HP board member and former executive VP Ann Livermore is one of the savviest executives in Silicon Valley, and yet she and the rest of HP's upper management were caught flatfooted by an Oracle proposal that has contributed greatly to the situations HP and Oracle find themselves in today. The implications go far beyond the trial at hand and, while probably legal, illustrate the no-holds-barred form of business that Oracle plays brilliantly.

What Say We Split It?

I have to admit, this trial is not shaping up to be the page 6 gossip column stuff that I'd originally thought. In Livermore's continuing testimony, she said Oracle had approached HP about a three-way deal to buy Sun Microsystems. In essence, Oracle would take the software, which included Java, MySQL, and a good bit more, while HP would take the hardware, which of course includes the SPARC architecture and its development. While that deal would seem to play to each company's strength, it put HP in a virtual no-win situation.

But before we get into the significance and even brilliance of Oracle's move, let's recap. HP is suing Oracle for $4 billion because Oracle decided it would no longer port new versions of its software to HP-UX on Itanium hardware. Oracle is countersuing over anything it can think of, and rather than settling out of court, each party feels it'll get a better shake from the public if it lets the trial go forward.

The brilliance here is that by even proposing splitting the Sun assets, Oracle couldn't lose, and in fact it probably realized it could win big no matter what the outcome. Here are two scenarios I see.

[ What else is Oracle CEO Larry Ellison up to? Read There's Something About Larry. ]

First, understand that the once high-flying Sun, which, during the height of the Web boom had declared itself the dot in dotcom, was suffering badly from profit margin pressure on hardware and the breadth and width of its software portfolio, some of which was open source (i.e., low margins). It had no choice but to continue evolving SPARC to keep up with IBM and its POWER chip as well as Intel and its Itanium and even x86 chips. Meanwhile, it didn't have ancillary businesses like HP's printers and supplies to give it some financial relief from the margin pressures.

Sun was heading toward being the No. 3 player in a three-dog race, and customers knew it. But customers also had a vested interest in Sun's success, particularly on the software side. Some were highly invested in Solaris and Sun hardware, but they relied far more on Java and MySQL. So much so that Oracle proposed the logical split to HP: "You're a hardware company, we're a software company. You take the Sun server market share and we'll take the software assets." It would be clear to most observers that Oracle was proposing taking the valuable stuff and forcing HP to take what was of little value beyond acquiring market share in a rapidly shrinking business.

Mind If I Take The Big Piece?

Scenario one: HP works with Oracle, its BFF, and takes on the Sun hardware products. What does it get? First, it gets flashbacks to its acquisition of Compaq in 2002, where it got three platforms that needed to be retired: VMS/VAX, Ultrix/Alpha, and Tandem NonStop. The last thing HP needed was two RISC platforms that, while they came with lots of loyal customers, would be terribly expensive to support.