The new HP: Not so dull anymore

'Dare to be dull' might just be the HP of the past. Giving away mainframes and moving aggressively to partner with tomorrow's 'software gorillas' are two reasons why.

Written by Michael Fitzgerald, Contributor May 2, 1999 at 5:00 p.m. PT

Hewlett-Packard Co. no longer dares to be dull -- the computing giant is morphing into a company that's just plain daring.

The No. 2 computer maker, struggling to counter slowing earnings and shrinking profit margins, is raising eyebrows with its emerging E-Services plan, thanks to some new sales models that target burgeoning electronic businesses.

Among the new sales models is a plan to give away hardware, services and software to promising customers - getting their businesses online in less than 100 days -- in exchange for equity stakes or a slice of revenues. (See the story Psst! Wanna free mainframe?)

In short, HP (NYSE:HWP) may be your next VC.

Gimmick or genius?
While the 'free' hardware model might seem gimmicky, Ann Livermore, who runs HP's newly minted Enterprise Computing Group, says she expects it could generate as much as 50 percent of her $15 billion unit's revenues within four years. (Read the Q&A with Livermore.)

"There is absolutely going to be a percentage of spending on computers and services that will go this way," Livermore said. "This is a slam dunk in terms of where marketplace is going and the approach that we've taken. We just gotta see whether it turns into the whole game."

Analysts say HP's strategy, while not without risk, could trigger a revolution in the way hardware makers do business.

"It could be the beginning of a huge trend," said Dataquest's Kimball Brown. "This fits in with all this application service provider business that's starting to come up (in the market). It's like going back to time-sharing and renting services, rather than building your own data center."

Brown noted that server spending has fallen from 52 percent of all hardware dollars in 1990 to 22 percent in 1998. He predicted that moves like HP's will be part of a trend the other way.

Up in 90 days
The company's new E-Services include a plan called Commerce for the Millenium, in which HP will partner with a host of service providers to offer packaged services to small and medium-sized business. In some cases, HP will charge for services on a price-per-transaction basis. In others, HP will provide all the services to get a business online.

"We give it for free to an ISP and we get a percentage of the revenue that they get from merchants," explained Nicke Earle, vice president of marketing at HP's Enterprise Group in Santa Clara, Calif. "For the merchant, we're going for a very fast time to market. We guarantee that any merchant that signs up for this service will be live within 90 days...we'll take care of everything -- the customers don't have to build computer knowledge; they can stick to the knitting."

HP will continue to announce products and plans this month to make its service plans gel with its sales model. Among them: New storage area networking products and storage services this week, which Earle said will be part of revenue-sharing deals.

Hewlett-Packard Co. no longer dares to be dull -- the computing giant is morphing into a company that's just plain daring.

In short, HP (NYSE:HWP) may be your next VC.

Analysts say HP's strategy, while not without risk, could trigger a revolution in the way hardware makers do business.

Brown noted that server spending has fallen from 52 percent of all hardware dollars in 1990 to 22 percent in 1998. He predicted that moves like HP's will be part of a trend the other way.

The coming of Chai
The Palo Alto, Calif., company's series of E-Services announcements will climax with an event on May 18, where it will among other things demonstrate Chai, its Java clone, working on client systems, as well as a Jini-like set of infrastructure applications.

Also likely for that date: New alliances, along the lines of HP's $35 million partnership with Broadvision, announced last Monday, or its recent $100 million joint venture with middleware maker BEA Systems Inc.

"We have major gaps (in strategy) between BEA and Broadvision, and we'll be announcing other relationships plus other HP technology in May that continue to plug those gaps," said Nigel Ball, general manager of HP's E-Services Group.

Livermore acknowledged the May 18 announcement. While she did not give specifics, she said that by the end of May, HP's E-Services scheme, announced in March and rolling out piecemeal, should finally be clear.

Creating turmoil
Also clear: HP's newfound aggressiveness.

"We're trying to create a little turmoil for our competitors," said Livermore, 40. "We're trying to do this with a speed and aggressiveness that's not usually thought about when you think about HP."

