The Ellison files: Oracle strikes back

Over the course of a few months in 2009, Hewlett-Packard’s (HPQ) top executives engaged in a furious debate. Intel (INTC) was considering halting production of its Itanium chip, a high-powered but expensive workhorse that had fallen out of favor with nearly every company except HP. If it went extinct, so too would HP’s Integrity line of servers, which still made a ton of money for the Silicon Valley hardware manufacturer. The executives decided to hide the outlook from their customers, business partners, and even employees. “The Itanium situation is one of our most closely guarded secrets,” wrote Martin Fink, the head of HP’s high-end server business, to another executive. That e-mail is part of a stream of private communications between Fink, former HP Chief Executive Officer Mark Hurd, Intel CEO Paul Otellini, and numerous others that have just been made public in connection with ongoing litigation. In March 2011, enterprise giant Oracle (ORCL), which makes database software that runs on about 80 percent of HP’s Integrity servers, announced it would no longer develop Itanium-based products, citing conversations with Intel higher-ups about the chip’s murky future. HP sued Oracle for reneging on an agreement. Oracle countersued. Snippets of both parties’ arguments have trickled out as the cases wind through court. But more than a dozen previously redacted documents were obtained by Bloomberg Businessweek in their original form. The confidential communications make it vividly clear how badly HP wanted to prolong the life of Itanium—widely considered one of the tech industry’s most costly duds—even, possibly, at the expense of its customers and business partners. Regardless of the legal outcome, the documents show that Oracle CEO Larry Ellison retains a remarkable knack for dragging opponents through the muck. It was not, of course, supposed to come to this. Itanium was conceived in the mid-1990s as a state-of-the-art chip that would correct decades of past design mistakes. Intel and HP spent billions developing and marketing it, expecting rivals like Sun Microsystems, IBM (IBM), Silicon Graphics Inc. (SGI), and Compaq Computer to recognize the technology’s supremacy and use it in their own servers. In the years that followed, Itanium became an industry laughingstock, even as its backers poured more than $15 billion into the chip. New versions tended to arrive late and slower than expected, and software makers took their time updating applications for it. SGI, one of the Itanium converts, went bankrupt and abandoned the chip. Most others decided that Intel’s regular Xeon chips, which were advancing at a quicker clip, were the better long-term bet. Critics dubbed the chip “Itanic,” and HP ended up as the only major Itanium backer. While HP did not sell huge volumes of Itanium-based servers, it did make a lot of money on them, with some configurations costing upwards of $1 million. The buyers tended to be large organizations like banks and government agencies, which also paid HP for multiyear service agreements to support the hardware. But by the late 2000s, the court documents show, Intel wanted a clean break. Due to Itanium’s high engineering costs, Intel barely made any money on the chips, and only then because HP helped pay the R&D bills and guaranteed a certain level of sales. “So what happens if we don’t pay?” one HP staffer asked Fink in a 2009 e-mail. Fink’s response: Intel would “exit Itanium and have a round of high-fives.” Even as Fink wrote that e-mail, HP continued telling its customers that Itanium had a bright future. In fact, the company was plotting ways to dump Itanium and stop paying Intel. One option: Acquire Sun Microsystems. Its server software would give HP flexibility in the event of the demise of its own product, which was “on a death march due to [the] inevitable Itanium trajectory,” argued one executive in 2009. (Oracle ended up purchasing Sun later that year.) In other documents, HP describes a number of secret projects to move its high-end server business over to the Xeon chips the rest of the industry had come to rely upon. Time and again, Fink, in particular, talks about the imminent “end of life” of Itanium while trying to keep that knowledge from partners like Microsoft (MSFT), which, like Oracle, made software to run on Itanium. Fink urged HP executives to “avoid any (Itanium) conversations” about the chip’s future and instead “extract money from Microsoft” to accelerate engineering work related to the secret projects. When Oracle announced its decision in March 2011 to stop supporting Itanium, HP went on the attack, saying Oracle was doing thousands of customers a disservice. To date, Oracle has been losing the public-relations war. “Customers are not buying Oracle’s reasoning for this move,” says Dan Olds, an analyst at Gabriel Consulting Group. “They essentially think Oracle is trying to take a competitor off the board” by crippling HP. The new documents, though, show that HP kept some of its biggest customers and most important partners in the dark about the future of one of its priciest products. An HP spokesman declined to comment on the record, but the company argues that some of the statements by Fink and other executives were the result of Intel’s aggressive negotiations to get HP to pay more money for Itanium’s development. The companies say they’ve since agreed to continue making new versions of Itanium. One of the documents shows that last year, Intel’s Otellini chided Oracle’s Ellison for dragging the chipmaker into the brawl. Otellini took issue with the fact that Oracle cited “discussions with senior Intel management” as a reason for doubting Itanium’s future. Instead of reassuring Ellison about the maligned chip, Otellini bristles. “You asked me a confidential question and I gave you an [sic] confidential answer,” he writes. “It was this breach that bothers me most.” The bottom line: HP’s persistence with a chip most peers have forsaken has created tension with Intel and a legal battle with Oracle.