International Think-Tank on Innovation and Competition
On the Oracle-Sun Merger
July 10, 2009
On April 20, 2009, the world’s third-biggest software producer Oracle announced its intention to buy Sun Microsystems for US$ 7 billion. Sun had previously been in negotiations with IBM, Oracle’s main rival in the enterprise server software market. Last week, the US Department of Justice signalled that it is going to take a closer look at the deal, and though Oracle is publicly exuding confidence that it will get the official thumbs-up by the end of August, a “Phase I” clearance is far from a certainty. Oracle will take its case to EU regulators before the summer holidays shut Brussels down.
As is generally the case with mergers between such large corporations, an antitrust evaluation is necessary to verify whether the deal can have anti-competitive effects and ultimately hurt consumers. In this case the issue is particularly complex for the American and European antitrust authorities.
At first glance, a merger between a company that is mainly focused on software with one largely focused on hardware would not appear to raise antitrust concerns. However, a closer look at the interests of the two companies in the area of software can provide a different impression, especially if we recall that on a number of occasions Oracle has engaged in acquisitions aimed at substantial business change that led to higher prices (for instance in the case of the BEA Web Logic products) or discontinued production (for instance in the recent case of the Virtual Iron products).
If the merger goes through Oracle will become the dominant company as a single supplier of enterprise hardware and software. In this unique position, it may try to eliminate competition, reduce consumer choice and increase prices. This is a possible way to harm final consumers that should be taken into consideration by the antitrust authorities. But there is also a more dangerous threat that this acquisition could hide.
After the merger, Oracle will control Sun’s technologies, including the celebrated Java, which is a widely used language and platform for application-hosting used on over 6 billion devices worldwide (way more than Windows), including mobile phones and server platforms. At that point competition for Java-based “application servers” (which are actually “web middleware” software applications for internet-based transactions) and for the wider Java middleware market (accounting for about $ 5 billion) will be limited to two major companies, Oracle and IBM, without any strong competitive pressure. These are the typical situations in which a merger reduces competition and allows the duopolists to increase margins and profits, while hurting the final consumers.
Moreover, one may wonder whether Oracle will use Sun’s technologies for its own purposes only and pursue anti-competitive strategies toward other firms. In particular Oracle may have incentives to restrict licensing for its competitors, for instance the European SAP (a leading competitor of Oracle in business software) whose business is delivered on Sun’ server systems, or to increase prices for the other firms, including the many European telecommunications technology firms -- Nokia, Symbian, Alcatel, Ericsson, Siemens - that all licence Java.
Finally, while Oracle is focused on commercial software, most of the software marketed by Sun is open source. This is the case for Solaris, the most popular operating system derived from enterprise Unix, and MySQL, the most popular database for websites. One may wonder what will be the destiny of these technologies and of their current users, and how what one industry observer has referred to as the “beginning of the slow,* inexorable death of Java” will impact on the large European open source sector.
Of course, all of these critical points can be the subject of antitrust concern only if they lead to consequences that hurt current or future consumers, and not if they end up hurting the competitors per se. However, a closer look at this merger, at its implications for the future strategies of Oracle and at the entry conditions in its market, is going to be useful, especially to make sure that the role of Java as an open platform will be preserved after this acquisition. In the fin de regne atmosphere that hangs over the European Commission at the moment, and with case teams already tied up in other economically and technically complex investigations (as the Intel and Microsoft Internet Explorer cases), DG Competition may not have the appetite to challenge Oracle’s bold grab. EU-based software developers building applications for the Java platform will be watching nervously.
* Bill Roth, a former Vice President at Sun Microsystems, quoted in Software Development Times on the Web (David Rubinstein), 9th June 2009, available at http://www.sdtimes.com/link/33525.
