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By Alorie Gilbert, 8 June 2004 07:55

NEWS Oracle attorneys made a forceful effort to blast holes in the government's case to block its $7.7bn bid to buy PeopleSoft in the opening arguments of a federal antitrust trial in San Francisco on Monday.

Oracle attorney Dan Wall dropped a bombshell on the opening day of the closely watched trial, claiming that its hostile bid for PeopleSoft triggered Microsoft to enter merger talks last year with German software maker SAP, an Oracle rival.

The revelation, which Microsoft had announced earlier in the day, could prove critical to the case. The US Justice Department, which seeks to block Oracle's proposed buyout, has disregarded Microsoft as a competitive factor in the market in which PeopleSoft and Oracle compete.

The Justice Department argues that a PeopleSoft buyout would leave just two suppliers of software that very large companies use to organize their finances, human resources and other corporate activities - Oracle and SAP. By removing PeopleSoft from the equation, the two remaining players could hike prices, the agency argues.

In his opening remarks, Justice Department lead attorney Claude Scott presented numerous video clips of testimony the Justice Department has gathered from Oracle executives, including Oracle CEO Larry Ellison, and Oracle business documents. But Scott got bogged down at several points as he sought to explain how the clips related to his arguments.

Vaughn Walker, the US district judge hearing the case, peppered Scott with questions throughout his opening remarks, which became at times a meandering discussion of pricing practices and market definitions. As Scott sought to explain, for example, how software can be made configurable, Walker snapped: "Tell us what that is."

When Scott said there's no set pricing for business applications, and every factor is negotiable, Walker replied: "That sounds like good old-fashioned competition to me. Why should the government want to stop that?"

Central to Scott's argument was that Germany's SAP, the global market share leader in the corporate-applications market, has a smaller presence in the United States than it does in Europe, so that it's not always a viable choice for customers that select PeopleSoft's products. "Often, SAP is ruled out because of its architecture and high cost of installation," he said.

Oracle's Wall blasted that argument, in part by using Microsoft's talks with SAP, to show that competition in the market is in constant flux. "Microsoft is an important competitor to us and will be a greater one in the future," he said.

With only a few interruptions from an attentive Walker, Wall attacked the antitrust agency's case as "anecdotal and vignette-driven". He said the legal basis of the agency's case - a relatively obscure antitrust dynamic known as unilateral effects - is flawed because SAP and a number of up-and-coming rivals, including Microsoft, would keep competition strong if Oracle and PeopleSoft combined.

"So long as SAP is in town, we have to compete aggressively," Wall said.

Wall criticised the Justice Department's convoluted definition of the market in which Oracle and PeopleSoft compete. Saying the government had bent over backward to describe a market that would suffer from the merger, he pointed to the agency's 200-word description of it. "It's Yahweh, the market whose name can't be spoken," Wall said, in one of several humorous sound bytes.

The first customer witness called by the Justice Department said the proposed acquisition would reduce competition and, perhaps, increase costs. Scott Hatfield, senior vice president and chief information officer of Cox Communications in Atlanta, said Cox recently decided to update its financial software system and the competition narrowed to Oracle and PeopleSoft, he said. "If this merger goes through, I was concerned that [the competition] would be closed to one."

Cox's eventual choice, in early 2004, was Oracle, winning on factors such as total cost of ownership, functional fit and technology. "We signed a contract for financial management applications and three years of maintenance," he said. Hatfield estimated that having two primary competitors vying for the business rather than one saved Cox from $1m to $2m.

The non-jury trial is expected to last about four weeks, with the government presenting its case first. Oracle is expected to follow on about 19 June.

Alorie Gilbert writes for CNET News.com. CNET News.com editor Karen Southwick also contributed to this report.