InformationWeek

March 8, 1999

HP's Big Break

Vendor to spin off unit as part of its E-commerce push

By Martin J. Garvey

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he motivation behind Hewlett-Packard's decision to spin off its test and measurement business can be summed up in two words: Web commerce. HP, a diversified supplier of everything from medical instruments to high-end Unix servers, wants to be known simply as an E-commerce infrastructure company.

To get there, HP last week disclosed plans to spin off its $7.6 billion measurement business as a separate company. HP's $39.5 billioncomputer and imaging division will retain the HP name and focus on helping businesses and service providers create "information utilities."

It's an idea, first described by HP officials several years ago, that's being played out now on the Internet and intranets. HP wants to provide the systems and services needed to sell products and deliver services--such as online procurement, applications hosting, and pay-per-use software--over the Web. HP sees growth in selling server farms to E-commerce providers as businesses increasingly outsource nonstrategic business functions.

"The recent massive proliferation of the Internet has made the deployment of an information utility practical and economical," says HP chairman and CEO Lew Platt. "We are the only company that has the back-end computers, storage networks, enabling technologies, and appliances to participate in all segments of the utility."

HP competitors Compaq, Dell, IBM, Sun Microsystems, and others have similar strategies, but HP executives think they have some advantages. "We already handle processing for 30% of airline E-tickets issued today, and we're active in E-banking," says Nick Earle, HP's VP of worldwide marketing.

To reach its goals, HP is pursuing exclusive relationships with software companies and service providers that are moving in the same direction. In January, HP acquired Open Skies Inc., which sells airline tickets online, and HP has a deal with Security First Technologies, a subsidiary of Security First Network Bank, an electronic bank. HP is also discussing online service ventures with other banks and phone companies, company officials say.

HP is also partnering with Ariba Technologies Inc. to be the supplier of hardware, Internet hosting, and network infrastructure for Ariba.com, a Web-based procurement service launched last week that links business buyers with materials suppliers (see story, p. 30). "Business-to-business commerce is the real E-business, and the real action is in purchasing," says Earle.

Ariba will use HP's OpenView management software; Web QoS quality-of-service software, which lets service providers ensure network access for certain customers; and MC/ServiceGuard software to manage traffic and availability on Ariba.com. The site runs on clustered HP 9000 Enterprise Servers.

And HP is practicing what it preaches: It will use Ariba's software for its own internal purchasing of nonproduction supplies and services, amounting to approximately $7 billion in annual spending.

New Opportunities
Will HP's information-utility concept fly with its business customers? "It is absolutely a trend in business," says Susan Webb, senior VP with Chase Treasury Services, a unit of Chase Manhattan Corp. in New York. "The ubiquity of the Internet creates opportunities that never existed before."

Chase is already moving in this direction. The bank is a partner in a joint venture called Intelisys that provides Web-based procurement software and services for other companies. Webb says Chase views HP as a potential infrastructure supplier. "In this field, you have to enter swiftly with high-quality partners," says Webb.

Prak Bhagwanjee, director of architecture at Johnson Controls Inc., a manufacturer of auto parts and building ventilation systems, likes the idea of outsourcing the purchase of commodity tools his company uses. HP is in "good shape" to provide an E-commerce infrastructure, says Bhagwanjee.

The focus on E-business gives HP an opportunity to grow its server business and offset mounting problems that are hurting all the large PC vendors. HP was the fourth-largest PC vendor in the world in the fourth quarter of 1998, when it sold 5.4 million PCs, up 26% from the last quarter of 1997, according to Dataquest.

But with PC prices dropping, HP's PC revenue declined in the commercial market for the fiscal quarter ended Jan 31. Overall, the company's revenue of $11.9 billion was flat in the quarter compared with a year ago, while profits were up 3% to $960 million.

HP already has a server portfolio to handle E-business, and products better suited for the large-scale requirements of Internet service providers are on the way. By midyear, for example, a single image of HP's Unix operating system, HP-UX, will be able to run across 128 PA-RISC processors in a four-server configuration, a significant step up in scalability for HP.

HP was third only to IBM and Compaq in server sales in the fourth quarter of 1998, according to Dataquest. HP intends to build on those products to increase their attractiveness for Internet-ready business.

This week, HP will unveil Web QoS 2, an upgrade to its quality-of-service Web-site software. The product has been integrated with Netscape's Enterprise Server 3.6. Other elements in HP's E-commerce technology portfolio include Fibre Channel-based storage area networks, encryption technology, and management software.

IBM, for one, isn't impressed. Susan Whitney, IBM's VP of server marketing, says HP doesn't have the data-center heritage to compete effectively in IT environments that need the processing power of an information utility. "When you're trading on the Web or your shop floor is on the Web, you must have the secure levels of computing that exist in the data center," she says.

Platt's response? "IBM's strategy is to turn every company into an E-business by Web-enabling existing processes, which is essential but not enough to build an E-services marketplace," he says.

But some users aren't ready to buy into so-called E-services. Among the potential concerns, says Bill Holt, IS manager for AirTouch Cellular in Bellevue, Wash., are data compatibility between customers and service providers, network bandwidth, and security. "This may be a hard sell--akin to the network computer," he says.

HP plans to complete the division of its business in the first half of next year. Meanwhile, the company will begin to search for a replacement for Platt, who plans to retire from HP, to head up its independent computer business. "HP isn't doing things the old way anymore," says Paul MaCauken, a senior analyst with Gartner Group Inc. That's because, in the Net economy, the old way no longer works.

--with additional reporting by Mary Hayes, Amy K. Larsen, and Clinton Wilder