HP sees Net future in Compaq

While Hewlett-Packard and Compaq Computer shares were plunging to their respective 52-week lows last week following their proposed $20 billion merger, much of the focus was on the PC market. Lost in the shuffle--but even more important to the future of both companies--was how the combined company would fare in the ISP market, which includes application service providers and Web-hosting companies.

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"The battle lines are really around companies like IBM, Sun and HP/Compaq that are trying to provide solutions to increasingly complex telecom environments," said Lee Doyle, group vice president of research for IDC. 

Rather than watch their one-time market-leading companies continue to flounder, the roll-up strategy of HP Chairwoman and CEO Carly Fiorina and Compaq Chairman and CEO Michael Capellas will give the combined companies "the scope and ability to challenge IBM in the enterprise space," Fiorina said.

But analysts were skeptical, saying the new player must fire on several cylinders. The annual revenues of the new HP  would be on par with IBM at around $87.4 billion. That revenue would come from four operating units: a $20 billion image and printing unit, a $29 billion access device business, a $23 billion infrastructure business and a $15 billion service business.

Most early prognosticators dismiss HP's access device unit's chances of competing in the currently stalled consumer PC market with Dell Computer. They say its cost structure would be difficult to improve, even with HP claiming annual cost savings of $2.5 billion beginning in the middle of its fiscal year 1994.

Though never mentioning Dell directly in its investor presentation, HP, as well as Compaq, clearly view the PC as more than a mere desktop device. "It's not about where PC business has been, but where the Internet access business will be," Capellas said. "It's not about the PCs of yesterday; it's about evolving the [Internet] access of the future."

Carly Fiorina and Michael Capellas know that the success of a combined HP/Compaq will ride on the Internet. AP Photo/Suzanne Plunkett

Fiorina's commitment on taking over HP two years ago was to "exploit the intersection of the Internet." To control that intersection, her company cannot concede the consumer PC market. More important, it must compete with Sun Microsystems and others--including Dell--for the ISP market.

The combined company's total server revenue would put it in the top spot overall, with IBM and Sun close seconds and Dell a distant third (Figure 1).

Total revenue leadership in the overall server market, however, does not equate to leadership in the service provider space. "It doesn't make them the dominant server supplier to [service providers] the same way it does in the enterprise," Doyle said. "Obviously this company needs to be successful in the enterprise space, but it [still] needs to be successful in the [service provider] space, and today that space is defined by telecom companies."

That space also is defined in part by IBM, which has grown largely through its services organization, and by Sun, which has captured the Internet through its high-end server product line and its focus on application development through Java.

And it is there that HP looks to compete strongly. The company expects to gain ground in services even though worldwide service revenue for a combined HP/Compaq still would leave it at No. 3 behind IBM and EDS (Figure 2).

HP and Compaq each generate about $1 billion in business in the service provider market that includes servers, software, integration and management, according to IDC. But the market is much bigger than that, and in order to capture a more substantial piece of it, HP must shore up its services arm.

"Services and integration--including planning, architecting, supporting and maintaining--is an integral part of the [service provider] infrastructure play because a lot of companies need assistance with various parts of it," Doyle said.

Analyst Ron Westfall of Current Analysis gave HP guarded credit for trying to become more services-oriented. "Even during these tough times there is a strong business case for emulating IBM at its own game," he said.

On the other hand, "A company the size of Compaq, with all its distressed assets, could very well become just a big anchor that forces HP down further," Westfall added.

HP also gains significant telecom technology, if undetermined market share, by acquiring Compaq Telecom. A Compaq spokesman called Compaq Telecom one of the best-kept secrets in the business, saying, "the market presence and infrastructure is way beyond what most people imagine."

Home Location Register (HLR) The functional unit responsible for managing mobile subscribers. Two types of information reside in the HLR: subscriber information and part of the mobile information that allow incoming calls to be routed to the mobile subscriber. The HLR stores the IMSI, MS ISDN number, VLR address, and subscriber data on supplementary services.  --from Agilent's Wireless Dictionary

Compaq Telecom claims a 29% market share in home location registers for the wireless service provider market and has a significant business in service control points and other intelligent network products. The company entered into an agreement with Ericsson last year to co-develop switching computers for Ericsson's AXE-based next-generation wireless and wireline networks.

HP's and Compaq's heritage of openness could serve the combined company in competing in the new telecom environment, said Neil Strothers, senior analyst for Cahners In-Stat Group.

"When this is all put together, we will be the No. 1 partner of Microsoft, of Oracle, of SAP, of Intel and countless others," Capellas said.

HP's vision of ubiquitous computing has been under development for years in the company's CoolTown lab, which was created as a showcase for future Internet products. HP will need to make CoolTown a reality if it is to follow through on its vision of controlling the intersection of the Internet.

"We are at a fundamental shift in technology of how we think about what the Web will do, what the Internet will do and about content delivery systems," Capellas said.

Capellas thinks the combined company would be positioned to do that. But being in position and making the big play are two different things. HP must execute. The analysts know that. The competition knows that. And apparently, Fiorina knows that.

"This is a leapfrog move to accelerate our ability to execute on the strategy we and Compaq have been on for the last two years. [But] none of it will matter if we can't integrate this effectively," Fiorina said.