SAP admits wrongdoing in Oracle lawsuit

SAP filed its response to Oracle's complaint last night, admitting that its TomorrowNow subsidiary engaged in some inappropriate downloads of Oracle intellectual property.

SAP reasserts the rights of its TN unit to download materials on behalf of Oracle customers who have the rights to those materials. It points out that "Oracle’s complaint does not challenge the basic propriety of third party support, nor do its factual allegations support the inflammatory statements" of Oracle's complaint.

At the same time, SAP claimed that the Oracle materials did not leave TN's internal systems, which are separate from the rest of SAP's network. SAP's response says,

Upon acquiring TN, SAP AG and SAP America put in place extensive policies to assure that no allegedly confidential material of Oracle obtained by TN on behalf of its customers would reach SAP AG or SAP America. Defendants are unaware of any breach of these policies, and believe that none has occurred.

It continues,

Oracle’s allegation that TN’s downloading conduct was “corporate theft” or involved SAP AG or SAP America is simply untrue.

SAP also announced that it is installing a new head over its TN unit. Former SAP Americas COO Mark White will now oversee TN, with founder and CEO Andrew Nelson reporting to White.

I think SAP is smart to admit any wrongdoing at this point. Any such activities would eventually be exposed anyway during Oracle's discovery process, leading to a drip by drip release of negative information about SAP. At this point, the issue would is to what extent TN or SAP benefited from the downloaded materials and what damages should be awarded.

SAP takes its turn at throwing punches at Oracle:

Oracle professes surprise and confusion about how TN can provide services more cost-effectively than Oracle. The answer is simple – TN does not force its service customers to pay artificially inflated prices for service to fund Oracle’s future acquisition and integration of products that customers do not want or need.

Of course, SAP does not mention that its own maintenance fees for customers of SAP software are pretty much in line with Oracle's. So, SAP should be careful about continuing this line of reasoning.

More seriously, in my opinion, SAP indicated that the U.S. Department of Justice is investigating SAP and TN. I speculated earlier that this lawsuit could lead to criminal charges against SAP, TN, or individuals implicated in the illicit activities.

SAP's response to Oracle's complaint is available here. SAP has also issued a press release on this matter.

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Oracle's Q4 beats estimates

It looks like I was wrong.

When Oracle exceeded Wall Street expectations at the end of its third quarter, I speculated that Oracle might have done so by draining its sales pipeline for Q4. I based that on word I had heard of some extremely generous discounts that Oracle was granting to prospects that signed by the end of Q3. Such a move would deliver superior results for Q3 but risked pulling in sales that might have otherwise closed in Q4.

At the time I wrote that readers should check back in three months to see if I was right. Well, now it's three months later and Oracle has announced Q4 new license sales that are 17% higher than the same quarter last year. That's well above Oracle's forecast of a 5-15% increase. Revenue overall rose 20%, and net profit jumped 23%. Impressive results all around.

So, what's going on? Catz attributed Oracle's success to execution, which is no doubt true. But it also confirms Oracle's strategy, in which it has been able to integrate a string of software acquisitions into its operations without losing customers. It also is showing momentum against its chief rival, SAP--a fact which it continues to promote on its website.

Oracle is now forecasting a whopping 20-30% increase in new license sales in its for its first quarter, which would include revenues from new acquisitions Hyperion and Agile Software.

The Wall Street Journal has more on Oracle's Q4 results.

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Malware damages fall to $13.3 billion annually

Over at Computer Economics, we've just released our latest annual Malware Report. Included in the report, is our estimate of annual worldwide direct cost to business of malware attacks, where we report that such damages fell to $13.3 billion last year, from $14.2 billion in 2005.

We attribute the drop in direct cost damages to two factors, one good, one bad.

• The good factor is that, in our estimation, the antivirus vendors do a pretty good job of thwarting malware attacks before they can become the massive worldwide storms that organizations experience in previous years. It's been some time since we've seen an attack like the Love Bug in 2000, or even MyDoom, Netsky, or Sasser in 2004.

• The bad factor is that much of the drop in direct damages has to do with the changing nature of malware. Malware authors these days aren't writing viruses, worms, and trojans primarily to cause damage, but to make money. To make money, you don't damage the host computer--you keep it running to serve as a spam proxy, or to perpetuate click-fraud, or to steal confidential information, for example.

Therefore, direct cost damages may be declining but indirect and secondary damages are increasing. Follow the links below for further discussion of the implications of this point.

