The Big Three: market powers, distinctly different

While Oracle Chairman Larry Ellison would like government regulators in both the U.S. and Europe to believe otherwise, three large suppliers dominate the enterprise software market.

The numbers speak for themselves. In 2002, the "Big Three" vendors—SAP, Oracle, and PeopleSoft—raked in 58 percent of the nearly $20 billion spent on ERP software, according to Boston-based AMR Research. And that was before PeopleSoft acquired J.D. Edwards.

As a result of that deal, completed in July 2003, the Big Three control 63 percent of the market. And according to figures compiled by ARC Advisory Group, another Boston-based analyst firm, this trio has an even tighter grip on the manufacturing sector, where it takes in 68.5 percent of all ERP software dollars.

While these numbers paint a clear picture of market dominance, they also raise several questions. Among them are: how did so much market power get concentrated in the hands of so few vendors, and does this situation limit users' choices when it comes to purchasing ERP systems?

The question of whether users' choices are limited is the central point of contention in a U.S. Department of Justice lawsuit seeking to prevent Oracle from buying PeopleSoft. European Union officials also are pondering this question as part of their review of the proposed merger. It's easier to explain how these three particular vendors rose to the top of the enterprise software market.

Essentially, they started out selling a single product that appealed to large corporations and expanded their offerings as business grew. For SAP, that first product was an accounting package. PeopleSoft started with a human resources application, and Oracle's initial product was its still industry-leading database. While these vendors have managed to separate themselves from the rest of the pack in the enterprise software market, there are distinct differences between the three.

"There is a Big Three in the ERP market, but when you look closely you see that SAP is far and away the leader, partly because it has done a superior job of marketing its products," says John Moore, an ARC VP.

Yvonne Genovese, who tracks the ERP market for Stamford, Conn.-based Gartner, agrees, noting that many users are aware that SAP's NetWeaver platform contains tools for integrating disparate applications—along with a portal that can serve as a single user interface for those applications—but few seem to know that PeopleSoft's AppConnect platform offers an almost-identical technology stack.

Roy Satterthwaite, a PeopleSoft VP, expressed frustration with this fact in a recent interview. He describes AppConnect as a platform for "connecting people, processes, and data through portal, integration, and analytics technology, respectively," adding that it allows organizations to give users the exact information they need to perform their jobs more effectively.

"PeopleSoft AppConnect was introduced into the market ahead of SAP NetWeaver," says Sattherwaite, "and all of its components are real and in use today. While NetWeaver may be an exciting vision for SAP customers, the reality is that much of what is promised with NetWeaver is not available today."

Nils Herzberg, an SAP senior VP, responds, "More than 14,000 installations and multiple references at customer sites prove that NetWeaver is real and gaining momentum in many verticals, including manufacturing."

Even if NetWeaver is still a work-in-progress, SAP's business is not likely to falter before it is finished. "SAP is good at seeing where customers are experiencing problems and then turning its marketing toward that problem," Moore says. "It may not always have a solution, but it has been able to stall the market until it develops one. Oracle can stall the market in certain verticals, like electronics, but it doesn't have the same clout as SAP."

Its clout has enabled SAP to become a top-tier supplier in several application categories—including supply chain management, product life-cycle management, and customer relationship management—despite releasing its solutions much later than other vendors.

Genovese says SAP has accomplished this because it has come the closest to satisfying users' growing desire to have most of their applications tied to a single, integrated technology platform. "Users want to get away from having every little piece of the company tied together through some type of integration service," she says. "They especially want their core functionality—financials, human resources, and inventory and production control—to be integrated. And where they need an application to provide some differentiation in a key area, they want to be able to add that piece through [an open integration platform]."

Moore says SAP is the closest of the Big Three to meeting this standard because of its long history of building most of its own applications. "When [SAP makes] an acquisition, it tends to be a small company with good technology that can be folded into the SAP product suite with a minimum of integration headaches. They try to keep their house tidy."

By contrast, PeopleSoft got all of its major applications, except for financials and human resources, through acquisition, which means it has relied on application programming interfaces (APIs) and other integration technologies to tie those applications together. Analysts surmise that fact led to PeopleSoft's early development of an open integration platform.

Oracle, like SAP, has developed most of its own applications, and until very recently it appeared to have no real strategy for linking its applications to other vendors' products. Instead, it encouraged customers to avoid integration issues altogether by purchasing all of their applications from Oracle.

At its AppsWorld user conference this past February, Oracle introduced the concept of a data hub, or integration repository, that can pull and manage data from all applications within an enterprise as the centerpiece of a new open integration strategy. Most industry observers agree this was the first time Oracle publicly acknowledged the need to integrate its products with other applications, but Rick Jewell, VP of manufacturing, says it appears that the industry has not been paying attention to Oracle's integration initiatives.

"The Oracle E-Business suite has always provided an open architecture with extensive API's for companies to integrate third-party products," says Jewell. "And the recently announced integration repository makes those APIs more visible so companies can cost-effectively time and integrate existing or recently acquired applications to Oracle."

Oracle also has been criticized for not developing solutions for specific vertical industries, which has become a crucial strategy for selling enterprise applications in the manufacturing sector. But Jewell says that is a mistaken impression as well. "Since 1991", says Jewell, "Oracle has been developing manufacturing applications that support the unique requirements of companies in aerospace and defense, automotive, consumer packaged goods, high-tech, industrial, and life sciences."

Genovese says Oracle has "opportunistically chased vertical markets" without developing clear strategies or products for those markets, except for high-tech electronics. But she leveled her harshest criticism on this point at PeopleSoft.

She contends PeopleSoft didn't have a viable manufacturing product until it purchased J.D. Edwards. Following the acquisition, PeopleSoft came away with three product lines: PeopleSoft Enterprise, the original PeopleSoft product; PeopleSoft Enterprise One (formerly J.D. Edwards 5); and PeopleSoft World, a former J.D. Edwards package that runs on the IBM iSeries platform.

"I could not with a straight face recommend that a company use PeopleSoft Enterprise," Genovese declares. "I could recommend Enterprise One, but that would be primarily for medium-size companies. The manufacturing functionality would work well for almost any company, but anyone needing need global financials and human resources capabilities would run into problems. They would have to decide if they want to invest in two platforms. They could buy the Enterprise package for financials and HR, and then buy the prepackaged integration tools [inside AppConnect] for connecting to the manufacturing modules of Enterprise One."

Andy Carlson, PeopleSoft's VP of supply chain management, concedes that Enterprise and Enterprise One are built on separate technology platforms, but says they were designed to run on the same IT infrastructure—common operating systems and databases—and that applications from the two suites are easily linked through Web services.

Ironically, Enterprise One's appeal to medium-size companies could help PeopleSoft gain ground on its two closest competitors because most large corporations already have ERP systems in place, leaving the middle market as the most fertile ground for new sales.

Moore says Oracle has done fairly well selling to medium-size companies, particularly in the manufacturing sector. SAP, on the other hand, will have to crank up its marketing machine to convince potential customers that its products—widely perceived as cumbersome—have been streamlined enough to work in a medium-size enterprise.