The New Converged Infrastructure: A Challenge and an Opportunity

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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