HP Focuses On Strategy

At last week’s Industry Analysts’ Meeting, 100 HP executives, managers, and technologists met with about 100 industry analysts.  The good news is, not only did everyone survive; they seemed to have a pretty good time.

HP is determined to put the merger behind them as “The Story” and to get analysts and press to focus on HP’s strategy for focusing and growing the bigger and more important company they have now become.  Most of it was pretty impressive.  The messages were polished and logical.  The product roadmaps and the services to support them seemed on target.

Yet the analysts retain their air of skepticism, their desire to see more proof before they allow HP to take its place at the table as the Number Two company in the IT industry.

Good News

In some areas, HP has a very strong story to tell:

	HP is now able (thanks to their partnership with Intel and its Itanium processor) to offer a choice of three operating system families (Windows, HP-UX and Linux) on a single processor architecture.  HP believes that this is superior to IBM’s offering of a single operating system (Linux) across multiple processor architectures (x-, p-, i-, and e- series) although, in fact, IBM can support multiple choices on all of these platforms.
	HP’s printing business is stronger than every.  Recently refreshed with 50+ new offerings, it is more profitable than ever, deriving 53% of its revenue from its annuity supplies business.  HP is also in the process of entering the high-end color printing business through its Indigo acquisition, currently working with 30 “Lighthouse” (pilot partner) accounts to gain knowledge of particular high potential industry segments.  This could represent a substantial new revenue stream for HP.
	HP has been moving its OpenView systems management software offerings into a new, broader Adaptive Infrastructure framework which will provide automated diagnostics, self-healing, and eventually much more self management, not just for HP hardware, but for all types of products in networked environments.  Of course, all of the systems vendors, including IBM (with its Autonomic Computing Initiative) and Sun (with its N1 software) are moving in this direction, each with a slightly different focus and at a different stage in its execution.

 It’s A Very Competitive Environment

But this is a tough market, in an economy that has not yet recovered from 9-11, the Internet Bubble, or a general air of disenchantment with the financial markets.  Selling new IT systems is harder, takes longer, and may never again be as profitable as it was in the mid-nineties.

This makes other systems vendors very competitive.  HP will have to deal with IBM and Sun in the high-end systems market.  Interestingly, while Sun keeps referring to HP as easy pickings in its pursuit of additional revenue via increased market share, HP sees Sun as the weaker of its two systems competitors.  We suspect that in markets like Financial Services, where HP, Sun, and IBM all compete strongly, it could get very ugly.

HP won’t be able to get much relaxation in the low-end, either.  Dell is pushing strongly into the desktop market, making the battle for desktop supremacy much tougher.  They’re like Coke and Pepsi now, fighting for a point or two of market share in a mature and slowing market.  Dell has sharpened the fight by deciding to stop purchasing printers from HP (because it wanted its own brand) and to sign up with Lexmark.  We doubt the mighty HP printer empire need tremble, especially in the retail channel, but we do think Dell will sell quite a few printers, bundled with their PC’s.

Service As A Factor

In service, it sometimes seems as if HP protests too much.  HP tried to buy PWC before it decided to merge with Compaq.  According to HP, they turned this merger down seven times.  According to PWC, HP wouldn’t pay them enough at the top of the market and IBM offered them more at the bottom.  We doubt we’ll ever know the real story.  In any case, while HP has an excellent and well-deserved reputation for support, it can’t begin to drive the revenue numbers IBM can from internal consulting and systems integration staff.  They can partner with large firms like Accenture and Deloitte, Touche to insure that their customers are properly served, but they can’t bring the revenue from this business to their own bottom line.  HP argues this gives them flexibility in times when the services business turns down and a better position with partners (since it’s less of a competitors).  IBM will tell customers it can provide a single point of accountability and unlimited resources for large scale jobs.

HP seemed sensitive on this point, mentioning over and over again that unlike IBM they would not force customers to “integrate their vertical stack.”  At first, we thought this was a middleware statement.  Seeking clarification, we discovered it was rather a thrust at the notion that IBM Services would tell customers they should buy IBM middleware rather than giving them best of breed choices in an open environment (as HP can choose to do – in fact, does by strategy, since part of their stack comes from third parties like BEA).  We’d agree that IBM Services is likely to offer IBM solutions to customers who arrive with problems, a clean sheet of paper and no vendor preferences.  We’d also note that such malleable customers are rare – most have heterogeneous environments full of competitive equipment and IBM is prepared to build systems around what is in place, frequently implementing solutions on competitive hardware and software.

On Balance

We liked what we saw of HP last week.  Lots of smart people, working hard.  Not every question has an easy answer, but the tools to find answers seem to be in place.  As analysts arrived at the meeting, HP asked them to rate HP’s progress in the merger.  When they were surveyed after the meeting, the same questions were included.  I’d bet a lot of analysts who said they were “concerned” about HP before the meeting started were much calmer two days later.   

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