HP Targets Software’s Big League

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

tubelights.

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

league.

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

software.

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?
Called 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 pipeline.	Called 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.	Called 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)	Called 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