions combined with information technology services.
Simply outsourcing certain financial and human resource functions is also a viable option to purchasing the type of software offered by SAP, PeopleSoft and Oracle.
Yet what history tells us is that a lack of imagination or an unwillingness to use one encumbers antitrust enforcement.
In the Standard Oil case of 1911, the U.S. government separated the company into 33 entities not because it raised prices but because a judge decided it had concentrated various parts of the production process under one umbrella. Even before the case was settled, Standard Oil's market share fell from 90% to 60%.
The case of Alcoa Aluminum in 1945 is "equally absurd," noted economist Jim Cox. Alcoa was the dominant producer of primary aluminum in the U.S. Though similar to the Standard Oil case, there is no evidence the company restricted its output or raised prices.
Yet here, too, the decision went against Alcoa.
The two cases bear a similarity to the Oracle-PeopleSoft controversy. Cox points out that in the case of Alcoa, a judge had to restrict the definition of the market to "primary" aluminum, ignoring the competition represented by reprocessed aluminum.
In the Standard Oil case, the judge did not address or take seriously imported oil as a competitive factor.
"In other words, the courts had to first artificially narrow the market in order to find these companies guilty," said Cox.
Richard Rahn, an adjunct scholar at the Cato Institute, has argued that the real problem is too many bureaucrats at the Justice Department.
What's The Answer?
It's not clear that career lawyers are to blame. That's a little like getting mad at wolves for attacking sheep. Career attorneys are not required, nor expected, to "make" policy.
The solution is for political leadership in the administration to adopt a market-friendly approach to antitrust policy. It's time for people in the administration who understand markets to step in and make the right decision.
Stuart Anderson is executive director of the National Foundation for American Policy, an Arlington, Va.-based public policy research organization.