HP's Demand Letter and Oracle's Cover-up Costs

Rob Enderle

The drama between HP and Oracle thickened this week when HP issued a demand letter to Oracle as the first step in what will likely be protracted litigation.

 

HP's risk is relatively low, but not insignificant, because making the dispute more visible will make their joint customers more nervous. However, Oracle's risk could be epic because if HP plays this the way I would, the result could be litigation from each of the 140K or so large customers the two companies share. And while that would be expensive, the news surrounding this potential litigation could drive customers away from Oracle like a forest fire would drive a herd of buffalo. At the core of this is likely one mistake that Larry Ellison personally made, which he doesn't want to admit.

 

Let me explain.

 

Sun Was a Mistake

 

As we age, and if you're younger you'll have this to look forward to, you are both more likely to make mistakes that feel foolish and you want to cover them up so you don't appear infirm. I'm not convinced that you make more mistakes, but only that your experience makes them, in your own eyes, less forgivable. With CEOs and public figures it can be very pronounced and I've watched a number go through this painful process over the years (Charlie Sheen would be an example, and to showcase that it happens to younger people, too, you have Congressman Weiner).


 

Larry Ellison is approaching his seventies and while he is clearly in better shape than I am, he undoubtedly has this concern. In short, the attempt to cover up a mistake actually results in more damage than if he or she had just admitted it and moved on.

 

The other thing that becomes clear is that if you have a dream, you have less and less time to achieve it and that can lead to being tactical in your thinking and jumping to bad opportunities. Ellison has always lusted after IBM's power and in Sun he saw a quicker way to get there. I think it is likely that prior to Sun becoming available, he was working on a way to merge with HP and that was part of his reason for befriending Mark Hurd, though it may simply have been that HP and Oracle were close and Ellison and Hurd shared tennis as an interest.

 

In Ellison's eagerness he didn't think through the collateral damage of the purchase to his relationship with HP, nor did he anticipate the time it would take to get through regulatory approval. The end result was that buying one of HP's big rivals made it less likely that he would acquire or merge with HP and, just like a spouse who is cheating, looked for a reason to get a divorce that he could blame on HP. He clearly was still thinking tactically, the problems were multiplying and he was looking for a quick fix.

 

HP provided that reason when it fired Mark Hurd and Ellison immediately jumped on this event in the media to create distance from the company. He then hired Hurd without really thinking either act through and likely without the facts. I get here after talking to some folks around Oracle who claim that even Oracle's CFO didn't hear of Hurd being hired until the press release went out, and by how hard Hurd was fighting to keep the letter that resulted in him being fired from HP from going public. Ellison was moving first and thinking later and neither Hurd nor Ellison wanted that mistake made public.

 

Still, the two companies were tied together by agreements surrounding around 140K shared customers and Oracle needed a reason to break the agreements. After a meeting with Intel's Xeon group that contained no information on Itanium, Oracle/Ellison concluded Itanium was not supported by Intel strategically giving him reason to pull away from it and HP. Once again, thinking tactically, the company didn't realize it was significant that the Itanium and Xeon organizations are siloed in Intel and rarely, if ever, show each other's road map. In fact, at the same time Oracle was announcing the death of Itanium, HP and Intel were presenting an Itanium roadmap to a large analysts gathering that I was attending.

 

Oracle went down a path of tactical short-sighted decisions all hinging on the Sun acquisition, which was designed to shortcut Oracle's path to becoming IBM, and actually weakened the company significantly instead because it effectively turned HP, one of the most powerful companies in the world, from a close ally to a mortal enemy in exchange for control of a nearly dead alternative. The opportunity cost of this decision is epic to Oracle, but may be insignificant to the liability resulting from trying to cover it up.

 

HP's Likely Strategy

 

Much like the spouse who wasn't cheating in a relationship that breaks up, HP was initially like a deer in the headlights. It had actually done nothing wrong and was blindsided by the vehemence in which it was attacked by what had been a trusted partner. It took the company a while to react because it had just fired its CEO and the collateral damage from that and Oracle's attack had cost it much of its board as well. However, once it realized that Oracle had become its biggest problem, HP moved to address hiring a CEO and a chairman who were best suited to address the threat and worked on slowly repositioning the company to address it.

 

Now all of this is speculation and what follows is what I would do (I used to do litigation strategy) if I were driving HP's response. HP's demand letter will likely be ignored by Oracle and, in fact, it is expected. The real audience for that letter is the 140K customers who, like children in an ugly divorce where one spouse cheated but doesn't want to admit that as the cause, have become collateral damage. The play is not only for their hearts and minds, but to turn these customers into litigation weapons against Oracle.

 

Companies don't sue their vendors easily, but HP's filing and subtle strategy against Oracle is to create case law, by way of judgment, that can then be used by these large customers to file their own lawsuits and get rapid settlements/judgments from Oracle for breach of contract. While Intel will be uncomfortable with this, Intel will likely have to enter on HP's side because it was Oracle's false pronouncement on Itanium that triggered the breach.

