What Happens Now in the HP-Oracle Lawsuit Over Itanium?
Software giant Oracle lost fair and square this week before a California state court in its dispute with rival Hewlett-Packard over its decision to stop porting software that runs on servers using Intel’s Itanium processor.
But the questions stemming from the dispute don’t stop with the decision by Judge James Kleinberg ruling that Oracle must abide by the terms of promises it made to HP in 2010 when it settled an unrelated lawsuit concerning Oracle’s hiring of former HP CEO Mark Hurd.
First off for HP is the question of whether the damage to its Business Critical Server business unit, which sells the Integrity line of servers that use the chips, can be reversed. The damage is plain to see in HP’s financial results. For the first six months of the year, sales are off by $275 million, in a business unit that last year saw sales north of $1.1 billion. The uncertainty brought about by the lawsuit has hurt sales, and HP has made it clear it expects them to remain under pressure.
But it’s not lost sales that are hurting HP the most: A half-billion-dollar drop in sales at a company on track do $123 billion this year isn’t much to get excited about. It’s the profits. Legal filings made public over the course of the suit showed that HP derives a healthy portion of its profits from ongoing service and support contracts with companies that buy its Integrity servers. While HP doesn’t routinely break these numbers out in regulatory filings, documents showed that in 2010, HP derived about 15 percent of its profits on an EBIT basis (Earnings Before Interest and Taxes) on business related to Itanium.
Reversing the trend will be hard. For one thing, the legal fight isn’t over. Oracle has promised both to appeal the decision and to continue to press its counter-claims against HP in court, so the uncertainty among HP customers will continue, though as HP’s enterprise chief Dave Donatelli put it to me in an interview in June, the first step toward saving the BCS business is winning the lawsuit.
HP does have a plan to move Itanium customers onto more mainstream servers. It’s called Odyssey, and it involves building a new generation of Business Critical Servers on a more mainstream platform, probably Intel’s Xeon. Over time — and it would take several years — Integrity customers could be persuaded to move in this direction. Exactly how HP preserves the highly profitable service and sales contracts upon which it has relied all these years isn’t entirely clear. One key piece of the strategy would likely involve the creation by HP of a version of its Unix operating system, called HP-UX, that runs on Intel’s mainstream x86 chips.
For Oracle’s part, while its appeal is pending it will have to rejigger its plans and issue an update to its database software for Itanium systems. Existing customers had nothing to worry about in the first place. But it now faces the prospect of paying out a significant damages award to HP. Even if it is as high as $4 billion as many reports have suggested — and it likely won’t be — Oracle’s balance sheet, flush with almost $31 billion in combined cash and short term investments, can take the hit.
But why let it go that far? HP CEO Meg Whitman has referred to the historical relationship that existed between HP and Oracle as “one of the great partnerships in IT history.” And Oracle CEO Larry Ellison has said he likes Whitman.
There have been at least two rounds of settlement talks held before and during the trial. Now that the primary issue of the trial — whether Oracle was bound to stick to an agreement it made in 2010 — has been decided, perhaps there’s ground upon which to build the foundations of a third way out of the dispute.
Oracle’s point that the Itanium chip is nearing the end of its life has more merit than either HP or Intel would care to admit. There may indeed be a few more generations left of Itanium, but nothing can change the fact that the world of enterprise computing is turning its back on Unix and non-x86 chips. The research firm IDC noted in May that the size of the market for non-x86 servers as a percentage of the overall server market has declined to the lowest it has ever seen.
Both HP and Oracle have to respond to this. HP’s response is Odyssey. Oracle, which owns the legacy Sun Microsystems business of SPARC-based servers running Solaris, has its Exadata, Exalogic and Exalytics hardware systems, all of which are based on Intel x86 chips. As the migration away from Unix plays out, customers of both HP’s Integrity line and Oracle’s SPARC systems are going to be forced to choose a way forward.
Depending on the case, both Oracle and HP will be jockeying for this emerging segment of post-Unix customers. One would think they’d want to do so with the maximum amount of customer goodwill. These are specialized customers — shared customers were the basis of the partnership in the first place — who don’t make their computing choices lightly and who tend to stick with one vendor for a long time. For them, the sight of these two tech industry heavyweights fighting so bitterly must be getting tiresome.