'The issue is how far you can stretch your brand, from the consumer to the high end' - Marzio Gobbato, Worldwide Business Development Manager,Business Desktop Division, Hewlett-Packard

-Marzio Gobbato, Worldwide Business Development Manager,

Business Desktop Division, Hewlett-Packard

width="282" height="341" align="left">The booming home market and the double take on the
SME market segment by PC majors is not just a domestic phenomenon-it is also global. And
Hewlett-Packard (HP) has the envious distinction amongst the PC majors of having developed
a strong product branding across these select market segment in addition to its
traditional hold in the corporate segment. Today, the company has four distinct PC brands
straddling the market, leading to a doubly fast unit growth compared to the overall
market. In an interview to DATAQUEST, Marzio Gobbato, who heads the Business Desktop
Division from Grenoble in France, gives insight into many of the recent strategic
decisions spearheading their roller coaster growth rate. Graduating in Marketing and
Strategy Management from Spain, Gobbato joined HP Italy in 1985. Since then he has held
various senior positions including the company's Account Manager and Business Development
Manager in Italy, Eastern Europe and recently France. Read on for this all revealing
dialog on HP's winning product segmentation strategy.

HP has only recently entered the
sub-$1,000-PC market and launched lower cost versions of the commercial PC in the form of
the Brio. What prompted the company to enter these price bands later than its competitors?

Partly, the reason why we have gone below the $1,000-mark is because at HP we are
following the Intel strategy. So we do not have any plans for the time being to use AMD or
Cyrix or any other processor. And if you look at the Intel road map, it is basically
divided into two. With Celeron you are addressing the sub-$500 machines and with PII and
the new PIII processors, the over $500 machines. So the $699 price that we have announced
for the new Brio line in the US is a consequence of the Celeron positioning as well as the
aggressiveness we want to put in the market today.

How have you differentiated the
positioning of the Brio and Pavilion PC?

Pavilion is a home PC and the way it is structured, the way it is sold and the way it is
marketed is for the home consumer. Brio is technically a desktop business PC, for
organizations with 1 to 1,000-plus employees. And this is the reason why we have deployed
a full line of Brio, Vectra and Kayak PC machines for meeting business customer needs.

But for a particular market
segment, the small and home office, is there any overlap between Brio and Pavilion PCs?

Absolutely not from our point of view. The features inside-for example the software-are
big differentiators. In the Pavilion, you see home software, entertainment software, basic
applications, and in the business machines you see full-fledged software suites like small
business editions, MS word and professional software that you don't find on the other
side. We do not have multi-year deals with companies. Of course, we have a deal with
Microsoft for MS works that we put in the Pavilion and then we do have some multimedia
games which we negotiate every time we need to. But it is not that we negotiate one deal
for a couple of years and then keep that stuff. New games come in, new programs come in
and we negotiate anew. For Brio, what we are doing is have region-wide deals and not
worldwide deals. We do that as a bundle majority of times rather than loading it on the
hard disk. The point I am trying to make is that we don't have a multi-year contract with
a software vendor. What we see when we are introducing a product is the right software out
there and the best price that we can have.



Our R&D engineers at HP spend a lot of time and research making Pavilion optimized for
home. Now you would ask is there an overlap. That depends on who the customer is and why
he wants to buy it. For example, in Pavilion we have AMD processor, because it is okay
with the customer. In the Brio we do not have the AMD processor because small business
customers have clearly told us that they want Intel processors. It is easy for us to
migrate to AMD if we want to, but we will not do that till the end customer wants it.

Both Pavilion and Brio require
different sales channels, with Pavilion PCs requiring retail outlet development. How is HP
building this expertise?

We have a lot of retail experience from our printer business. We have been marketing
inkjet printers for a long time-for almost ten years or so through retail channels. When
we created the home PC Division in US we brought expertise from inside as well as from
outside. And in the US, it is a very successful business for us. The strategy we are
following for Pavilion is a country-by-country launch. And in India we are just starting.
And a similar approach is what we are taking for Brio. We are going for a country-to
country launch to make sure it's successful and we are understanding the differences.

For Brio are you leveraging your
investment in printer channels?

Basically, I would say that we are using the HP channel infrastructure to distribute our
Brio PCs. And technically, yes we have quite a big expertise in dealing with the channels
and we are leveraging our experience with channel distribution.

Moving ahead, how have you
differentiated the positioning of Brio and Vectra PCs?

Vectra is a corporate machine. It is designed to meet corporate customer needs. I am
talking about a big corporation with say a 1,000 employees or more. These guys will be
from MIS departments and that's where Vectra fits in. One of the needs of corporate
customers is stability because they have to deploy software on their desktops. The
desktops have to be stable in order to have the same software features.



The Brio machine is different. It addresses business customers-but with a different
priority. The customer priority in this segment is the lowest cost of ownership with the
highest quality. The Brio PC does not bring stability. It is changing inside much
faster-the components, the bios, the disks-all this stuff is changing to address other
needs. For a small business customers, price is very important.

But does it not make much better
sense to have one scaleable brand like Vectra to meet multi-customer needs?

It is not possible, because you cannot mix corporate customers with small business
users. As both have two different needs. I think the issue is how far you can stretch your
brand, from the consumer to the very high end. This goes back to the last 20 years of
education and can be debated time and again. Look at what Intel did, the company could
have easily taken a Pentium Processor and gone all the way down to $599 or so. I think it
is the brand equity that our corporate customers are looking at. We feel if we take Vectra
down to $599 price point-majority of the business is coming from the sub $-1,000
category-it will become a sub-$,1000 machine. And we are going to have a very difficult
time positioning Vectra for our major enterprise customers. That is the reason why we came
up with a sub-1,000 brand. But it still remains a moot point that how far you can stretch
a brand.

