Infrastructure // PC & Servers
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1/17/2012
05:07 PM
Art Wittmann
Art Wittmann
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One CES Lesson: HP's Apotheker Had It Right

TV manufacturers want to make your company's laptops, tablets, and phones too. Don't swim against this tide.

The buzz at the Consumer Electronics Show last week was mostly about the long-term viability of the show, but the real sea change has to do with which companies at CES were driving consumer-level innovation--and that change is going to be critical to your IT department's strategy.

U.S. and to some extent Japanese companies are taking a backseat to Korean and Chinese manufacturers. Dell and Hewlett-Packard didn't exhibit (though HP was seen around Las Vegas), while Microsoft says this is its last year at CES. And of course, Apple doesn't participate, even though literally hundreds of exhibitors were showing wares that somehow extend Apple products.

The bottom line: Your back office equipment vendor isn't likely to be the same one that provides your end user systems. Those old associations are all but demolished, and that should make you rethink how your users get their technology gear.

[What gadget makers shined at CES 2012? See CES 2012 Gadget Wrap-Up: Cool To Crazy. ]

The energy at the show was around exhibitors such LG and Samsung, both of which thrive by making important evolutionary improvements to products, but not revolutionary ones. They've taken Apple's smartphone and tablet concepts and produced as good or better versions running Android. To a large degree, it's the PC story all over again, with a timeline accelerated by the higher stakes and better skills of the players.

As the PC industry grew up, Apple made advances; IBM made reference designs; and Compaq, Dell, and a pile of others made the money by offering incremental improvements and running the licensed operating system of the day.

The same is true for ultrabooks, the ultrathin laptop-like devices that were all the rage at CES. Intel offered the reference design, and the Asian manufactures ran with it. Samsung, Asus, LG, Toshiba, Sony, and Lenovo are all cranking out multiple variations of the ultrabook, while HP unveiled just one model in Vegas and Dell trotted out a poor contender in the XPS 13. Dell's version is too thick and heavy, the resolution's too low, and the processor's too slow. (Other than that, how was the play, Mrs. Lincoln?)

After spending a week at CES, I'm convinced that along with Apple--which could be relegated to much smaller market shares based on its price premium--the winners in phones, tablets, and now ultrabooks will be the Korean and Chinese vendors. Costs in the U.S. and Japan are just too high for most manufacturers there to compete, and as companies such as HP and Dell size up the profit margins on those products, they'll choose to spend their intellectual and R&D capital where they can make some real money: in back-office systems.

For the most part, former HP CEO Leo Apotheker, ousted in September, had it right in wanting to spin off the company's personal systems group, a decision his successor, Meg Whitman, has since reversed. If Apotheker hadn't botched that effort, showing all the finesse of a (drunken) bull in a china shop, the result probably would have been a positive one for HP. Now it'll have to get there through attrition.

If Asus, Lenovo, LG, and Samsung (not to mention Vizio, Acer…you get the idea) can make MacBook Air-like ultrabooks that sell in the $600 to $700 range, it will pretty much be game over in the personal systems market for HP and Dell. Apple will be challenged too.

Compare HP and Samsung as an illustration. Both companies offer top-of-the-line ultrabooks for $1,399; the specs are similar, except that the case for HP's machine is made of Gorilla Glass, while Samsung's is aluminum. The HP version looks cool, but it weighs 50% more than the Samsung model. And Samsung is already offering a number of less expensive ultrabook versions, while HP has just this one. That fact alone should make you wonder how committed HP is to competing in this sector. [[ Editor's note: HP contacted us after this story published, to note that it also offers the Folio 13, which it considers a business ultrabook (and thus did not bring to CES to demo.) The Folio 13 is similar to Dell’s XPS 13, but weighs a half pound more and sports a bigger battery. ]]

So, the trend is clear, in a few years it’ll be about as unlikely that you’ll be buying end user gear from traditional IT vendors as it is that you’d buy a TV or digital camera from one of them. That certainly will be the case for tablets.

You can get comfortable with these new vendors as your suppliers, or you can take matters a step further and leave the decision about end user hardware to your end users. A nod to the latter notion came at CES from none other than VMware, which showed its virtualization software running on an LG phone--the idea being that users would buy the phone and carve out a virtualized corner of it for their work environment.

It's still early in the game, but as your company's ranks fill up with employees who've grown up with technology, they'll be less and less willing to use the locked-down systems IT wants to provide. It's time to embrace this new direction.

