April 5, 2010 by Jonathan Gross
Last week, Manufacturing AUTOMATION’s new online columnist, Jonathan Gross, spoke to Rimini Street CEO and founder Seth Ravin about his company’s high stakes legal battle with tech giant Oracle – and why he thinks Oracle’s ERP maintenance business model is “under great threat”.
Rimini Street recently took the offensive in its legal battle against software, database and server giant, Oracle. In my previous article on this lawsuit, I wrote about Oracle’s claims that Rimini – an independent 3rd party provider of ERP maintenance and support services – operates an illegal business model predicated on computer hacking and theft.
“Oracle is disingenuous to make those claims and we will call them out…‘operating an illegal business model’ is an outrageous statement,” said Seth Ravin, Rimini’s founder and CEO.
On March 29, Rimini officially responded. It filed court documents in a lawsuit that is as much about the court room as it is about the court of public opinion. Rimini filed a defence, a counterclaim and a motion to dismiss 12 of Oracle’s 13 claims. Rimini takes the position that it has done nothing wrong. In response to the theft allegations, Rimini argues that it had the right to use automated computer tools to download the files in question. Its position is diametrically opposed to Oracle’s – and based on the belief that Oracle is using the courts to avoid market-based competition.
“Oracle’s [business] model is under great threat," explains Ravin. He says that this case is just another example of “the old guard trying to hold on through litigation…However, it’s up to us. We’re not going to allow intimidation from Oracle’s side and aggressive legal tactics to stand in the way”.
Oracle, meanwhile, continues to believe in the strength of its claim.
“Oracle is committed to customer choice and vigorous competition, but draws the line with any company, big or small, that steals its intellectual property. The massive theft that Rimini and Mr. Ravin engaged in is not healthy competition. We will prove this in court," an Oracle spokesperson revealed in an e-mail last week.
In my experience, legal cases are seldom black or white. Litigants tend to be rather myopic: they often times fail to appreciate opposing perspectives. I wouldn’t be surprised if this case falls somewhere in the ambiguous grey area.
Nonetheless, there are certain events that could lead one to infer that Rimini’s operations are legitimate. First, in July of 2009, Rimini closed a financing deal with Adams Street Partners, a global private equity firm with about $20 billion in assets under management. One could presume that Adams Street’s team of investment bankers and lawyers did their due diligence and were satisfied that Rimini’s business practices are legitimate (or at least defensible).
Second, Rimini continues to sign up high profile partners and customers, and does not appear to have lost any big accounts. Rimini still counts companies like AT&T, Microsoft and IBM as partners. Its clients include Novell, Toshiba, Virgin Mobile, Liz Claiborne and Pillsbury. One could presume that these companies did their homework before signing agreements.
Finally, Rimini claims that it gave Oracle a chance to pull back the curtains on its operations. In its court filings, Rimini says that it offered Oracle a chance to review its business practices. It also claims to have offered Oracle a chance to have an independent auditor audit Rimini’s compliance with those business practices. Oracle allegedly ignored those offers.
However, none of these three arguments is strong enough to disprove Oracle’s claims (assuming, for argument’s sake, that Oracle first proves its claims). With respect to the first two arguments, no one knows the extent of due diligence that was actually performed. With respect to the third argument, we don’t yet know the full set of facts surrounding Rimini’s audit offer. For example, unreasonable restrictions could have been attached. Oracle did not respond when contacted for comment on this issue.
Lawsuit or no lawsuit, a review of Oracle’s financial results might explain why it would want to protect its ERP maintenance services business. In Q2 2010, Oracle’s maintenance services business brought in a $3.2 billion profit at 92% gross margins. During that same period, its non-maintenance core businesses lost $800 million. Cheaper and competitive maintenance alternatives could threaten to turn Oracle’s golden egg into a brick of coal.
Rimini seems to pose a credible threat to Oracle’s maintenance services business. Rimini provides ERP support and maintenance services to Oracle and SAP users at roughly 50% of the prices charged by those companies.
Since its 2005 inception, Rimini has grown at a torrid pace and has opened offices around the world. Ravin might be right when he equates the size of Rimini to a “rounding error” on Oracle’s income statement. However, he strongly believes that his company is on the cusp of an ERP maintenance and support evolution.
“In 2010, Oracle sees a forest fire starting to race out of control," says Ravin. “Rimini may be in a position to go public and raise a significant amount of money. This would add gasoline to the fire and might make it burn out of control. Litigation is a way to try to slow things down.”
Ravin says that his company has been preparing for this legal battle for years. It has built up a war-chest and has hired a top legal team. The trial will likely take several years to complete. In my previous article, I argued that this lawsuit could define the shape of the future market for ERP maintenance and support services. Although that’s still possible, I no longer think that the marketplace will sit idly by, waiting for a trial. Rather, by the time a decision is rendered, this case could be a mere footnote in an industry defined by new entrants who are driving market prices down to a reasonable equilibrium.
Jonathan Gross LL.B., M.B.A., is a lawyer and consultant who specializes in aligning business with IT, selecting IT systems and implementing IT systems. You can catch his new online ERP column on the first Monday of every month. He can be reached at firstname.lastname@example.org and followed at http://twitter.com/Pemeco.