ISG Software Research Analyst Perspectives

Just when it seemed that Hewlett-Packard’s new management team led by CEO Leo Apotheker had a growing and solidifying technology agenda that included mobile computing, yesterday it all changed. In a sudden move accompanied by a flurry of communications, HP shut down its fledgling efforts around webOS, the TouchPad tablet and the Pre smartphone that developed from its acquisition of Palm. All this year HP had invested heavily and promoted loudly the webOS technology, promising the industry and customers that it would be a major player in mobility. I thought that the company had a good opportunity, but its plan and execution were anything but spectacular. This bombshell was communicated as a side note to HP’s lower-than-expected third-quarter 2011 financial results and was widely interpreted by the business and consumer media as a failure for HP. It was becoming clear that the market did not support HP’s mobile products and maybe its underlying technology but not because the technology was inferior. HP also announced it is “exploring strategic alternatives for the Personal Systems Group,” rumored to be a spin-off of the PC division into a separate company; based on the industry shift to mobile computing that is probably a good idea. I think the shutdown of its mobility efforts is bad for the industry. Although the market is consolidating around Apple and Android with Google’s intent to acquire Motorola Mobility, there still could be room for a strong third player. Microsoft has stumbled with continuous changes and its dubious partnering with Nokia, and RIM is experiencing declining BlackBerry sales and customer commitments. But maybe HP saw playing for third place as too costly an investment. I observed back in March (See: “HP’s New World Order according to Leo Apotheker”) that HP’s new generation of products would face challenges. No matter how good or fast the technology is, that alone will not make a market, and mobility requires a completely different approach and team than HP had. For example, HP recently communicated that webOS runs faster than Apple’s iOS on the iPad, but does it really matter? My analysis shows that HP just pushed the mobile inventory into its channel and spent a lot on advertising while hoping for growth. That did not work; neither the consumer nor the business market embraced the products readily, and sales were so low the company was forced to make some drastic decisions. In a last attempt to increase sales of the TouchPad HP lowered the price sharply, rumored to be coming out with a midsize tablet and did even more advertising. In fact I just saw a commercial last night as the media burns through what it was paid to promote. But price alone was not the problem; a mixed strategy for both consumers and business didn’t set up either for success. HP also was slow and awkward in trying to enlist a strong application developer ecosystem. In almost all cases it did not actively engage with business applications providers to convince them to adapt their native iOS applications or new mobile development to webOS. As a result, the software community and customers took a wait-and-see approach. Most of my sources across software providers quietly indicated they would just build HTML5-compatible applications to work on the TouchPad as they are on Android and other mobile devices. This approach does not take into account the unique aspects of the technology and would leave HP without an ecosystem of native applications, thus relegating it to a commodity play with dozens of other tablets. I spent significant time reviewing mobile applications and tools on smartphones and tablets and could not find any strong reason to choose HP’s. This was confirmed by the lackluster marketing and partnering in the software market on the HP website and by dialogue with executives who had released applications on other mobile platforms. If HP had spent some of its advertising budget on its digital marketing and community development, it might have gotten much better results. Now it has to pull off a PR miracle to keep its large channel suppliers like Best Buy and others that are demanding HP take back its now-stale inventory that they cannot honestly sell to customers. It will be interesting to see if Best Buy and others offer trade-in value for an Android tablet or Apple iPad; if I had bought a TouchPad from a retailer, I would demand it. So now HP plans to invest further into enterprise software position and announced its intent to acquire Autonomy. This move has definite value since HP already has a software business in this area and some synergy with its IT operations and management software. Autonomy expanded beyond its roots in search into a range of information access and governance technologies, creating what I would call an information platform that can be used for a range of information applications, which our benchmark research shows are growing in demand by businesses. In fact the market is significant enough that our firm created a new category called information applications to track its growth. So far Autonomy has operated its organizations in a fragmented way, missing out in presenting a more unified approach to its enterprise customers. It has overlapping products with HP in records management and discovery for regulatory and compliance processes, so there will have to be a sorting out of product lines if the merger goes through. This raises the question of whether HP can integrate Autonomy with the rest of its software operations; it has not done any sizable software acquisitions since Mercury Interactive some years ago. Although Leo Apotheker and other SAP veterans he has brought in have experience in integrating acquisitions, HP is a different company at a different time. Its challenge is to get on the short list of CIOs with its enterprise software portfolio, and with fierce competition from IBM, Oracle and SAP that could prove difficult. My inside sources at HP still indicate that the acquisition of Vertica and its data appliances is not generating ROI at expected rates. There HP faces Teradata’s competition and other challenges from the growing big-data technology Hadoop that has begun to even challenge Oracle’s stature in the database market. My colleague David Menninger’s recent benchmark research on Hadoop and information management shows Hadoop is a viable option for new data management projects in IT. HP will continue to find challenges in growing its data and appliance business without further acquisitions. The question will be whether further investment into recently acquired Vertica but is it worth the risk since it could fall the way of its predecessor HP Neoview (See: “HP Gives Up on Business Intelligence and Analytics Markets”) since HP demands surely must want larger growth to succeed in this market. We have yet to hear HP explain how it can take a significant part of the growing business analytics market that our extensive research has found to be quite sizable, even though HP has plenty of technology assets here. So far IBM and SAP on a global scale have been capitalizing on analytics, and Oracle is beginning to see that just pushing the database and middleware will not appeal to the business buyers of analytics. There are many skeptics in the industry regarding whether it is worth the risk to join HP in its efforts in this area; HP should remember that the most important element of gaining growth in an established market is people with a passion for their products. I have not seen a lot of that in HP with all of the changes and pressure for revenue growth with significant cost controls. All of these dramatic changes to its technology portfolio that reverse its commitments have produced significant uncertainty about HP’s direction, not just in the financial markets but also in its employees, partners and customers. Confidence in purchasing from HP is undermined by the last year of reversals. Its communications since the beginning of the year have been haphazard and do not build trust for making decisions on its technology. In addition HP continues to operate in a fairly closed environment in terms of interacting with the industry, and it shows no sign of changes to participate in a more open dialogue like others in the technology sector. HP actually wanted me to pay them to gain access to their recent set of presentations for HP Discover for example which was quite hilarious. Having cut off its investments in the mobility technology market, HP should not assume that it can prosper in the enterprise software market just by relying on the experience its management team has from other companies including SAP. Without further acquisitions to acquire customers, technology and people with expertise, HP can expect heavy criticism. It also must prove to be trustworthy in its communications and demonstrate solid growth in its refocused software business strategy. For those considering anything other than printers from HP, let the buyer beware until the company can re-establish trust and improve communications to the market. It remains to be seen whether trading the so recently favored webOS and the TouchPad for Autonomy and a commitment to enterprise software will play well with its customers. I advise you to wait and see whether you can trust HP for your business; maybe you should ask for a guarantee in money and time invested so you don’t wind up with legacy technology right after you purchase it. Regards, Mark Smith – CEO & Chief Research Officer

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