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1/31/2012 | 2:50:20 AM
re: One CES Lesson: HP's Apotheker Had It Right
I think Meg Whitman will have to do something before she has "all the finesse of a (drunken) bull in a china shop." To this point, she has basically just said that she is going to continue down the path of irrelevance with HP's outdated business model. Leo made a mess of the execution ($12 billion for Autonomy was maybe the most absurd acquisition in IT since, well... Palm), but he at least recognized the need to change something. Meg seems to have decided that the reinvention thing didn't work, so lets go back to ink and pushing PCs and x86 servers in volume as the margins continue to tank.
Radio Free Omaha
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Radio Free Omaha,
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1/30/2012 | 10:35:46 PM
re: One CES Lesson: HP's Apotheker Had It Right
"They've taken Apple's smartphone and tablet concepts and produced as good or better versions running Android." Hilarious! "After spending a week at CES, I'm convinced that along with Apple--which could be relegated to much smaller market shares based on its price premium...." Hilarious! So I was thinking this was a comedy column. But then I came to the reference to Meg Whitman, which was soberingly right on, except it didn't seem to make clear that she is the one that has "all the finesse of a (drunken) bull in a china shop." If you'd done that, then that would have returned you to your winningly funny ways. Although it might still have been being too nice to her.
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1/21/2012 | 5:33:30 AM
re: One CES Lesson: HP's Apotheker Had It Right
Good comment, Art. I agree, there are no great options for HP, only less bad options. They tied themselves too tightly to Microsoft and now they are going to lose a substantial portion of the client side with the rise of Android/Linux and Apple. HP, and Dell, seem to be blind to that fact. They are just addicted to Microsoft's steady revenue streams, albeit at give away margins, and do not want to take on the user experience side of the OS.

IBM does more than ok, but that is a different story. IBM sells highly differentiated servers/storage and software (as well as services) which have little to do with the client side. There were no strong synergies for IBM with PCs as all of their businesses were in the data center or on the business process side. Unlike IBM, HP has to worry about the impact of PCs on their large printers/ink and lower-end x86 servers businesses. No one stopped purchasing WebSphere or mainframe because they could no longer get a bundled deal with ThinkPads, but they may stop purchasing HP printers/ink and x86 servers if they cannot purchase them with PCs. IBM was also were not so foolish as to acquire a giant PC company when the writing was on the wall that PCs were becoming commodities. IBM acquired PwC plus software companies, HP acquired Compaq and they have been going in different directions since that time. That is HP's issue, the "Compaq problem", they have too much of their business wrapped around the client side or client-plus commodity data center hardware.

As you mention, this may be a slow death through attrition as the Asian manufacturers break-up their PC/printer strongholds (or PC/printers just become irrelevant), but I think losing PCs would result in a rapid death. At least holding onto PCs gives them time to come up with a plan.... Other than that, things are great at HP!

PS, I think the Itanium blowup by Oracle is going to be a huge hit for HP, much larger than people realize. The Itanium servers, BCS, look negligible on HP's financials, but when you consider the services/software that is attached to those installs, as well as x86 servers/storage that are held in place by them, it is a much larger impact.
ArtWittmann
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ArtWittmann,
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1/19/2012 | 3:47:30 PM
re: One CES Lesson: HP's Apotheker Had It Right
Excellent summary of the situation, Simon. The notion of the one stop shop is certainly something that Ray Lane said HP's customers want from the company. But I don't think that really exists today. If you take end user computing devices to be just laptops and desktops, then sure, HP's one stop shop story makes sense.

But that's not the case anymore. There simply is no vendor who has your smart phones, tablets, PCs, servers, storage and more. So if that one neck to choke was really important to me, I'd pick Samsung to be my end user hardware provider and HP, IBM or Dell to provide the back office gear.

Your point about price leverage with Intel is a good one, but I'm not sure it's so big as spell the need for staying in the end user system business. IBM does ok.

You see both HP and Dell moving as quickly as they can to beef up differentiated offerings in networking, storage, services and software. How well and how quickly they get there will have a lot to do with the health of their businesses. The asian manufacturers will take the end user hardware business. It's not a matter of if, but when. Google is doing its best to see to that.
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1/19/2012 | 4:57:17 AM
re: One CES Lesson: HP's Apotheker Had It Right
Good article, Art. I don't know if I agree about HP and PCs. I definitely agree that PCs are commoditized and everyone and their cousin is coming to compete. The problem for HP is that their whole company is built around PCs at this point, or at least the one-provider value proposition. They rely on their component volumes from PCs to lower the costs on their pretty undifferentiated x86 servers and storage. Also, if HP loses its "one-stop all IT infrastructure" value proposition, what's left? If they have to compete based upon each product set's individual merits as opposed to a bundled deal, they will get killed. Servers are behind IBM. Storage is behind EMC, NetApp, and IBM. Networking is behind Cisco and Juniper. Outsourcing/managed services are behind IBM, Accenture, and the Indian companies (Tata, Infosys and the rest). Software is behind... every major software provider and is largely tied to their infrastructure. They will still have print/ink, but that is declining and also tied to PCs. If their customers are no long "HP shops" and look at each purchase individually, bad things happen for HP. IMO, if they lose PCs, they lose x86 servers (Itanium is pretty well gone already), if they lose x86 servers, they lose storage and network, if they lose hardware in general, they lose software/services. You may be right that companies will start to shop PCs independently from everything else and the same result will happen through attrition, but corporate IT managers don't really change anything unless someone is making them. It could take a long time.
Server Market Splitsville
Server Market Splitsville
Just because the server market's in the doldrums doesn't mean innovation has ceased. Far from it -- server technology is enjoying the biggest renaissance since the dawn of x86 systems. But the primary driver is now service providers, not enterprises.
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