The full report, entitled, 2007 Malware Report: The Economic Impact of Viruses, Spyware, Adware, Botnets, and Other Malicious Code analyzes the cost of malware at the worldwide, organization, and event level.

An extended description of the report is available, as well as a more complete excerpt, on the Computer Economics website.

Oracle now charges SAP with copyright violation

Right on schedule, Oracle has amended its complaint against SAP and its third-party support unit, TomorrowNow (TN). (You can read the background on this case in my original post on the subject, and also developments prior to today in my post earlier this week.)

In its amended complaint, Oracle is adding copyright violation to its previous charges of theft of intellectual property. At the time of the original filing, Oracle had not registered the copyright for many of the support materials. It has since done so and is now suing for additional damages under U.S. copyright law.

In its amended filing, Oracle gives one interesting example of TN's copyright violations.

86. The DST Solution. In at least one instance, SAP TN has also, publicly displayed, distributed, and thereby profited from Oracle’s copyrighted Software and Support Materials. In December 2006, Oracle developed a knowledge solution related to the recent early change to Daylight Savings Time (the “DST Solution”). The DST Solution is a narrative document with specific instructions for how to conform certain Oracle software to the new Daylight Savings Time change. Oracle fielded more than a thousand service requests from its customers related to the Daylight Savings Time change, and its DST Solution helped resolve more than 750 of them.

87. Oracle traced downloads of the DST Solution to SAP TN’s IP address on January 8, 2007 and January 15, 2007. Oracle also noticed that SAP TN posted a “PeopleSoft Daylight Savings Time solution” on its website. SAP TN’s “solution” is substantially similar in total–and in large part appears to be copied identically from–Oracle’s DST Solution. SAP TN’s copied version even includes minor errors in the original DST Solution that Oracle later corrected. SAP TN’s version also substitutes an SAP TN logo in place of the original Oracle logo and copyright notice.

88. Oracle has registered the downloaded version of its DST Solution that SAP TN copied and created derivative works from, and later distributed and publicly displayed, as well as a later version that SAP TN also downloaded shortly before Oracle filed its original Complaint, Registration Nos. TX 6-541-019 and TX 6-541-018. No customer is licensed to create derivative works from, distribute or publicly display Oracle’s Software and Support Materials, and neither is SAP.

If this case involved anyone other than SAP, it is likely that upon discovering this activity, Oracle would have notified the offending party to cease-and-desist.

As I noted previously, Oracle's earlier allegations of excessive and improper downloads might be explained by a TN consultant simply trying to work efficiently, using a single customer's user credentials to download materials for multiple customers.

The copyright infringement allegation, though, is harder to explain--essentially republishing an Oracle document, including errors, with an SAP logo. If true, TN has really handed Oracle a big club to use against SAP.

SAP denies any wrongdoing and promises to vigorously defend itself. It has until July 2 to respond.

Oracle has a special SAP lawsuit webpage with all related documents.

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Latest on the Oracle/SAP lawsuit

It's time for an update on Oracle's lawsuit against SAP alleging theft of intellectual property by SAP's TomorrowNow unit, which provides third-party support for some Oracle products.
Here's the latest:

1. On April 30, Oracle asked for a court order to force SAP to preserve electronic records that Oracle might want as evidence. In its filing, Oracle complained that SAP has not responded to a proposed "stipulation order" concerning such records, such as server logs. (As a side note, this is a good example of how new federal eDiscovery rules are coming into play in litigation.)
   
   
2. On May 9, the judge in the case resigned after finding herself disqualified and requested that the case be reassigned to a different judge. She did not give a reason for her resignation. The news means that a trial will be delayed, however. Her filing noted that "all pending dates of motions, pretrial conferences and trial are hereby vacated and are to be reset by the newly assigned judge."
   
   
3. On May 10, SAP CEO Henning Kagermann said in a speech to shareholders that SAP would put up a "massive fight against the accusations" that Oracle has made. "SAP respects the protection of intellectual property," he said. "At the moment we are investigating every single claim in the lawsuit and composing the defense that we will file with the court."
   
   He also positioned the lawsuit as an attempt to kill the third-party Oracle support business. "Even if Oracle portrays it differently in its petition, we believe what this is about is an attempt to make it more difficult for third parties to provide service and support for Oracle software," he said.
   
   
4. One week later, Oracle and SAP agreed to extend the deadline to June 1 for Oracle to file an amended complaint, with SAP's response now pushed back to July 2.
   