So how fast do these two
products change?

The Vectra is certified for all the major networks. We put a lot of manageability tools on
it. We do not roll that product as fast as Brio. So every time Intel comes up with a new
processor we have a Brio. We are again targeting different customers.



The HP belief is that there are three products for three major customers. One is for the
home users, one for the small and medium-sized companies, and one for the large
corporations. We believe that the needs of these three segments are very different and we
need to plan our strategies along those lines. Some of our competitors try to be one
machine for everybody and it becomes very difficult to position that product. As long as
there are three key segments, each imparting a different message, we think we need three
specific brands. The fourth one is our Kayak workstation, our high-end machine.

What is the profile of a Vectra
user?

It is definitely a customer working in a large organization. An end-user behind the MIS
department, standardizing needs, machines, software and other things. He is even deciding
what configuration machine other end-users need to have, depending on their jobs.

Would large enterprises purchase
both Vectra and Brio machines?

No, I think large corporations standardize on one platform. Some corporations in the US
and even in the Asia-Pacific want to have the latest machines for their employees. They
for some reason always want to have the latest machine. Vectra will not provide that-it
would provide stability-Brio can come in there. On the other hand, some corporations do
not want to change their products fast. You know we are having a problem-as Intel is
rolling out Pentium processors so fast-some corporations are saying 'don't roll.' They
want to have the same product for two years and as you know in the PC business, we are
rolling every 3-4 months. So it's a challenge for us as to make big corporations roll
faster-but for them to roll is very expensive.



Now HP is one of our biggest customers with over hundred thousand employees and majority
of them having Vectras. If you go around and see, they are using old Vectras, not the
latest. As just rolling for a hundred thousand employees is a very expensive proposition
for large corporations. These are the kind of needs that you have to address. When you
think about your machines and the way you design them, you need to keep stability for at
least one year, otherwise these big corporations will not roll.



For example, government organizations prefer to buy Brio rather than Vectra because what
they are interested in is the cost of acquisition. Similarly in education, which can also
be considered as a large corporation in terms of units deployed, they do not care much
about stability. What they care very much about is the latest and greatest technology.
That's what Brio brings to you-the latest and the greatest. When Intel announces the
Pentium III, Brio would be the first Pentium III machine in the market. Brio addresses
customers who want the latest and the greatest at a competitive price.

How closely do you work with
Intel? How early in the day are the new processors available to you?

We, of course test, new processors before using them in our machines. We are one of
their largest processor users alongwith two or three of our competitors. Intel works with
three or four of us regularly and continuously to put the product on the market before
somebody else. It's like Microsoft beta testing-we get a prototype, we test it and work
very, very closely with Intel. A rolling cycle, and that's why it is difficult to say how
much before the introduction of the processor we test it.

How do you view the entry of SGI
into the NT workstation space?

We are the number one in the NT workstation market and will continue to be so with 30%
marketshare. Now SGI is again going to be a niche here. They are going to go after the
graphics market and they have better graphics. Our workstation is a powerhouse. We are
going after performance requirements from financial institutions, telecom, CAD and
everything. Their machine and our machine, if you just compare the price it is three
times. Their starting price is $6,000 and above and while our pricing starts at $2,000
plus.



The second thing is that SGI does not have an experience of selling through channels. HP
has been working with channels for a long, long time. And that is another advantage. I
know they have been trying to recruit many channel partners around the world and so far
their success has not been great. This one is going to take a lot of time.

What is the difference between
your channel strategy for the Kayak and the Vectra range of PCs?

We are using more VARs for the Kayak workstation.

HP has claimed that globally its
unit share is growing at twice the rate of the market. What is the reason for that?

For a time we were just playing in one segment of the overall PC market, which was the
large organizations or enterprise segment. Now we have more sub-brands for the small and
medium enterprises, the PC workstation market and we are playing in the home PC market. So
we were playing only in the 40% of the market, whereas our competitors were playing in
every segment. Now when we have started to play in every segment, people have started
taking notice of it. That is where the growth is coming from and we have the right brands
to go after these segments. With the Brio we are filling the gap between the local brands
and the MNC PCs.

There have been relatively fewer
internet initiatives from you. Is there any particular reason for this?

Let's take some examples. Compaq got into trouble trying to do too many things. The
company tried to become an enterprise company by getting into enterprise, and then
overnight it tried to become an internet company. And IBM is clearly going after the
internet. If you take it at face value, the company has lost almost a billion dollars in
the PC hardware business as announced last year. So it is clearly positioning itself as an
internet-slash direct

company.



Now in HP we are definitely in the enterprise market, we have no doubt about that. What we
are trying to do is clarify our internet strategy. How are we going to make the internet
an advantage for us in the open market. I think that strategy will become clear in the
next few months or so. We have not been very clear on our internet strategy-no doubt about
that. I believe the next chapter in internet is going to be more in services and that's
where HP is putting a lot of resources and focus on.

What is the relative share of
your revenue from Brio, Vectra and Kayak PCs?

I don't think we will be able to disclose that. However, let me articulate this in a
different way. If you take the large corporations, small and medium enterprises and the
workstations, the last account for about 10% of our business. The large corporate are
about 70% and the rest is SMEs. So I think the relative product share is deducible.

How do you view the current
rebound of the Asia-Pacific market?

The Asia-Pacific region is performing very well despite the economic crisis sweeping the
region. In AP, HP is in third place in terms of PC marketshare with a share of around
6.5%. In the US, HP PCs are in fourth place with substantial growth in the last quarter.
Our current marketshare is 6.7% according to IDC.

How do you anticipate the Y2K
problem to affect your last two quarters?

I think there are many opinions about Y2K. I do not think anybody has got the right
answers.