HP Targets Software’s Big League

For the first time, we are
clubbing all
our offerings. We now have an integrated software strategy which will
greatly improve our bottom line

Steve Au-yeung, GM (software solutions), H-P APAC

I was really hurt,” said Steve Au-yeung, HP’s general manager for
software solutions in the Asia-Pacific region. It was the APAC launch of HP’s
new software suites and Au-yeung was hosting a pre-launch dinner at Singapore’s
Shangri La Hotel. Suddenly, amidst the bonhomie, a South-East Asian journalist
piped up to ask in all sincerity, “But Steve, since when does HP have a
software business?”

And that really, is the gist of the story.

Of course, H-P has a software business. But so far, it has been pretty much
on the fringes. At $2 billion a year, it contributes only 4% to the company’s
overall revenues. Compare this with IBM’s $13-billion software group (a very
respectable 15% of overall revenue) or Sun’s $1-billion software sales
(accounting for over 6% of revenues). Numbers aside, in popular perception, to
say that H-P also makes software is something like saying Wipro also makes

Which explains the journalist’s question. It also explains why this
February, H-P repackaged its 25 software products into two main suites–HP
OpenView and HP Netaction–the heart of its e-business and ‘always on’
Internet infrastructure vision. At the high-profile launches in the US and APAC
regions, it also announced a “new software strategy” that it hoped
would transport the company’s software division from the wilderness to the big

The new integrated approach

Before we look at H-P’s software strategy, a word about the two suites——the
new-look HP OpenView enables businesses to manage their IT infrastructure; from
networks and systems to applications and storage. It includes the network node
manager, the storage manager, optimizer and builder, OmniBack II, Problem
Diagnosis 1.0 and HP OpenView Internet Services 3.0.

HP Netaction, on the other hand, is a back-end environment for Web services
that allows companies to develop, integrate and deploy their e-services
solutions. It includes Bluestone’s application server (Bluestone is the
company that H-P acquired recently, but more of that later) that facilitates
e-business transactions between a user’s Web browser and a company’s
back-end database. It also includes E-Speak, an open-source software that
automatically finds services on the Internet and cuts deals according to
preferences such as price, speed or quality.

Says Au-yeung, “For the first time, we’ve put all our offerings
together. We now have an integrated software strategy that we hope will greatly
improve our bottomline.” But there are issues to be addressed.

The changed paradigm

H-P is a hardware company. Unlike IBM, its software business has not grown
organically with its hardware business. A foray into software at this stage,
therefore, requires a cultural transition that is not always easy to make.
Processes, product assembly lines, even basic attitudes are different between
the two sectors…which is one of the reasons why despite its periodic
incursions into software (like its UX operating system initiative six years
ago), H-P has never been able to treat software as a primary business area. Says
Au-yeung, “We are acutely aware of this. And believe me, we are taking
steps to bridge that gap.”

One of the steps H-P took was to acquire a company called Bluestone in
October 2000. This gave H-P an application server product, a key-missing piece
in their web services strategy, but more importantly, it gave H-P a partner that
understood software. The company also did something it has rarely done before–put
former Bluestone chief executive Kevin Kilroy in charge of its middleware
division. Says Au-yeung, “That is a measure of how important we think that
cultural shift is. It is also a measure of our commitment to software.”

Which is true. And if this partnership works, it could be the turning point
in H-P’s software fortunes. Rob Nishi, formerly of Bluestone, now with HP
Bluestone’s Middleware Division, agrees. “We are a typical software
company. If you come to our offices in the US, you will find people hanging from
the chandeliers. We understand this market.”

The crucial aspect, however, would be H-P’s ability to let Bluestone run
the show in the long run. There are enough precedents where dominant partners
have subsumed bought-over companies. Look at what happened when Nortel bought
Unix. Or for that matter, when Compaq bought over Digital. What Microsoft does
to the companies and products it buys is of course, quite another story.

Nishi, however, has no such misgivings. “We are confident that we are
still the masters of our own fortunes. I don’t think we’ll get consumed by
H-P. Of course, there is an overall company policy and company objective within
which we have to work. But they are not dictating to us.”

Seeking a cohesive strategy

H-P, however, has other problems. Like many other companies, it has tried to
keep Microsoft happy by pushing MS Windows and NT, while at the same time trying
to sell its own operating system, the HP UX. As a result of running with the
hares and hunting with the hounds, its OS business hasn’t done quite as well
as rival Sun’s Solaris or even the Linux offerings from Caldera and Red Hat.