   
5. Then, yesterday, TomorrowNow CEO Andrew Nelson began to speak up, not so much about the lawsuit directly, but about the value of his firm's services relative to Oracle's. In an interview with CNET's silicon.com, he questioned the value to customers of paying maintenance fees so Oracle could invest in future products, such as Fusion. He said,
   

   Oracle customers no longer value pre-funding a Fusion application that they no longer understand, that's uncertain to them and that they're not sure they will ever use.
   
   Oracle has to respond to that. The challenges they've created through their M&A strategy... they've really dug a hole for themselves.

In the meantime, TomorrowNow continues to sell new business, though it's not clear how much of it is for Oracle support. Last week it announced that it expects to sell support contracts for 10 clients of Baan (now Infor's ERP ln).

Not to be left out of the action, TomorrowNow competitor Rimini Street sends word that it has picked up a new deal to support a Siebel implementation at medical products manufacturer Beekley Corporation. Rimini Street claims a savings for Beekley of 50% in support costs, while stabilizing the system and improving Beekley's service to its customers.

Expect more news next week when Oracle amends its complaint, and then July 2 when SAP is due to respond.

Update, Jun. 2: Oracle has amended its complaint to include copyright infringement. Read more in my post for June 2.

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More on Microsoft's attempted patent shakedown of open source users

There's a good overview on the battle between Microsoft and open source developers/users/distributors--of all places, on CNN's Money website. The lengthy article goes into the history of software patents, an overview of open source licenses, a biopic on Richard Stallman, the father of the GPL open source license, and the latest chess moves in the Microsoft/Novell agreement regarding Linux.

The good news is that the U.S. Supreme Court recently raised the bar for the types of patents that Microsoft is using to threaten open source. The bad news is that large corporate customers of open source are more likely to be cowed by the threat of lawsuits than they are to fight Microsoft's shake-down attempts on principle.

Read more on the CNNMoney.com website.

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The coming wave of IT staff retirements

Over at Computer Economics we've just published a special report on the soon-to-be-felt impact of baby-boomer retirements on IT organizations.

From the abstract:

As the baby-boomer generation ages, a growing number of senior IT professionals are nearing retirement, and many organizations have not fully prepared for the loss of so many leaders and experienced technical staff members.

Furthermore, as younger IT staff replace older workers, the demographics within the typical IT shop are changing, leading to a number of "generational issues" (differences between generations in their skills, culture, and experience) that will need to be addressed.

This special report, based on our survey of over 150 organizations, documents the extent of these problems by size of organization, highlights the various strategies that IT groups are taking to deal with them, and provides practical recommendations for IT executives to prepare for the coming generational transition of the IT workforce.

This issue might not have the doomsday sounds of Y2K, but it might have a greater long-term impact. For many organizations, loss of knowledgeable staff might be the tipping point for finally replacing many of those legacy systems.

An executive summary of the report is here.

Google and Saleforce.com to team against Microsoft?

The Wall Street Journal this morning is reporting that talks are underway between Google and Salesforce.com concerning a partnership. The goal is to combine Google's email, instant messaging, and other online services with Salesforce.com's applications, effectively providing an alternative to Microsoft's desktop and business applications.

By teaming up, Google and Salesforce.com could be better equipped to contend with Microsoft, a mutual rival. Google has long competed with Microsoft in areas such as search and email. More recently, Google began offering online word-processing, spreadsheet and calendar services for consumers and businesses -- Web-based applications known as Google Apps -- that offer an alternative to Microsoft's productivity software.

Salesforce.com also competes with Microsoft's customer-relationship management software. Microsoft plans to offer a Web-based version of that software that could compete more directly with Salesforce.com.

I say, why stop there? Google should acquire Salesforce.com outright. That would put Google's best-in-class scalable infrastructure underneath Salesforce.com's best-in-class software-as-a-service (SaaS) platform. It would catapult Salesforce.com's position as a provider of enterprise applications to small and mid-size businesses, leapfrogging Microsoft's nascent attempts in this area.

A Google buyout of Salesforce.com? I think it's a real possibility.

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Oracle bolsters its PLM-credibility by acquiring Agile

Oracle has made a big move into product lifecycle management (PLM), with its announcement today that it is acquiring Agile Software, one of the leading niche vendors in this space. It's an all cash deal, for $8.10 per share, or nearly $500 million.

