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| BRAINSTORM |
What is HP today?
By David Kirkpatrick
FORTUNE.COM
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(FORTUNE.COM) -- No big tech company today is harder to understand than Hewlett-Packard. Yesterday it reported quarterly results that were better than Wall Street expected. There clearly are strong signs that HP, as CEO Carly Fiorina said on the conference call, is "no longer an integration story." The acquisition of Compaq is more or less done, sooner than skeptics ever could have expected. HP says it has cut $3.5 billion out of its annual costs since the merger.
But what is HP? I have a clearer idea where its competitors are going. IBM's services revenues are approaching half of the total, and it has made impressive progress developing a software business around WebSphere, which is rapidly becoming an important platform for developing business applications. Dell, on the other hand, is the ultimate hardware company for an age of standards and commoditization. Whatever hardware the industry flings up, Dell will sell, and probably for less than anybody else.
HP is in the middle. On the one hand it wants to be like IBM, moving toward software and services and a new era of computing on demand. At the same time, it faces off with Dell, promising endlessly to match its efficiencies, even as Dell shows every sign of staying ahead. In the recent quarter, HP's Personal Systems brought in $5.1 billion in revenue but only $21 million in operating profit.
Fiorina has had great success improving efficiency at HP, but it's harder to develop and deliver on a convincing and distinctive vision. The company's new $400 million ad campaign is a step in the right direction. The ads are bottom-line oriented--emphasizing HP's ability to help demanding CIOs achieve superior results while closely managing costs. Much of the rhetoric sounds like IBM, especially the recurring theme of "on-demand computing." However, one line, "Demand accountability, rather than account control, from your IT partner," is an unsubtle dig at Big Blue. But why should HP be any less interested in account control than IBM? Isn't that what all this shift toward software and services is really about?
HP remains primarily a hardware company, in a time when the strategic importance of hardware is diminishing quickly. Services at HP still represent only about one-sixth of revenues. But on-demand computing is not just talk--it's where the world is going. If you get your computing power and applications the same way you get electricity out of a wall--without thinking much about where it's coming from--you won't care if the distant power plant is an HP-UX server or C3PO's excess brain capacity.
HP has yet to demonstrate why it makes sense to have this particular array of hardware and software products under one roof. The world--and Wall Street--will increasingly want evidence why it makes sense for the phenomenally profitable printer business to remain with everything else. Where is the strategic synergy? Printing and imaging, which at $5.5 billion represents 30% of quarterly sales, brought in a stunning $918 million in operating profits, 76% of the total.
HP continues to put much stock in its tagline "Invent." Executives at Dell, in particular, like to poke fun at this slogan, but the printing business proves that the word has meaning at HP. Last year's complete remaking of the consumer printer line--even the manufacturing process--enabled prices to drop dramatically even as profit margins, and market share jumped upward. It was a triumph for HP rising star Vyomesh Joshi, who runs the printer group. (For the definitive account of this product transformation, see Noshua Watson's FORTUNE story from February, "What's Wrong With Hewlett-Packard's Deskjet Printers?"
When I think of the challenges facing HP, my mind often wanders to another company--BEA Systems. It owns the world's only substantial software competitor to IBM's WebSphere, called WebLogic. HP and BEA need each other. HP has one great software product--OpenView--which leads the industry in system management and monitoring. But it has nowhere near the breadth of IBM's offerings. And software is likely to be the determining factor in tech wars of the future. HP needs to offer customers a solution analogous to IBM's, and it cannot do so without having an alternative to WebSphere.
HP has also notably cozied up to Microsoft. By all appearances HP is the software giant's favorite PC-maker. Microsoft two weeks ago unveiled its prototype PC of the future, called "Athens," designed in conjunction with HP. The alliance is another way for HP to offer something IBM cannot. Microsoft, too, is thinking harder and harder about competing with IBM.
Many positive signs. Fiorina has done a stellar job since the merger. But there's still a nagging sense in the back of my head that this company remains not-fully formed, that it may be a hardware-heavy colossus in a software world. Fiorina's biggest challenges may still be before her.
