Both Microsoft and IBM intend to move into the high-end market to compete with Oracle, a key government witness has said.

Microsoft Corp. and IBM both plan to move into the market to supply software to run key business functions, a government witness in the antitrust trial against Oracle said in a San Francisco federal court on Thursday.

The surprise testimony appeared to support Oracle Corp.’s argument that the market for such software is competitive enough to accommodate its proposed hostile takeover of PeopleSoft Inc. PSFT.O .

U.S. antitrust officials have sued to block the $7.7 billion acquisition because they believe it would hurt competition and drive up prices for software that helps companies manage their human resources and finances.

The argument against the merger hinges on the government’s argument that the barrier to new entrants to the market would be prohibitively high.

But a technology consultant called to testify in support of the government’s case on Thursday said he believed Microsoft, which has made it a strategic priority to supply software to smaller and medium-sized businesses, would eventually move into the high end of the market.

“It’s pretty clear they’re coming,” said Perry Keating, senior vice-president at consultant group BearingPoint, referring to Microsoft Corp. MSFT.O , the world’s largest software maker.

“They almost did it on Monday,” he said, referring to news announced earlier this week by Microsoft that it considered — but later abandoned — the idea of buying Germany’s SAP SAPG.DE SAP.N , the business software leader.

Keating said Siebel Systems Inc. could also become a player in the human resource and financial software market. The company is already dominant in customer relationship management software.

An IBM spokesman was not immediately available for comment.

Microsoft disputed Keating’s claim. “We’re very pleased with our progress in providing solutions for the small- and mid-sized solutions market,” said Microsoft spokesman Jim Desler. “That’s where our focus remains.”

In a second apparent setback to the government’s case, U.S. District Court Judge Vaughn Walker earlier Thursday said the Justice Department would also have to meet a high standard to keep information provided by corporate witnesses under seal.

Witnesses for the U.S. Justice Department, such as PeopleSoft and IBM, have fought Oracle’s efforts to make public internal corporate documents that antitrust regulators are using to make their case against Oracle.

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