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Microsoft on Sale

By Tim Beyers
January 11, 2005

Say you make some sort of productivity software for PCs and small networks. Say you've built a large stable of customers who really like your products. In fact, your stuff is becoming a standard for most PC users. Word of mouth spreads. Analysts say you're one of the leaders in a market that's exploding. No doubt about it, life is grand.

That's just about the time you get the bad news: Microsoft (Nasdaq: MSFT) is entering your market. Within a few years, you're struggling to just hang on.

You've heard this story before, right? If you haven't, ask Novell (Nasdaq: NOVL) about WordPerfect. Ask AOL what happened to Netscape. Before its recent rhythmic revival, Apple Computer (Nasdaq: AAPL) was perhaps the most famous of Mr. Softy's victims. And just last month, Foolish colleague Rich Smith wrote about how shares of computer virus fighters McAfee (NYSE: MFE) and Symantec (Nasdaq: SYMC) plummeted on fears that Mr. Softy was making a run for their customers.

So it came as no surprise to me that Microsoft made banner headlines on yesterday's news that it would offer a 25% discount on its Microsoft Business Solutions software for current PeopleSoft customers willing to switch. The move is predictable. After all, no one is sure how many PeopleSoft customers will stick around to see Oracle (Nasdaq: ORCL) become "OracleSoft." Here's why I think the answer is going to be a lot.

First, Microsoft doesn't have a product capable of handling business tasks such as manufacturing, human resources, or inventory management on a massive scale. Mr. Softy's products, while good, are more sharply aimed at small businesses. Microsoft even admitted as much during the antitrust trial between Oracle and the Justice Department. Back then the company said it had designs on business software market leader SAP (NYSE: SAP).

Second, and even more important, many of PeopleSoft's newest licensees have contractual guarantees that their software will continue to be supported by Oracle. If the database king backs off in any way, it could be faced with billions in refunds.

And finally, PeopleSoft's applications are inherently complex, and the cost of switching to new software for even a small deployment could reach into the millions. Till Microsoft announces plans to use its cash hoard to cover those fees, it poses little danger to the OracleSoft franchise.

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Rumor has it that Oracle will lay off as many as 6,000 former PeopleSoft staffers by Friday. Wow. Can Ellison succeed in integrating the two former rivals with that kind of attrition? And how much of a threat does Microsoft really pose? SAP? Debate all this and more at the Oracle discussion board. Only at Fool.com.

Fool contributor Tim Beyers owns shares of Oracle. You can view his Fool profile and other stock holdings here. The Motley Fool has a disclosure policy.