Agile's software has been well-regarded as a solution for centralizing and managing product information. In a nutshell, Agile creates a central respository for all sorts of product information, such as specifications and drawings--information that in most organzations resides in a variety of paper and electronic files, scattered in various departments. Agile creates one system of record for all such information, making it easy to access and maintain by anyone with rights to see it or change it.

PLM systems are not easy to implement. There are many cultural obstacles to getting these various departments to standardize and normalize naming conventions and specification data. There are also countless debates about who "owns" what information. But organizations that implement successfully realize huge benefits, such as faster new product development, rapid engineering change, higher product quality, and reduced cost of service. Companies using Agile's products include Acer, Flextronics, GE Medical Systems, Harris, Heinz, Johnson & Johnson, Lockheed Martin, McDonald's, Micron, QUALCOMM, Shell, and ZF.

Agile's financial performance hasn't been as successful as its product concept. Agile rode high in the late 90's as part of the Internet boom, as Agile's products provided a platform for customers and suppliers to collaborate on product development over the Internet. Its stock price exceeded $100 per share briefly at the end of 2000, before starting a decline that saw it under $6 in late 2002--the result of the dot-com collapse. It's bounced around between $6 and $10 since then. It hasn't been helped by finding itself in trouble recently over its misstatement of employee stock options, forcing it to take a charge of nearly $70 million in accounting adjustments. It's combined losses since 2001 have exceeded $140 million.

Agile's failure as a niche vendor underlines the fact that PLM is an enterprise solution, and to be most successful it ought to be part of an intergrated enterprise suite of products. So, hopefully, its acquisition by Oracle will help it to become more successful in the future.

On the other hand, Agile really bolsters Oracle's credibility on the engineering side of the customer's house. I've evaluated Oracle's E-Business Suite in the past on behalf of an engineering-centric organization, and although Oracle was making progress in PLM, there was an awful lot of functionality that was only promised in future releases. It wasn't even close in terms of the functionality offered by Baan (now Infor's ERPln) The addition of Agile to Oracle's portfolio should solve that problem quickly.

For more details on the deal, see Oracle's press release as well as a special page on Agile's website.

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No such thing as a mid-market company

Josh Greenbaum thinks that enterprise software vendors are mistaken when they try to segment buyers according to size. According to Josh, the requirements of software buyers do not vary significantly according to the size of the company. Rather, they are driven primarily according to the organization's view of technology.

Here's my simple market taxonomy, which I believe pretty much spells out the death of the mythical mid-market company.

Market segment #1 consists of buyers for whom IT is a utility, much like electricity and water, that is a basic commodity but has little if any role in defining strategic advantage. IT keeps the lights on, but it is really secondary to the task at hand.

Market segment #2 consists of buyers for whom IT is a major strategic differentiator, one of the things that drives competitiveness and supports innovation. These buyers also use IT to keep the lights on, but the real reason they buy technology is to deploy it at the cutting edges of their industry.

I think Josh is on to something. Nearly all enterprise software vendors segment the market according to size. The reason: it's easy. Deciding whether a lead should be assigned to the direct sales force or to a reseller is simple--just see how large the organization is, either by annual sales or number of employees.

Likewise, business planning is straightforward. How large is the addressable market in a certain territory? Simply count the number of firms in each size category and SIC code. Furthermore, because most vendors price software according to the size of the company (i.e. the number of employees, or number of users), forecasting average selling price in each market segment is a simple calculation.

Carrying the scheme further, vendors often target their product offerings according to the size of the buyer. For large companies, they may sell a full-featured product (e.g. mySAP, or Oracle E-Business Suite). For the so-called mid-market, they may sell a completely different product (e.g. Oracle's J.D. Edwards). Or, they may pre-configure the big-company product into one or more mid-market versions that supposedly represent typical mid-market requirements (both Oracle and SAP utilize this approach as well). The problem is that, invariably, the buyer always seems to need one or two features that are not in mid-market product or the pre-configured template.

As with most sales and marketing issues, the problem is that vendors do not look at the market from the buyer's perspective. Companies do not generally go looking for a "mid-market solution." When they say they do, what they really mean is that they want the mid-market price and ease-of-use. But their primary driver is to find a product that meets their requirements. This leads to all sorts of interesting stories, such as having to convince the vendor that a so-called mid-market company is actually a good fit for the vendor's big company product, or vice-versa. I always find it amusing when I have to sell a prospect to the vendor.

Fortunately, most vendors have a few grey-haired sales types that "get it," in spite of what the program dictates. Finding those individuals is the key.

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