HP's way forward? Commoditize software, buy Red Hat

HP's way forward? Commoditize software, buy Red Hat

Summary: Hewlett-Packard should aim to use in-house and open source software to provide a low-cost software stack that could undercut rivals on pricing, argues one analyst.

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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.

Related:

HP's challenge: Move services upstream

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Topics: Software, CXO, Hewlett-Packard, Linux, Open Source, IT Employment

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21 comments
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  • It would be great to have HP buy Red Hat. Also, Google should buy Ubuntu.

    NT.
    DonnieBoy
    • RE: HP's way forward? Commoditize software, buy Red Hat

      @DonnieBoy <br>And Apple should buy both and then Microsoft and Apple should just merge and finally IBM should acquire everything. Is there any value to your post or to this blog. Nothing. Look at P. Douglas first question, do you have concrete answer for that, if you don't please stay out of it.

      HP already has HPUX and Web OS both are *ix derivatives and they don't get any value from this transaction. Also Google has Android and ChromeOS and both are Linux clones, what would Google gain buy just buying Ubuntu. Big Nothing IMO.
      Ram U
    • Actually, that would be a really dumb move....

      @DonnieBoy

      Redhat continues to make a profit, whereas Novell needed Microsoft money to keep afloat.

      Why would HP spend that kind of money to buy a distribution when they can easily fork a new distribution of their own? What incentive would RedHat have to even consider selling out?

      Sheesh!!
      linux for me
  • Hasn't commoditizing Unix software ...

    .... lead to decreasing amounts of revenue in the Unix / Linux ecosystem? Isn't Apple profitable precisely because of its use of proprietary software? It is through Apple's proprietary iOS software, that the company is able to make so much money from its hardware, to the point where Apple makes many, many times more profits than Google - which uses highly commoditized software. Commoditizing software, in particular adopting OSS, drives overall more money out of an ecosystem - not the reverse. If it is HP's goal to grow its business along with the IT sector, it would be prudent for the company to supply software services to its customers, and maximize the value of it hardware stacks, through the use of proprietary software.
    P. Douglas
    • Poor example

      @P. Douglas <br><br>High margin proprietary ANYTHING is a transitional phenomenon. The IT sector is becoming very mature. Both HW and SW will become more and more commoditized.<br><br>Just because Apple has managed to make a lot of money during a technology inflection point, does not mean that they will be able to maintain their margins long term.<br><br>If you wish to plan a successful strategy, looking in your rear view mirror is generally not a wise thing to do. As they say, hindsight is 20/20, but is does not predict the future.
      Economister
  • Signals The End

    When companies turn to OSS it has in the past been a reliable indicator that the company is on the skids. See Novell and Sun for examples although HP is currently profitable and the others were much closer to the end when they changed.
    curph
    • Cause or effect? (nt)

      @curph

      nt
      Economister
  • How can you possibly do both?

    The major reason for Windows' success is because it was OEM independent, allowing for OEM competition while still guaranteeing the buyer a consistent platform. I don't see how Red Hat could succeed, much less be commoditized, if you tie it to one OEM.
    Michael Kelly
  • RE: HP's way forward? Commoditize software, buy Red Hat

    Why should they? They already have WebOS and which is a derivative of *ix already, they could scale it and use it instead of just buying another Linux clone company. They don't get any value with this purchase.
    Ram U
  • Buying something that you already own (another *NIX)...

    seems a rather foolish way to spend your money, and frankly, a rather poor business plan.

    While I like and use RHEL, HP has no need of it. They already have several UNIX code-bases to work with; HP-UX and Tru64 UNIX (from the Compaq debacle). Buying and then supporting another would be a waste of money and resources.

    Furthermore, the OSS fans wouldn't like it (see Oracle & Open Office for an example of what would likely happen) and as a result they would ultimately lose Linux customers (and therefore value) with this purchase. frankly, I would hope that the new top-dog has learned from the folly of the old one (Carly's HPaqDEC horror-show) and would avoid such a maneuver.

    It would weaken HP further, split their limited resources more, and reduce their focus. None of these is a plan to improve a company. They need to focus in on what they do best, and expand from there using their own core-competencies.

    As always, just my $0.02 USD based on 30+ years in the business -- your opinion may well vary.

    Regards,
    Jon
    JonathonDoe
  • Where's the profit?

    It sounds like a confused attempt to imitate IBM's strategy of commoditising Unix with Linux. This strategy has worked for IBM because they've got an enormous proprietary software stack to run on top of a commoditised OS, and a services business to tie it all together. Indeed, IBM are the second-largest software firm in the world, after Microsoft, and software accounts for nearly half of their profit.

    Given the relatively small size of HP's software business, successful commoditisation of the server software stack would certainly hurt IBM (and Oracle) more than it would hurt HP. However, there are two key questions. The first is, would HP be able to commoditise software? It's far from obvious that they would. Putting together a commodity software stack able to compete with IBM and Oracle would be a substantial undertaking. If they could manage to do that, why haven't they done it already, with a proprietary software stack?

