With Hewlett-Packard's strategy day a week away, analysts are placing their bets on what CEO Leo Apotheker will outline. After HP's last quarter, expectations are low, but Cowen analyst Peter Goldmacher has an intriguing idea that could be quite disruptive.
Goldmacher outlines two options for HP. The first approach is the most obvious: Continue to offer an integrated IT stack that will compete with Oracle and IBM. That status quo approach is more of the same.
The second---and more intriguing idea---is that HP moves to commoditize software. In other words, HP could offer a low-cost stack by using in-house and open source software. HP can play the commodity infrastructure game well. Why not do the same in software?
Now the first reaction here is to dismiss Goldmacher's idea. After all, HP's doesn't have the software portfolio compared to Oracle, SAP, IBM and other companies. But here's why I like Goldmacher's HP commodity software rap: The company has absolutely nothing to protect.
HP doesn't have to milk software maintenance revenue. HP doesn't have a massive software revenue stream to protect. And HP can do software that's cheap and feed it through its massive sales channel. In other words, HP's lack of a footprint in software is its advantage. Goldmacher writes:
Enterprise IT is not a growth business and while M&A works well for vendors, it still hasn’t solved the IT buyer’s main problem: maintaining existing solutions represents the vast majority of IT spend leaving precious little budget in invest in new projects. If HP continues to play to its strengths, over time it can put together a low cost stack of in house and open source technologies designed to commoditize infrastructure software and compete aggressively on price for non mission critical workloads. HP has no legacy business to defend. It can come into the space as the low cost alternative and compete aggressively on price in an inherently higher margin opportunity than its existing businesses.
HP has historically focused on hardware acquisitions that have enabled it to buy components at lower prices. HP could buy Red Hat and start doing the same thing with enterprise software. And the numbers add up: HP's Software business has an operating profit margin of 21.2 percent for fiscal 2010. Red Hat has margins of 24.7 percent for fiscal 2011 year to date.
According to Goldmacher, HP could leave mission critical workloads to Oracle and slowly erode Larry Ellison's "opportunity to sell eight figure enterprise wide contracts" over time. Of course, HP's move into open source would likely nuke a partnership with Microsoft, but that's a small price to pay, says Goldmacher.
The truly comical thing about Goldmacher's note is that you know Apotheker's big HP strategy has probably been set for weeks. Even if HP suddenly like Goldmacher's idea, the company couldn't do much about it in time for next week's presentation. If Apotheker turns up with a status quo IT stack pitch next week, the first thing he may want to do is hire Goldmacher.