Court case reveals extent of pricing war

Court case reveals extent of pricing war

Oracle’s legal battle highlighted how much vendors will discount prices to secure business. They make double-glazing salesmen look respectable. MIS UK reports

Oracle’s battle royal with the US Department of Justice as to whether it should be allowed to mount a hostile takeover bid for rival PeopleSoft is officially over, but customers testifying in the case are making it clear that it is software pricing practices that are really on trial. Cutting prices

Amid the evidence in the case is fascinating testimony from end users about just how far Oracle and other software vendors are prepared to discount their prices in order to secure business. Officially Oracle insists it has a global price list from which it does not veer, but this is in stark contrast to the evidence from customers in court.

Among the revelations that came out in court were: in chasing a deal with Greyhound Lines last year, Oracle offered 80 per cent off its price for human resources software and support; in 2002, Oracle cut its price by 88 per cent to compete with PeopleSoft for a deal with Merrill Lynch. PeopleSoft also cut $13 million from its list price for Albertsons, a grocery chain.

The battle of bids

Oracle offered discounts of more than 70 per cent to dozens of customers to beat bids by PeopleSoft.

In one instance, it offered to cut $2.5m, or 83 per cent, off the list price of human resource software at test equipment manufacturer Teradyne.

Oracle lowered the price from $3m to $531,000. Teradyne was an Oracle user already, but ran PeopleSoft to manage its HR operations. Teradyne was considering replacing PeopleSoft’s HR software because PeopleSoft was forcing it to upgrade to a new version.

Discounts need to be approved by senior management at Oracle. Some 222 Oracle discount request forms were examined by expert witnesses in the case.

The forms make their discount requests based on multiple criteria, such as whether the deal was for a US customer rather than a non-US one and whether the software licence fee was more than $500,000. Of the 222 discount forms, 122 of them listed PeopleSoft as the reason to offer a discount.

Deep discounts

According to an internal Oracle memo, the salesman in the Teradyne case argued: “I am requesting a relatively deep discount given the level of desperation at [PeopleSoft], and the unnatural acts they are committing in the field.”

In another instance, which involved a bid for business at Hallmark Cards, the discount request reads: “Extremely competitive situation... [PeopleSoft CEO] Craig Conway all over this account with meetings and calls.”

Curtis Wolfe, CIO for the State of North Dakota, testified that Oracle, PeopleSoft and three other vendors offered to sell the state financial and HR management software for $35m to $40m. North Dakota selected PeopleSoft after it lowered its price to $21m and Oracle reduced its bid to $18m.

Meanwhile PeopleSoft was prepared to approve discounts of up to 55 per cent off list price to win business from Oracle. Such discounting was deployed with several US customers, including Target, Cardinal Health System and Carefirst, in order to fend off competition from rivals. In the CareFirst deal, PeopleSoft approved a 55 per cent discount and was seemingly ready to consider a 65 per cent discount if that is what it took to win the business.

Competition worries

DaimlerChrysler is among the companies to have wrung major discounts from its vendors by playing one off against the other, admitted Michael Gorriz, DaimlerChrysler vice-president of IT business systems, who added that he was worried that fewer vendors in the market would reduce his negotiating clout with the surviving firms.

If the Oracle-PeopleSoft buyout goes through, DaimlerChrysler would likely be cut off from long-term maintenance upgrades for its existing PeopleSoft applications and would likely have to pay hefty prices if it decided to switch to SAP as a defensive measure, he suggested. “I would be concerned about price level and innovation,’’ he added.

The message to users is clear: haggle hard, play the field and let the potential bidders for your business slit their own throats when cutting you a good deal.

“There’s so much price discrimination in this market. [Customers should] recognise that price discrimination is an operating tool used in this market,” said economist Kenneth Elzinga of the University of Virginia.

“What is driving the discounts – where salespeople are saying ‘I need to be more aggressive on price to get the account’ – is not midmarket, it is not legacy systems, not in-house systems, it’s not outsourcers, but fierce competition.”

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