 

At the end of the process, each of these 140K customers should have sufficient evidence to get a judgment for actual and punitive damages for Oracle's breach. Now while that cost could be in the billions, most may still not take legal action, but if only 1 percent do, that would be 1.4K customers, and the negative publicity of that many customers all taking Oracle to court for breach, along with the likely discovery that some of the buyers may have accepted kickbacks for Oracle's business could be of company-ending significance.

 

Granted if Oracle sees the threat and settles out and/or shuts down the failed Sun effort, then Oracle survives wounded but wiser, but I doubt Ellison or Hurd will. (It is interesting to note that after firing its CEO, Oracle is now reporting increasing Sun sales. The increases may be the result of the CFO no longer overseeing the accuracy of the numbers, which is yet another risk because this could be material misreporting and come to light during discovery.) My guess is, in that scenario, Hurd would be the scapegoat.

 

Wrapping Up: What This Means for You

 

If you aren't one of the 140K customers at risk (Oracle on HP hardware), this ordeal, if I'm correct, will take place over the next several years giving you time to consider alternatives to Oracle as the risks to Oracle become more pronounced.

 

If you are one of the 140K customers, you may want to have initial conversations with your legal team in anticipation of being given a present by HP. You could use it to recover much of what you have spent on Oracle and if you want to take advantage of it, monitor the HP/Oracle dispute closely so you can be the first to move in case Oracle goes bankrupt in the process.

 

And if you want a party, I expect there is one going on at IBM and SAP because both are likely the biggest beneficiaries of this dispute. SAP gets HP on the rebound and IBM can appear as a safe haven during the battle.



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Jun 16, 2011 3:07 AM Rob Enderle Rob Enderle  says: in response to Leroy Fevrius

Ah if life were so easy so that you could make up something about someone, do damage, and when proven wrong walk away with no harm done.  Issues for Oracle are rather extreme though.  First Intel doesn't have a ten year roadmap on anything, second they wouldn't share their Itanium roadmap with Oracle both because Oracle has a competing chip (SPARC) and because the Itanium team is a partnership of which Intel is one partner.   Second Mark Hurd, who used to run HP and NCR knows Itanium deeply and knows just how much a statement like Oracle made would damage HP.  He also knows about HP's roadmap going forward with this part and that Intel couldn't exit the HP/Intel Itanium agreement even if they wanted to.  Finally the burden of proof is on Oracle and this isn't a little company, they could have picked up the phone at any time to find out that what they said was false and didn't.  Larry knows Paul (Intel's CEO) and given the amount of money at risk, billions, a certain amount of care would be expected and clearly wasn't done. 

Oracle is in breach and proving this breach was in good faith will be a bitch (and we haven't even started on agreements between Intel and Oracle on confidentiality that were effectively breached by Oracle's announcement, even if they thought they knew Intel was going to pull the plug they aren't legally allowed to announce that). 

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Jun 16, 2011 5:51 AM Leroy Fevrius Leroy Fevrius  says:

Sorry I have just read that post and as far as I can see  the contract isbBetween HP and Oracle , Not Oracle and those customers. If Oracle decide that they will not offer their software on Itanium anymore, then those customers just change the hardware to either be Sun boxen or x86 derivative. Its not like their business is going to fail over night.

Anyway a quick way to settle this will be to ask Intel if the Itanium will remain in production and improved for the next 10 years, if so end of problem, Oracle keep making software for it, as it does for windows and the various other unix platforms, or am I missing something?

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Jun 16, 2011 9:24 AM Rob Enderle Rob Enderle  says: in response to Leroy Fevrius

First these are expensive systems typically costing $1M or more sold to very large companies and governments surrounded by contracts with clauses designed to protect the company from the kind of pricing changes that Oracle has implemented.   Oracle in effect raised prices on the claim that Itanium was dead and that Intel had told them this.   If Intel didn't, and Intel didn't, then that is fraud against the customers in question.   Intel doesn't have to prove they are doing anything with Itanium, they did nothing wrong, Oracle has to now prove their claim is accurate.  Realize that all of the processors in this class, SPARC, Power, and Itanium are small volume parts and none of them have mainstreamed like Core, Athlon, or ARM but then they don't sell to volume markets.   

Now clearly HP has been damaged by this claim as has Intel though it is doubtful that Intel will bring action against Oracle given they are, however, likely to enter on HPs side.

 

Finally with systems like this there are often written and implied contracts based on continued support from all of the major parties, Intel, Oracle, and HP are likely directly or indirectly tied to these contracts.  If Oracle did lie, then they breached these agreements fraudulently.   While I doubt criminal charges, because the burden (reasonable doubt) is so high, the customers could bring civil cases but likely won't unless HP hands these customers the case on a platter.  Even then this will be an exception but with 140K customers all with legal staff of some kind and a tough economy some should move.  

And this is all under an English legal system, if someone gets the idea to bring this case in one of the countries under a Napoleonic legal system where the burden of proof shifts entirely to Oracle, and litigation can follow judgment things could get vastly nastier.    

