IBM-HP Rivalry Heats Up

IBM made a bigger incursion than usual at this year's HP World--a trade show for thousands of Hewlett-Packard Co. customers, equipment resellers and companies whose technologies work on HP computer systems.

IBM traditionally has a booth at HP World to display software that runs on HP systems. But at the August show in Atlanta, Big Blue urged attendees to depart HP World for a seminar about IBM's own systems, sweetening the offer with a drawing for a free convertible.

Meanwhile, IBM marketers drove around the Georgia World Congress Center handing out Lego building blocks to brag about the toy company's decision that week to replace HP computing systems with IBM products.

In a rivalry with big implications for these two U.S. technology stalwarts--and for the companies, schools and governments that spend billions on their products--IBM is doing its utmost to keep HP a wannabe.

HP picked this fight last year when it bought Compaq Computer Corp. for $19 billion, the biggest high-tech acquisition ever, and said it would challenge IBM's lead in lucrative corporate computing markets.

And while there is little sign that HP is even close to beating IBM at its own game, IBM isn't taking chances.

It has doubled the commissions it pays resellers who oust HP products. It beats its chest whenever it beats HP to a big contract, like one coming next week with Alpine Electronics Inc. And its people portray HP as a bit player in services and software--which generate two-thirds of IBM's revenue.

"I don't ever see HP," said Scott Hebner, an IBM software vice president. "They don't bring any real software assets to the table."

The head of IBM's systems group, William Zeitler, contends HP is so worried about losses in the server market that it is aggressively cutting prices and possibly "stuffing" its sales channel--artificially boosting revenue by giving resellers more products than they need. HP denies the charge.

Zeitler also predicts that most customers who spurn IBM servers will choose low-cost specialist Dell Inc., not HP.

IBM now pays a 10 percent commission, up from 5 percent, to certain resellers who get businesses to replace their HP equipment with IBM gear. IBM gives the same cut if it's Sun Microsystems Inc. that's on the losing end.

HP says it considered all the IBM broadsides a compliment. And it, too, offers a commission to sales partners who displace IBM or Sun--15 percent.

"It's not surprising IBM is trying to point their guns in our direction," said Jim Milton, an HP senior vice president in enterprise systems. "It's a testimony to how we're doing in the marketplace."

Zeitler called the commission increase a mere sign of IBM aggressiveness.

"We intend to move as many users as we can to our side, and use every weapon in our arsenal to do it," he said.

That battle helps customers.

At O.C. Tanner Co., a workplace services firm with IBM and HP servers, chief information officer Dave Berg said HP "bent over backwards" to keep IBM from making more inroads. HP let Berg try a server for free for six months before he finally decided to buy.

"I like the idea of having both of them captive, because in some ways, it keeps both of them honest," Berg said. "As long as they serve us well, what's the difference?"

Actually, both companies love to highlight their differences.

Armonk, N.Y.-based IBM, which generated $87 billion in revenue the last four quarters, is mainly focused on corporate and government markets, though it still makes consumer laptops. Meanwhile, Palo Alto, Calif.-based HP, which had $71 billion in revenue in the past year, also sells consumer printers, cameras, and home entertainment devices.

When it comes to corporate computing, IBM makes more of what it sells, including Web infrastructure software and chips for several kinds of servers. IBM says its in-house assets help it shape products for customers in particular industries.

HP has its own network-management software, but mainly incorporates software from other vendors, notably Microsoft Corp., BEA Systems Inc. and Oracle Corp. HP is banking heavily on Intel Corp.'s Itanium server chips, which HP co-developed.

HP says its approach helps customers get more out of their existing equipment instead of forcing them to buy all new stuff.

"IBM is using a page from the playbook of the '70s and '80s, which was: IBM's operating systems, IBM's applications, IBM's services," said Nora Denzel, who heads HP's Adaptive Enterprise service. "Ultimately that play was rejected."

HP says adopting technologies made by others is less expensive. But IBM has made similar bets--it also offers servers with Intel processors and the open-source Linux operating system.

And there isn't much evidence IBM costs more.

Interland Inc., a Web hosting company with HP and IBM servers, recently shifted new purchases toward IBM. The two brands were "very similar," said John Lally, Interland's product management director, but "IBM was able to win on economics, which was our most important decision point."

IBM is the world's top server seller by revenue. HP sells more units, however, and is the top supplier of servers on the Linux and Windows operating systems.

Those are two fast-growing segments, but they also produce lower profit margins.

Another risk for HP is having "an awful lot on its plate, because it is spread across so many markets" and is trying to cut costs, said analyst Charles King of the Sageza Group.

Also, while both companies' services divisions can help drum up hardware business, HP has only 65,000 employees in services to IBM's 180,000. IBM bolstered that by buying PricewaterhouseCoopers' consulting arm last year for $3.9 billion--a deal HP explored in 2000 at about $17 billion.

"From HP's standpoint, the services side is where they still have a way to go versus IBM," said Meta Group analyst Rob Schafer.

Even so, HP and IBM had better get used to each other. There's only so much business to go around.

In April, Procter & Gamble Co. hired HP to take over its internal tech operations, a 10-year deal worth $3 billion. Five months later, P&G announced a 10-year, $400 million pact to turn over management of its human-resources department to IBM.

Each contract required HP and IBM to take hundreds of P&G employees on as their own, which means "both IBM and HP will be working collaboratively in several areas," P&G spokesman Damon Jones said.

"We don't see any reason," he added, "why these companies won't be able to work together successfully.