InformationWeek: The Business Value of Technology

As shown by Compaq's earnings shortfall last week-and the abrupt resignation of the company's CEO and president, Eckhard Pfeiffer-there are consequences for technology companies that don't move fast enough. In contrast, IBM turned in sterling financial results for its latest quarter, and the company's stock enjoyed its largest one-day percentage gain ever. Analysts credit IBM's success in large part to a well-executed E-business strategy.

Hardware companies are under pressure to convince businesses they have the right technologies, services, and know-how to build the sophisticated Internet architectures these customers increasingly depend on. Hardware vendors have been gripped by a sense of urgency to address the opportunity. "Between 40% and 50% of all new business is related to E-business," says Patrick Rogers, worldwide marketing manager for HP 9000 servers. "You're down a deep, dark hole if you can't put together the capabilities." Just last month, Hewlett-Packard disclosed plans to spin off its measurement business and focus on being an E-business infrastructure supplier. HP will flesh out its strategy this week by revealing plans to co-develop E-commerce software with BroadVision Inc. and introduce new service offerings for Internet service providers. Two weeks ago, HP struck a three-year, $100 million deal to develop and market E-commerce apps with BEA Systems Inc. HP chairman and CEO Lew Platt promises more is to come.

Intel is also raising its E-commerce profile. Last week, the chipmaker disclosed plans to launch a division to build data centers for Web applications and hosting, storage, and delivery of Web content.

Vendors that fail to prove they can help build infrastructures for electronic business, or are late to the game, need only glance at Compaq's performance in the past quarter to realize the consequences. In February, Compaq described ambitious plans to provide E-business systems and services (Feb. 15, p. 18). But analysts say Compaq's obsession with retaining its lead in the PC market has come at the expense of a focus on the high-end systems, software, and services customers need for E-business initiatives.

Government Securities Clearing Corp. is still waiting for Compaq to help it integrate legacy data stored on its OpenVMS VAX systems with an Internet front end for moving data among banks, brokerages, and the federal government. "Compaq needs a way to get data out of those legacy systems and into an E-business strategy, and work with us on E-business," says Rob Palatnick, managing director of IT with the New York company that guarantees government securities trades. "So far, Compaq hasn't come forward."

Indeed, Compaq's E-business strategy hasn't taken root yet with its customers. Only 37% of IT managers who buy PCs and servers from Compaq consider the company to be a strategic E-commerce provider, according to an InformationWeek Research survey conducted earlier this year. "Compaq doesn't have turnkey solutions," says Prak Bhagwanjee, director of architecture for Johnson Controls Inc., a Milwaukee parts manufacturer looking to build E-commerce links with business partners. "What comes to my mind are PCs and Intel servers."

Bright Spots
In contrast to Compaq, which fell significantly short of revenue and profit goals, IBM posted net income of $1.5 billion for the first quarter, up 42% from the same period last year, and revenue of $20.3 billion, a 15% increase. In all, 30% of revenue was related to E-business, says IBM. The company has completed 18,000 E-business projects. "We'll grow with customers as they exploit E-business further," says Neil Isford, VP of E-commerce with IBM Global Services.

Sun Microsystems, which entered the Internet server market early and continues to be a market leader, also shone in its quarter ended March 28. Two weeks ago, Sun reported net profit of $261.2 million, up 13% after $30 million in charges related to an acquisition, and revenue of $2.94 billion, up 24%. Amit Chopra, a financial analyst with Credit Suisse First Boston, says Sun recognized early the benefit of selling to ISPs and other online providers. "Now Sun is the one locked in," he says.

Financial information provider Bloomberg LT chose Sun systems for its Internet infrastructure. "Hundreds of millions of trades come in, and we process them in milliseconds," says Tom Secunda, a founding partner at Bloomberg in New York. "We need a vendor that can come and help with any problem."

HP's deals this week demonstrate its seriousness about becoming a high-caliber E-business player. HP will resell BroadVision's One-To-One E-commerce server, applications, and tools; provide deployment services; and co-develop apps that let companies provide services and transactions over the Web. It's a smart partnership for a company eager to embrace the Web: BroadVision last week reported first-quarter revenue of $18.5 million, an 83% increase over last year, while net profit was $2.9 million, up from a $500,000 loss last year. BroadVision signed 43 new business customers last quarter, bringing its worldwide installed base to 317 accounts.

HP will also launch Commerce for the Millennium, a series of service offerings. E-Selling, due first, will enable ISPs to host commerce sites for small businesses, and other offerings will follow.