    The second question is, if HP did succeed in commoditising software, would the overall effect on profit be positive or negative? Even if its entire software business were destroyed, IBM would remain a formidable competitor in hardware and services. How would a commodity software stack help HP compete against IBM in hardware/services? Unless it could do that, it would only succeed in reducing the profit of both firms (but IBM more than HP). The bigger question would be HP's relationship with Microsoft. If that were to deteriorate, IT departments that run Microsoft software might well switch to another vendor, reducing HP's hardware/services revenue and profit.

    Maybe I'm missing something here, but a strategy that focuses on trying to destroy profitable businesses because competitors (IBM/Oracle) have been more successful in them is hardly the way to maximise profit. I'm reminded of the way Novell and Sun tried (and failed) to compete with Microsoft by attempting to commoditise office suite software. What they found is that customers (particularly IT departments) preferred a superior product to a cheaper (or free), but inferior one. This is at least as likely to be the case for server software.

    Surely the sensible thing for HP to do is to try to capture some of the Unix/Linux software revenue from IBM and Oracle, and/or to promote migration to the Microsoft software stack on HP hardware -- an area where HP have a competitive advantage over IBM and Oracle.
    WilErz
    • Microsoft is irrelevant in a way

      @WilErz
      "The bigger question would be HP's relationship with Microsoft."

      HP has the same relationship with Microsoft that just about any other ironmonger does. The only variable is the license and bundling options available for MS software. Do you honestly think that a company would switch from HP to Dell or vice-versa because Microsoft told them to?
      terry flores
      • RE: HP's way forward? Commoditize software, buy Red Hat

        @ terry flores

        In a word, yes -- but it isn't as simple as that.

        IT systems are often bought as packages, not as individual bits and pieces. One of the reasons IT departments that run Microsoft often buy HP is that they know Microsoft and HP have a very close partnership. If this perception were to change, many of these IT departments might well migrate to other vendors like Dell -- not because Microsoft 'told them to', but because they'd have doubts about HP's and Microsoft's commitment to ensuring that their systems work well together, and HP's longer-term commitment to the Windows server ecosystem.

        You're completely wrong in any case about HP's relationship with Microsoft. HP have a much closer relationship with Microsoft in the server space than the average server vendor -- arguably only Dell are in a similar position. Indeed, even the HP-Microsoft Joint Alliance website (www.hp-microsoft.com) is registered to a marketing firm known to work with HP (not Microsoft). If the HP-Microsoft partnership wasn't important to HP, they wouldn't devote so many resources to publicising and supporting it.

        If HP were to pull out, Dell could conceivably replace them as the premier provider of high-end hardware in the Windows ecosystem, although services would largely have to be provided by third parties (e.g. consultancies). However, IT departments wouldn't look kindly on a Dell/Microsoft ecosystem without a competitive alternative at the end of the channel. To keep them happy, Microsoft would probably have to develop a closer relationship with another server vendor (e.g. Fujitsu).
        WilErz
        • RE: HP's way forward? Commoditize software, buy Red Hat

          @ terry flores

          Put another way, if HP gave any hint that they were pulling out of their partnership with Microsoft, they'd generate an enormous amount of fear, uncertainty and doubt about the future of their own Windows-based server products. It would be a spectacular own goal.
          WilErz
  • RE: HP's way forward? Commoditize software, buy Red Hat

    Larry,
    Please clarify mentioning Red Hat in title and your article. Purchase Red Hat the company or partnership with Red Hat to use its software as a service, which it already is doing.

    If correct the same thing was mentioned in 2009 with IBM and did not happen.

    The link to Marketwatch from Peter Goldmacher, reported HP to buy Vertica.
    daikon
  • Redhat code obfuscation

    Just as an aside Larry, this would be a topic that will get swamped with talkback.

    Redhat has undertaken to officially obfuscate their RHEL6 source code as a form of a 'defensive measure' against clone vendors like Oracle and Centos.

    I am not sure what they have done conforms with GPLv2, but it is an interesting development.

    Don't like it one bit.
    Dietrich T. Schmitz, ~ Your Linux Advocate
    • RE: HP's way forward? Commoditize software, buy Red Hat

      @Dietrich T. Schmitz, Your Linux Advocate <br><br>Red Hats actions were most likely response to: Novell launches Suse Manager with rival's technology.<br>CentOS has no problem with this action. <br>Red Hat started closing access down to there Red Hat specific knowledge base last Friday. h-t-t-p://press.redhat.com/2011/03/04/commitment-to-open/
      daikon
  • Forget about all this Merge with SAP

    HP could easily merge with SAP they are not in the same sector and they would sell SAP-HP appliances for the companies around the world.

    Leo Apotheker, aka as farmacy ;-), talkes about selleing SAP appliances long time ago in an interview.
    antonio.vacas
  • Forget about all this Merge with SAP

    HP has got a lot to gain if they make a merge with SAP. They will send SAP-HP appliances ready only to be configured by someone like me ;-)

    Leo Apotheker, aka Pharmacy, talked about selling appliances ready to run. So why not make it now.

    By the way SAP-HP would push Oracle to the limit.
    antonio.vacas
    • Sorry for the double post

      @antonio.vacas
      antonio.vacas