For HP, a Simple Argument With Oracle Over Intel’s Itanium Chip
The legal sparring between Hewlett-Packard and Oracle over Intel’s Itanium chip is likely to get more contentious before the end of the week, as a deadline for a key filing from Oracle comes on Friday.
The expected filing is Oracle’s amended cross-complaint, wherein the company will lay out the basis of its legal argument explaining why its March 23 decision to stop building software that runs on servers using Intel’s Itanium chip was not only justified but doesn’t violate an agreement struck last year between Oracle and HP.
Oracle has made several colorful claims in court. Last month, for example, it compared an arrangement between HP and Intel to continue to produce and evolve the Itanium chip to a remake of the film “Weekend at Bernie’s.” And in August it argued that HP engaged in fraud by not telling Oracle that it was about to hire Léo Apotheker as its CEO and Ray Lane as its chairman when it was negotiating a settlement to a 2010 lawsuit over Oracle’s hiring of former HP CEO Mark Hurd.
But the real issue is a simple one, say people familiar with HP’s thinking in the case. Did Oracle agree to a contract with HP to continue to support Itanium — as it has been doing for years — or not?
The year 2010 was a weird one for executive moves among tech companies. Hurd resigned as CEO of HP, and took a job as president of Oracle just as Oracle was in the process of acquiring Sun Microsystems. HP sued Hurd and Oracle, and soon they settled. HP says that a clause in that settlement included a provision that Oracle would continue to port its database software to HP servers running the Itanium chip. Oracle has argued that this clause is not part of the final agreement. The settlement document itself remains confidential, but its details will likely emerge in the trial. Expect lots of arguing over different versions of the agreement.
One key part of Oracle’s argument has been that HP has been paying Intel to keep the Itanium chip alive in the face of its failure to gain traction in the mainstream server market over the last decade. This is something that HP readily concedes, since it and Intel developed the chip together in the early 1990s, and regularly renew their agreements — in 2004, 2007 and again in 2010 — to commit resources to build it and to design new generations of the chip every few years. The latest agreement calls for Intel to build two new generations of the chip.
Another argument Oracle has made concerns HP’s management during the last year. When the 2010 agreement ending the Hurd lawsuit was struck, HP was nearing the end of its search to replace Hurd. CFO Cathie Lesjak was interim CEO at the time. Ten days later, HP announced that Apotheker would become CEO. In a filing in August, Oracle argued that it never would have agreed to the Itanium partnership had it known that Apotheker, a onetime co-CEO of SAP and a figure in a contentious Oracle-SAP lawsuit, was about to become HP’s CEO. Ditto Ray Lane, a former Oracle president who was named HP’s chairman earlier this year.
People familiar with the case say that Oracle seemed unconcerned about HP’s ongoing search for a CEO, and didn’t raise any questions about it during settlement negotiations for the Hurd case. These people say that HP wasn’t deceptive, but that even if it had been it will be difficult for Oracle to argue that it’s not bound by the terms of the settlement. The language is clear and unambiguous enough that Oracle would have to argue that the Itanium clause in the agreement means nothing, these people say.
One thing is certain: The damage that HP is suffering from the ongoing uncertainty in the marketplace over its Itanium-based servers is starting to sting. HP calls these machines its “business critical” servers, and they are industrial-strength computers that aren’t sold in large numbers. Indeed, HP is the only vendor of note that even buys the Itanium chip.
But it’s a historically profitable business — HP won’t say exactly how profitable — on which HP charges its customers large service and support fees. In 2010, HP reported revenue of $2.3 billion from its business-critical operation, amounting to less than 2 percent of its $126 billion in sales that year. In 2011, HP reported that sales in its business-critical unit dropped 23 percent in the fourth quarter over the same period a year ago; sales for the year fell to just above $2 billion.
HP has argued that Oracle’s motivation is to steer HP customers toward its Sun hardware. If that was the strategy, sources briefed on the case say, it isn’t quite working out that way. One lucky party benefiting from the fight, they say, is IBM, who is winning business from some former HP customers. It’s one reason that HP is arguing for a speedy trial.