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Jun 16, 2011 9:45 AM Leroy Fevrius Leroy Fevrius  says: in response to Rob Enderle

Oh I know they are expensive systems, but the whole crux to this matter basically lies on the fate of Itanium. All Oracle has to do to defend against the HP lawsuit is to supena Intel. They can either force ntel to repeat what they told them in private, or force Intel in court to state what the road map for Itanium.

From what I can see oracle is saying that the Itanium is dead and now more chips will be produced for it after a certain point. If Intel refutes this, all oracle then has to do is say, ok sorry we got our wires crossed, and we will go back to releasing software for that platform as per our contract. Pay what couple of million if that goign away money to HP and thats the end of the Matter.

Now if Intel decides that under oath it won't repeat what it said to Oracle or under oath it wont admit that it will create new Itaniums beyond say next year, then I think thats pretty much proof that what Oracle says is true, any reasonable judge will not allow them to plead the 5th, not even in a Banana republic much less the US.

Not to put too fine a point on this, this whole mess could be ended by a simple satement from Intel saying Oracle is wrong and we will be producing Itanium and sucessors for the next 10 years.

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Jun 17, 2011 6:12 AM Leroy Fevrius Leroy Fevrius  says: in response to Rob Enderle

Sorry should have been a bit more explicit, when talking about roadmaps, I meant will these Chips be in production and sold in 10 years time. It no point producing Oracle Dbs for say old Alpha chips if that instruction set is going to be discontined. I hear the latest is that HP is trying to push for a Jury Trial, which I can understand, becuase a judge would pretty much go straight to the heart of the matter and ask intel are you planning on discontinuing the Chip an if so did you tell HP that you were?. Itel can't refuse to disclose this underoath. I notice that some parts of teh complaint filed by HP has been redacted, so it is possible for Intel to provide evidence without it being made public, although if Oracle wins then we will know that the chip is coming to an end.

Either way the only true winners out of all this is going to be the lawyers which is the most depressing thing for me.

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Jun 17, 2011 11:21 AM Rob Enderle Rob Enderle  says: in response to Leroy Fevrius

10 years is a long time in the chip industry and we are talking about systems that often remain in use for decades and have a massive installed base. If Itanium was discontinued tomorrow Oracle would still have to support the installed base for at least 5 additional years with updates or abandon all of these massive companies in violation of their agreements. IBM sets a 10 year limit on the high end systems they continue to support after the hardware has been discontinued and often extends beyond it. Intel doesn't know if they will be producing Xeon or Pentium in 10 years. 10 years ago we didn't even know what a Core processor or an Atom was. Their recent tri-gate technology effectively made the rest of their lines obsolete but replacement parts that are backwards compatible will be created at all levels. Finally, folks generally don't just upgrade their chips, other parts of the system become obsolete regularly as well (storage, memory, buss, power) so you have to replace them at regular intervals regardless.

There are three issues; can Intel discontinue Itanium? No because Itanium is a joint project, none of the players alone can discontinue it (it could be manufactured in Global Foundries if Intel didn't want to build it for instance). Oracle and particularly Mark Hurd knows this because he worked for both HP and NCR who are part of this partnership. Intel doesn't have to prove anything. In fact they may decline to share any part of this under confidentiality rules. Otherwise you could find out about the iPad 3 by claiming Apple was going to kill it and force them to show a roadmap you'd wanted to see in the first place. All that needs to be done is show that Intel can't kill Itanium alone and Mark Hurd and Larry Ellison should both know this going in.

Issue two; does Oracle have the contractual obligation to continue to support Itanium at the same level? This is more difficult and depends on contracts and agreements that haven't been disclosed. Pricing in particular likely remains under Oracle's control.

Issue three; what's the end game for all of the players? Underneath this is a strategy from both Oracle and HP that is not disclosed. Oracle is clearly the driver having instigated the attack and hiring HP's fired CEO. HP didn't breach the mutual agreement Oracle did, we are now exploring whether they did so illegally. Is the end game to cover up bad Sun performance, weaken HP for a future hostile takeover, or something else? HP is going aggressive in their response, are they trying to use this now to cripple Oracle, force Oracle back into their partnership, or get Oracle to fire Mark Hurd?

I'm glad you feel confidence that a judge, not named and without a technology background would quickly conclude that Oracle was right. The reason for a Jury is Juries tend to set much higher penalties than Judges do and, because the burden on a civil trial is low (compared to a criminal trial) proof may be easier. On the other hand they can be vastly harder to predict because, unlike a Judge, they have no history you can analyze. In the end Juries are the common practice and folks like tradition. Personally I prefer binding arbitration but then I tend to be on the side paying the bills more often than not.

On the lawyers, they aren't the ones who started this and they aren't the ones that have made this a spectacle. Yes they will make money but they'll earn it as neither HP nor Oracle are likely to go into this unarmed. You can't blame this one on them. This all stems from a series of foolish decisions, Oracle buying Sun, and whatever Mark Hurd did with his hot hostess and then lied about. If both of those things hadn't happened we wouldn't be wasting our time on this.

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