Intel, meanwhile, couldn't help but notice that networking companies with established E-commerce portfolios are profiting nicely. Lucent Technologies last week disclosed record revenue and earnings, driven largely by demand among carriers for equipment to build Net infrastructures. At a meeting for securities analysts in New York last week, Intel CEO Craig Barrett reiterated his goal of becoming the key chip supplier for networking as well as PCs. "We want to be the end-to-end building-block supplier to the Internet and data communications," said Barrett.

Intel plans to build more than 10 Internet server farms over the next few years and serve as a Web data center outsourcer. The first facility, to open in September, will cost up to $100 million to develop. Excite and Pandesic have signed on.

Special Issues
For PC and server vendors, the need to get involved in E-business is obvious. Although unit sales of servers and PCs are growing more than 15% per year, revenue is flattening. Vendors are selling high-end PCs to businesses for $1,000 or less, and similar pricing pressure is hitting the server market. Dataquest says server revenue in the fourth quarter dropped 4.3% to $4.6 billion compared with the fourth quarter of 1997. The culprits in both cases were hardware commoditization and price competition. IBM was particularly aggressive, launching a program to sell services at discounts of up to 15% on large-volume PC sales.

All this played a part in Compaq's recent quarter. Although revenue was up 66%, the results included revenue from Digital Equipment, and analysts had expected Compaq to realize more gains from the $9 billion acquisition. Compaq's net income of $281 million was about half of what it anticipated.

What went wrong? Analysts and sources inside Compaq say performance suffered because Pfeiffer was so concentrated on competing in the PC market that the company fell short on integrating its high-end server technologies and services for building E-businesses into a cohesive portfolio. Also, the company didn't see the growth it expected in high-end servers. "Compaq has all the pieces, but it hasn't figured out what to do with them yet," says Aberdeen Group analyst Joyce Becknell.

Compaq's PC-centric strategy backfired. Ed Ellett, Compaq's VP of PC products in North America, says the first quarter "was a little slower than it has been" in sales of corporate PCs. And chairman and interim CEO Ben Rosen indicated Compaq lost out on some big corporate PC deals.

This week, Dataquest will deliver its latest PC market estimates, which show Compaq's share slipping: Compaq's share dropped to 13.4% of 25 million units shipped worldwide in the first quarter. In the U.S., it was the only one of the five top vendors to see share drop, 2.1 percentage points, to 15.7% of 9.7 million units. Dell Computer, which grew 51%, is now just 1.4 percentage points behind Compaq in total market share.

What's more, customers say Dell is gaining recognition in the Internet market because it's focused on the E-business strategies IT managers want to embrace. "Companies should do what they preach," says Johnson Controls' Bhagwanjee. Dell has led competitors in several areas, such as custom Web sites for business customers, and build-to-order PC sales over the Web. According to John Delta, director of interactive services at Nasdaq.com, Dell is a team player: Its execs even get together with his IT managers to share "best practices" tips about running their respective sites.

But Compaq's attempt to embrace a direct Web sales strategy may have negatively affected most of its PC business. Industry insiders say Compaq alienated resellers with its direct PC program to small businesses, and resellers pushed competing products instead.

Still, Rosen has declared the company will move quickly to turn itself around, and analysts believe Compaq remains well-positioned to sell E-business products and services. Rosen noted the company's growing presence in Web servers, and a services business it acquired from Digital that contributed revenue of $1.6 billion in the quarter.

Compaq recently inked some big contracts to provide Internet infrastructures. Next month, it will unveil a $12 million deal with MD Anderson Cancer Center in Houston that includes systems and services for building a Web site for physicians and patients.

Compaq obviously has much of the technology to make a name for itself as an E-business provider. Late last year, the Internal Securities Exchange in New York, an electronic options exchange startup, invested in OpenVMS for its intranet applications. "Compaq is on a very high-end level," says Gary Katz, senior VP of marketing and business development at ISE. "It is helping us build the data center."

A test for every hardware vendor will come in the execution of infrastructure sales. Dell, for instance, was able to capitalize on its ability to offer low-priced servers to companies with expanding Internet needs. Nasdaq.com began on Compaq servers about three years ago but switched over to Dell, which was undercutting Compaq's $35,000 servers by more than 20%. "I didn't think we could grow our site the way we need to, spending that kind of money on Compaq servers," says Nasdaq.com's Delta.

Vendors are finding they need to think of customers' E-business needs first and foremost. Only when they've done that will customers view them as viable suppliers of systems and services.