Analysts praised HP for potentially creating revenue streams that break out of the traditional hardware cycles. Competitors acknowledge that the nature of e-business often means customers don't have money to pay for equipment until after their businesses go online.

"The Web is starting discussions on different types of deals," said Glen Rossman, an IBM (NYSE:IBM) spokesman in Armonk, N.Y. "We're not yet changing any approach in a blanket way, but we are open and willing to all types of new arrangements. There are not many things we would not consider."

But Sun Microsystems Inc. (Nasdaq:SUNW) was unimpressed.

"I think this is another desperate move to shift hardware to people who are not willing to pay for it," said Shahin Khan, Sun's director of data center and high performance marketing. Khan said Sun employs various financing models and that, for now, the company has no interest in following HP's lead.

Creating turmoil
Also clear: HP's newfound aggressiveness.

"We're trying to create a little turmoil for our competitors," said Livermore, 40. "We're trying to do this with a speed and aggressiveness that's not usually thought about when you think about HP."

But Sun Microsystems Inc. (Nasdaq:SUNW) was unimpressed.

Battling against Sun
Fighting back against Sun is part of the picture, according to analysts.

"Look, HP is a successful, broad-based, Unix commercial service provider. But nobody wants to talk about Unix anymore. They want to talk about e-commerce," said Jean Bozman, an analyst at International Data Corp.

"Sun's been able to capitalize on the Java phenomenon to sell a lot of hardware. So HP is saying, why can't we present this (E-Services plan) and play the same game?"

Back to the future
Some saw shades of the past, when HP, faced with similar financial situation, killed its proprietary mainframes in favor of Unix, just in time to catch the client/server wave.

Back then, "HP put the vision out there and they filled in underneath with products and servers. They see the same opportunity here," said Paul Hodges, CEO of Bloomfield Computing Solutions, which recently agreed not to sell Sun and to continue as an HP-only reseller.

Hodges predicted that "HP will lead with the vision and gain credibility with larger accounts, and not miss an opportunity. Sun is doing a nice job, and HP has to play in the same space."

HP's changes have impressed some customers, especially the new customers-cum-business partners.

'More aggressive'
"HP... is definitely more aggressive," said Dave Rome, vice president of marketing at Ariba Technologies, the Sunnyvale, Calif., business-to-business supply broker that serves as the protoype for HP's 'free' mainframe plan. "We're risk-sharing with them. They get no guaranteed income, but their upside is big."

Ariba has agreed to give HP an undisclosed percent of future revenues from its fledgling ariba.com site in exchange for the hardware, software and services to make the site go.

HP's Earle called the percentage "a significant share, not 1 or 2 percent."

Christopher Bell, principal of Pivot Computing LLC, a Boston startup that provides custom desktop and Internet-based application services that range from e-commerce to scientific programming tools, called it "a pretty powerful idea. ... Our limit right now is largely capital, and our ideas are capital-intensive."

Bigger businesses might be less inclined to make a deal with the devil.

One company approached by HP looked into the idea of trading hardware for revenue, but thought better of it. HP offered high-end Unix servers in exchange for an equity stake in the company, Fleet Credit Card Services LTD. Fleet turned the deal down and ultimately went with Sun servers.

"Any public company would really have a tough time doing (revenue-sharing)," said Joe Szabo, director of enterprise computing at the Horsham, Pa., company. "It's a new twist on an old idea. It's sort of like a mortgage. If you default, they go in and take their equipment out. But that's like putting lipstick on a bulldog. It might look good, but it's still a bulldog."

The new wave
Then again, HP doesn't expect many of its current customers to cotton to alternative financing plans.

The primary target for E-Services are Internet Service providers and so-called Application Service Providers, companies that derive revenues from transactions.

But Earle said that the new business offerings were not limited to any specific type of company.

"We start thinking like a venture capitalist," he said. "If we think it's going to make money then we'll go for it."

PC Week's John G. Spooner and John Madden and Sm@rt Reseller's Deborah Gage contributed to this piece.