How to Be a Billionaire - a PAC Comment on the Federal Jury Award against SAP

Munich, November 24, 2010: It is official now. SAP has to pay US$ 1.3 billion in damages to its arch rival, Oracle. This makes the acquisition of TomorrowNow in early 2005 another embarrassing episode for SAP at a time when markets had at last begun to forget about the company’s failed third-party maintenance strategy.

It had been clear for a while that SAP had infringed copyright, and SAP actually pleaded guilty to this infringement when its Co-CEO, Bill McDermott, apologized to Oracle. So the dispute then was over how big the damages were. SAP’s original estimate of US$ 40 million was certainly rather naive, which was underlined by the fact that SAP later increased its provisions to US$ 160 million. The jury, on the other hand, discussed damages ranging from at least US $500 million to US$ 3 billion. This raises the question whether SAP was tactically trying to downplay the extent of its guilt in public, or whether it was simply ill-advised.

To Continental Europeans, the sheer amount of damages awarded is disconcerting, the more so as it seems that this amount was determined with a certain degree of arbitrariness, judging by the fact that some members of the jury talked about “agreeing” on US$ 1.3 billion within the range just mentioned. Being an outside observer, this suggests to me that in the course of the lawsuit, neither of the litigants was able to realistically quantify the damage caused. According to the German weekly Handelsblatt, even Oracle’s claim had amounted to “a mere” US$ 1.7 billion. Moreover, when comparing the case “SAP vs. Oracle” with the disputes between Microsoft and the European Union a few years ago, I find this award even more difficult to understand. The case back then was meant to set an example, but the amount of damages Microsoft had to pay in the end is negligible compared to the award against SAP, especially since the disputes between Microsoft and the EU were far more complex. Back then, even the US Department of Justice felt obliged to criticize the level of payments fixed against Microsoft.

What are the consequences of this award for SAP’s clients and partners? In my opinion, it will have little or no impact on the clients, who have been justified in keeping their calm about this lawsuit over the past few weeks. For as long as the amount of damages does not threaten SAP’s existence - which is not the case - there are unlikely to be any negative effects on customers, such as SAP reducing its investment in topics like Timeless Software, BI, or BByD.

From my point of view, SAP’s owners, i.e. its shareholders, will bear the brunt. A few of them are well-off, but many are small shareholders and SAP employees. The latter in particular will feel the consequences of more severe austerity measures that will certainly be taken given the level of damages to be paid.

Last but not the least, the SAP ecosystem, i.e. SAP’s partners, will surely suffer under the effects of this award. The cost-cutting measures SAP can be expected to introduce may also affect some joint projects with partners.

So who is the winner in this case? Larry Ellison has gained over $1 billion. At least in Europe, but also in some US companies, I have noticed that Oracle’s extremely aggressive behavior has not gone down well with a rising number of business partners. Some clients and partners have begun to wonder whether Oracle had not better concentrate on the technological and organizational integration of the numerous acquired companies, where quite a few questions remain unanswered.

SAP has no doubt taken a considerable blow in this lawsuit, regarding its image as well as the size of the award. It remains to be seen whether Oracle has gained anything beyond the US$ 1.3 billion in damages it will receive. I doubt Oracle’s image will profit from this affair.

About Pierre Audoin Consultants (PAC): PAC is a global market research and strategic consulting firm for the Software and IT Services Industry. PAC helps IT vendors, CIOs, consultancies and investment firms by delivering analysis and advice to address a range of growth, technology, financial and operational issues.
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Tobias Ortwein
Senior Vice President, PAC GmbH,
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Christine Nayagam
Head of Marketing & Communication,
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