Long-time strategic partners
) could meet in court over a technological dispute. Though lawsuits
encircling patent infringements and violation of contract terms are
common in the tech sector, we think that the legal battle between
these two giants will be a major issue.
In March 2011, Oracle decided to abandon the development of
software needed to run itanium chip-based servers. The cessation
was based on the assumption that
) could stop the manufacture of itanium chips due to its feared
Oracle's decision came as a major blow to H-P -- the main user
of Itanium chips in servers needed to run large corporate databases
and other demanding computing tasks. Without Oracle's support, H-P
will have a hard time marketing its host of server offerings.
The announcement miffed Intel, which denied any plan of dumping
the itanium processor. Instead, the company informed that it has
long-term plans for the itanium-architecture and is developing two
itanium chips, namely Paulson and Kittson.
But Oracle stood firm. It maintained that itanium chips were
expensive and could specifically be used in only a few
applications. Therefore, Intel would scrap the itanium plan and
focus on a range of widely accepted processors. It also hit back at
Intel, claiming that the chip giant was being dishonest.
Despite repeated requests, Oracle stuck to its decision.
Consequently, H-P sued Oracle for breach of contract in June 2011.
H-P also alleged that Oracle was persuading customers to replace
their itanium-based HP servers with Sun servers (Oracle acquired
Sun Systems in January 2010).
The contract in question related to incessant software support
from Oracle for H-P's server systems. However, Oracle has denied
the existence of any such contract.
Following Oracle's announcement that it would withdraw software
support for itanium, sales of Hewlett-Packard's itanium-based
Integrity and Superdome machines, which it describes as "business
critical systems," have been falling. Sales of Itanium hardware
fell 23% to $421 million in Hewlett-Packard's fiscal second quarter
ended April 30. Oracle's decision could thus prove to be an
irrevocable loss to its server business.
To counter this loss, H-P is now demanding a court order to
compel Oracle to restore its software support. H-P is also
demanding damage charges of $500.0 million for the loss suffered in
the interim period.
In case this ruling is not passed, H-P has plans to seek $4.0
billion from Oracle in damages.
What Lies Ahead?
We believe the prime consideration would be whether any material
contract existed at all between the two. This could be a grey area
given Oracle's outright denial. On the other hand, H-P remains a
leading player despite recent pressures. Therefore, it is unlikely
to make a false claim.
Whatever the outcome, it is sure that both Oracle and H-P will
be more aggressive in grabbing server market share. It isn't just
the companies that will be affected, the end-users will also be in
deep water. Customers using H-P's itanium chip-based server will
have to search for better alternatives or restructure their IT
Oracle is not the first to dump the idea of itanium; it actually
followed in the footsteps of
Red Hat Inc.
The technology was jointly developed by Intel and H-P way back
in 1994. But the high-performance, high-end chip was tailor-made
for high-end servers. The product was slow to ramp up and was
suppressed by the wide acceptance of
Advanced Micro Devices Inc.
) 64-bit x-86 chip. Notably, in 2009,
), an Intel customer shifted from itanium to the x86-based Xeon
server chip family.
Considering the above situation, we think that it might be
difficult for H-P to carry on its itanium-based server business
profitably. For the time being, we have to take a "wait and see"
approach as H-P's fate is now tied to the court's decision.
Currently, H-P has a Zacks Rank #3, implying a short-term Hold
recommendation. Oracle, despite the case that it recently lost to
), has been assigned a Zacks Rank #2, implying a short-term Buy
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