Oracle Vs HP - Who Really Wins?
cris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a lawsuit that MarketWatch senior columnist, Therese Poletti, admits could happen only in Silicon Valley, Hewlett-Packard (NYSE: HPQ) recently began its case against Oracle (NASDAQ: ORCL) over a server chip that almost nobody uses any more. To put into context just how accurate Ms. Poletti’s characterization of the situation is, if this case involved two Wall Street firms, “Main Street” would be calling foul – the rumors would abound, ranging from cries that the firms should cover the expenses for the entire court system for the foreseeable future to speculation that the suit itself was another scheme to defraud the public. While some of the comparison speaks to the vengeance that lingers toward Wall Street, there can be no doubt that the case, which featured highly accusatory opening statements, is on the outer fringe. The bitter reality is that if the case drags out for too long, the most likely winner will be any competitors who remain unscathed, specifically IBM (NYSE: IBM), Intel (NASDAQ: INTC) and Advanced Micro Devices (AMD). Still within the context of the case and beyond, Oracle looks like the stock to buy amongst this peer group.
The Case
The genesis of this situation occurred nearly two decades ago when Hewlett-Packard, like every tech firm on earth was looking to make a major advance in its field. Enter the Itanium chip. This was meant to be a high-end computer chip that would allow Hewlett-Packard to create the fastest servers on the market and take a major step forward relative to its competitors. The undertaking, which was done in a partnership with Intel, never really got the momentum it needed to become the next big thing. As Ms. Poletti reports, some insiders began to refer to the chip as the “Itanic.” Unfortunately for all parties involved in the current litigation, the chip did not simply sink. It had enough functionality to remain viable, but not enough to revolutionize the chip market as had been the hope. Instead, the chip became an option for certain niche computer communities and languished on with minimal support.
At the heart of the problem is the fact that the chip does not utilize the standard x-86 architecture which stands behind the well-known “Intel-Inside” moniker. As most computer users know, when a new chip comes out and one buys a new computer, it is not necessary to buy a new computer; the software that one already owns can easily be transferred. A part of this portability is driven by consistent chip architecture, meaning that software developers need not re-invent their basic structure for each new chip. Itanium did not follow this design concept as it sought to make major advances. Part of the departure was to allow the chip to handle the rapidly expanding memory requirements of the industry – a feat ultimately accomplished by Advanced Micro in the existing chip architecture.
If one is beginning to wonder where Oracle fits into the picture, it is a fair question. Hewlett-Packard designed a defunct product that it could not use to displace the existing chip architecture and yet Oracle is being sued? While most corporate clients have long since migrated away from Itanium in favor of more industry standard solutions, Hewlett-Packard spent huge amounts of time and money transitioning many of its clients to Itanium-based systems. Switching these customers back to an X-86 driven system would be costly and is not really a viable solution for the company as an immediate jump concept. With time, Hewlett-Packard may be able to make the transition, but a full-stop exodus is not going to work. Again, one wonders how Oracle is involved?
Keep in mind that this is a breach of contract case. Central to Hewlett-Packard’s ability to successfully run its Itanium servers is Oracle’s database software. As Oracle focuses on the future, needed upgrades that would continue to allow Hewlett-Packard to efficiently run Itanium have come into question. Insiders have essentially concluded that Oracle’s action are making it “untenable” for Hewlett-Packard to use Oracle’s software moving forward. Enter the lawyers.
The remedy that plaintiff Hewlett-Packard is seeking is for Oracle to be ordered to continue to write software that would allow Hewlett-Packard to use their software on the Hewlett-Packard servers. Break that down: 1) Oracle counts Hewlett-Packard as a major client, despite the huge rivalry that exists between the two companies; 2) despite this client relationship, Oracle is trying to drop Hewlett-Packard as a client so that it may focus on other parts of its business; 3) Hewlett-Packard is not in a position to do without Oracle’s software and has a contract for services; so 4) Hewlett-Packard is suing Oracle to ensure that it is able to remain a paying client of Oracle.
If one takes this to the possible outcomes, the case becomes even more absurd. If Hewlett-Packard wins, it will have to continue to pay Oracle for use of its software product, meaning that a win for Hewlett-Packard, while irksome, is something of a win for Oracle anyway. If Hewlett-Packard loses, it will be a major blow to one of Oracle’s major competitors and will free up resources that can be deployed for other profitable pursuits. The only scenario in which Oracle really loses is if customers become disenchanted and, and Ms. Poletti suggests, run to IBM for solutions instead.
jewishitalian31 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
