HP is headed in a new direction. Or, more correctly, in an old direction.
In mid-August, HP announced it would be searching for a buyer for its consumer PC division, and halting production of all tablets and phones based on webOS. HP CEO Léo Apotheker said that the company would be focusing on software. The news sent HP’s stock, already depressed due to a sluggish economy, plummeting 20% the following day.
Hewlett-Packard has been a giant in technology ever since the company created the first Silicon Valley technology startup in 1939. The numbers were much smaller for startups in those days: Bill Hewlett and David Packard, both electrical engineers recently graduated from Stanford, took only US$538 in investment capital to create their business in Packard’s garage. With that meager sum, the pair eventually created a successful precision audio oscillator, a product that foretold the immediate future of the company in designing and selling electronic test equipment.
HP was known for pushing the boundaries of electronic test equipment, building highly accurate and sensitive oscilloscopes, frequency counters, and voltmeters. In the early 1960s, the company began researching semiconductors used them in calculators. In 1973, HP launched the HP 3000, its most successful line of minicomputers.
The remains of HP’s electronics testing and equipment roots were split off from the company as Agilent Technologies in 1999. In Agilent’s place came numerous other acquisitions. From Compaq to 3PAR, from 3Com to Fortify, HP has purchased technologies across the spectrum of use cases, from consumer companies to extremely focused enterprise offerings. HP is even said to have been the third unnamed bidder in the battle to acquire Sun Microsystems.
John Rymer, principal at Forrester Research, said that HP’s recent woes on the stock market aren’t necessarily indicative of its eventual demise, as was the case with Sun Microsystems, another company that desperately wanted to compete with IBM. “With Sun, the core of the business was Sparc and Solaris. Everything they did to try to goose that business, like giving away the software, didn’t address the core issue,” he said.
“Sun was a [one-dimensional] company, and HP is really a conglomerate. There are very big businesses under that HP brand. If they stub their toe on HP-UX and servers, there are lots of other ways for them to make that up.”
The weekend after HP announced it would be discontinuing its webOS product line, consumers snapped the devices up at fire-sale prices between $99 and $150. Rumored gluts of the devices at Best Buy were sold out or shipped back to HP.
“Think about, internally, how demoralizing it must be in the mobility division,” said Brenon Daly, research director of the 451 Group. “You’re talking about a growing market: tablets! Apple’s got 15 to 30 million of those things out there now. You’re talking about a market that’s going to be 10 to 20 times that size in the next couple of years, and yet HP’s said, ‘We’re not going to be in this market.’ That’s a phenomenal vote of no confidence.”
The renewed focus on software is, perhaps, unsurprising, given Apotheker’s history in the enterprise software world. Formerly the CEO of SAP, Apotheker also announced that HP would be buying software services firm Autonomy for $10.2 billion.
Turning it around
Apotheker’s chops may be in software, but Daly remains skeptical that he can turn things around. “The transformation of HP has to happen, but you can’t underestimate what’s going on there,” he said. “You’re selling your biggest business, shutting down a growth market, and continuing to pay an outrageous multiple for a software asset that is a collection of cobbled-together bits and pieces of other companies. Autonomy is a little bit of a rag-tag, stitch-’em-together operation.
“Yes, Apotheker has the backing of the board: They have turned the entire shop over to him and said, ‘Make it work.’ On the other hand, Wall Street does not have confidence,” as was evidenced by the precipitous drop in HP shares on August 19, the day after Apotheker announced his new plans.
“The fact that Apotheker is having to go out, hat in hand, and explain the decision to the investment community is a position of weakness,” said Daly. “He wants to restore HP to relevancy. He’s taken the steps. This is HP’s Valley of Death experience. This is a $120 billion-revenue company with a market cap of only $50 billion. Looking at it from the valuation point of view, they don’t have much to lose. They’re not growing software, they’re not growing services.”
The real cause of all this woe, said Daly, is HP’s near constant rate of mergers and acquisition, and subsequent failure to capitalize on the resulting new products. He used the Mercury Interactive acquisition as an example of this phenomenon.
“That [acquisition] was going to be the foundation play for the software division. It doubled the size of the software division. Meanwhile, you’ve got smaller companies, like ServiceNow, coming along and doubling revenue each year, and getting to be pretty serious. There’s a whole batch of service-management companies coming along that do it a lot slicker than Mercury ever did, much less the neglected Mercury of today,” he said.
Another major problem for HP is the fact that it is increasingly competing with the very companies it used to work alongside. “Their prior strategy was to leave software to others,” said Rymer. “They had partners, and HP provided middleware along with solutions. Some were packaged, some were through consulting gigs, and they played both sides of the market. They had that relationship with Oracle for databases, and with BEA for Java stuff. They still have a big business with Microsoft on .NET and Exchange, and all that.
“The problem is there are now too many conflicts, particularly with Oracle. Oracle wants to eat HP alive. That means you’ve got to have your own stuff, so I think the value has just shifted to software.”
Compounding the problem, said Rymer, is that while individual products at HP compete with IBM, Microsoft and Oracle, HP doesn’t actually have enough software to fully compete.
“Why is HP competing with Oracle and IBM with a software stack?” said Rymer. “To that I say, ‘What software stack?’ You have a bunch of products here they’re trying to monetize. They don’t compete with IBM and Oracle at all. You could argue that HP doesn’t even have an operating system. They have HP-UX, but they’re not going to invest in it anymore; it’s dead.”
To that end, IBM is still able to make money on AIX. Oracle recently acquired Solaris, and Windows remains the dominant platform for most businesses.
HP-UX, on the other hand, “has been the odd man out for a while,” said Rymer. “They just don’t have that much leverage there. If they go to something like Linux, it’s not theirs. They become just a packager, and that’s a low-value, low-margin business.”