More importantly, even where the company has been the first to offer a new
class of software–like its e-speak Web services product–it has not managed
to cash in on the first mover advantage. Despite being widely acknowledged as a
good product, e-speak took a long time to take off. Other H-P products did even
worse–like its OpenPix printing software and the VerSecure encryption

All of this points to a certain degree of incoherence. And analysts believe
some may have carried over to H-P’s latest software strategy too. HP’s
Netaction suite is seen as a reaction to a host of other hardware companies
announcing their web software strategies. Around June last year, Microsoft
announced its .NET vision. In December, Oracle announced Oracle 9i Dynamic
Services and early this February, Sun announced its Web services strategy that
includes Forte combined with the iPlanet e-biz software, Solaris OS and Java.
IBM, on its part, has come up with WebSphere, widely perceived in the market to
be the next potential market leader in this segment.

What H-P has going for it though is the NNM. OpenView’s Network Node
Manager is its best known product and competes well with IBM’s Tivoli, Aprisma
and Computer Associates’ Unicentre. That puts it right up there with some of
the best management systems in the world.

The Web Services Game What
others are doing?

the Oracle 9i Dynamic web services. Consists of 9i product families that
include the database and an application server software that runs
e-business transactions. Uses XML (Extensible Markup Language) and will
include an online directory where software programmers can register
their web services. Also has three new hosted online services: Oracle
Sales Online, Oracle Business Online and Oracle Mobile (a service
providing web information over the phone). More hosted services in the
Sun ONE (Open Net Environment). Includes Sun’s Forte and Java tools,
iPlanet and Sun’s Solaris OS. The company positions itself directly
against Microsoft .NET saying its applications, software and developer
guidelines are based in XML and Java. Sun also sells its web services
concept as infrastructure that is able to connect anything "with an
IP address or that is IP-addressable." This includes cell phone
networks, PDAs and even different kinds of networks like global
positioning systems.
Microsoft .NET, and the thrust is on making Microsoft’s existing
software available over the web to PCs, cellphones and personal digital
assistants (PDAs). Though .NET is at least two years away, Microsoft has
already announced .NET-based products. These include: Office.Net to be
shipped in 2002 and featuring handwriting and speech recognition
software; bCentral (a portal that will allow small businesses to rent
software and a folder for storing files online)and Windows DNA (web
development software which includes SQL server database and some new
tools for web development)
WebSphere. The version of developers includes built-in support for XML;
UDDI (Universal Description and Discovery Integration) standard; SOAP
(Simple Object Access Protocol); WSDL (Web Services Description
Language) and J2EE (Java 2 Enterprise Edition). It is planning to make
this available to developers for free. IBM also announced a version of
its WebSphere Internet infrastructure software designed to run on its
eServer(z900) and OS/390 mainframes.

While most analysts welcome the consolidation of H-P’s software offerings,
there are still two major gaps–software development tools for programmers and
integration software. "Its true," says Au-yeung. "We are not
completely integrated. But we are working on that. And you should hear something
from us again in this area in the next few months." Both aspects are
crucial to H-P. The success of its software suites will depend on validation
from both sides of the fence: programmers who need the development tools and
users who are now demanding more and more integration.

The question therefore is–does H-P have what it takes to move up that
ladder to full enterprise management and web integration?

Will software push hardware sales?

Right now, H-P doesn’t have much of a choice in the matter. The current
downturn in the IT industry in the US was heralded by H-P’s profit warning in
November–the first company to do so, followed since then by a host of others.

The fourth quarter revenue warning came at a time when PC sales were up 40%
and after eight straight quarters of H-P outperforming analyst expectations. At
that time, the company attributed the shortfall to pressure on margins, adverse
currency movements and higher than expected expenses.

This was followed by a first quarter warning in January this year. The US
slowdown has hit all hardware manufacturers and 2000 was an especially bad year
for the printer and PC markets–H-P is a big player in both these segments.
Though the company’s printer division coped with the slump a lot better than
most of its competitors, it was not left untouched. PC and server sales are down
and as projections go, 2001 is not going to be any better.

Like most companies, therefore, H-P is seeking to use it software offerings
to make inroads into or preserve its hardware sales. "Currently," says
Au-yeung, "our software sales are growing by 25% a year. And I consider
that to be really good." But then, the thing to remember is that H-P
software starts off from a smaller base.

More importantly, asked what kind of growth projections the company had in
mind for its software business, Au-yeung said, "I’d be happy if software
continued to provide 4% of the company’s revenues for the next three years.
After all, H-P could grow to be a $80-billion company!"

But with the US economy heading south the way it is? What would you say the
odds are?

By Sarita Rani in Singapore

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