Tough road ahead for Dell, HP
Rahul Sachitanand and Kushan Mitra April 27, 2011Two acquisitions, one made by former Chief Executive Mark Hurd in April last year and the second by its new leader Leo Apotheker in February have become the cornerstones of Hewlett-Packard's strategy to hold on to its position as one of technology's top dogs. The Palo Alto, California headquartered tech giant is not alone at transformation. Some 1,730 miles away, in the small town of Round Rock, Texas, Michael Dell, founder of the services-to-servers firm that bears his name, is in the midst of his own overhaul, building and buying his way into the cloud computing market, strengthening his services portfolio and belatedly entering the consumer electronics business with tablet PCs and smartphones.
Both firms, HP top of the pile with over $125 billion in revenues, and Dell, a company that started with just PCs, are fighting a similar battle. Both have been upstaged in recent months by the rapid rise of Apple, which first captured a large share in an image-conscious consumer market (think iPhone), but has increasingly made inroads into the lucrative enterprise space (think iPad). Apple's rise has caught both HP and Dell flatfooted, and now both are scrambling to make up for lost time. Early April, Apple's market cap was more than two and half times that of HP and Dell combined.
"Apple has done really well," agrees Dell, in a late-March interview. But "we're big fans of Android and it is fascinating to see how it (phones based on this mobile operating system) is outselling the iPhone, which was unthinkable a year ago." HP's response has been to buy ailing mobile devices company Palm, primarily for the target's WebOS, an operating system that Palm was developing for its smartphone range.
This $1.2 billion acquisition will power all of HP's latest mobile devices, from its iPad competitor, the TouchPad, to those embedded via the browser on tens of millions of desktops and laptops that the company still sells, and even on its printers. Dell, on the other hand, isn't shaking the market at its foundations with its plans. "We have the Streak and soon the Honeycomb (based on Android) for the consumer market," says Dell. "However, in overall spend, this market is a relatively small portion" of the overall computing products and services market.
Few analysts feel that HP is in any sort of financial trouble, but with the increasing commoditisation of hardware, other than the top-end of the market where everyone is trying to play catch-up with Apple, there is a feeling that HP needs to change fast. In an area outside the main ballrooms at the Hyatt Union Square in San Francisco, mid-March, HP was showcasing its future, from Palm devices running WebOS to the TouchPad. HP technologists were going out of their way to convince all comers - analysts, investors and mediapersons - that the tablet would trounce the iPad. However, half the crowd was using iPads themselves. The problem for HP is convincing application developers to get on board the WebOS train, evidently.
The 46-year-old Dell, instead, is betting his house on re-inventing his firm, once labelled a PC maker, into a complete technology solutions firm, with none of the legacy of its older rivals such as HP and IBM. As part of the transformation, he has followed up the purchase of Perot Systems in 2009 with the acquisition of InSite One in December last year, to strengthen his position as a tech vendor for healthcare clients. "To be relevant to our customers, we had to figure out what they wanted to accomplish beyond (buying) our shiny boxes," says Dell. So, he is trying to push them to pay for higher-value services and solutions from his firm. "We are making huge progress… it is a $1.8 trillion market and Dell is a $61.5 billion company," he says.
A key technology transition that both companies are trying to desperately hang onto is the rapid rise of cloud computing. Technology analysts Gartner predict this market will be worth nearly $150 billion by 2014. These kind of numbers clearly have HP and Dell riveted. Apotheker, for one, is moving beyond the WebOS plank to the new 'Cloud' strategy he announced in San Francisco. This February, HP acquired Vertica, a realtime analysis provider, which he believes will help the company get a leg-up over the competition with its ability to provide everything from hardware to software and network security solutions. "In less than a month we have developed a solution that showcases the power of Vertica's solutions along with our hardware," he told an assembled audience, going on to display how the solution allows businesses to mine huge data banks in real time. And, as his Chief Technology Officer Shane Robinson adds, the cloud for HP does not mean just one thing because "HP covers everything, like no other information technology company does, from devices, the hardware providing the content to those devices, to services for companies providing that content and even security solutions".
Dell is not standing by and letting HP take over the market. He has been on a M&A binge of his own, buying eight companies in the past 12 months alone. "Dell today is a very different company from four or five years ago," he says. "Two thirds of our margin comes from the non-PC business." So rather than look at the broad cloud computing market, Dell is focusing on key technology trends and buying companies that help ride this wave (Compellant in data tiering, for example) or add niche technology offerings to its portfolio (like Boomi to strengthen its software as a service, or SaaS, offerings).
Dell thinks all his moves will pay off in the long term. Already, the benefits are visible. "We had record EPS and increasing margins all year, with our highest EPS ever in Q4; gross margins were highest in 10 years and we had $1.5 billion in cash flow… ," he boasts, referring to earnings per share and the fourth quarter. Dell has sold some 15 million servers since it got into the business and is now adding systems management tools to entice more companies to buy its products and services. He points to KACE, a company Dell acquired a year ago, which provides a plug-in box for servers, which according to him can sort through and manage all devices on a network in 15 minutes.
HP, meanwhile, is trying to extend the reach of WebOS to new segments. Vyomesh Joshi, Executive Vice-President, Imaging and Printing Division, HP, and an HP veteran is excited about WebOS because of the possibilities it represents in printers.
"Imagine, you can store a document anywhere on the Internet and print it from any printer that runs WebOS, because that is what will happen. All but the cheapest printers will have a smart operating system in the future, and that will represent a major opportunity for developers, to develop applications across different product categories - PCs, mobiles, tablets, printers and scanners." Even Apotheker believes that it is not the 'quantity' but the 'quality' of applications that determines success in any marketplace. "A system might have hundreds of thousands of apps, but most users will stick to a few hundred and we will get those important apps onto the WebOS platform," he says.
Despite all this wide-angle talk, both firms are also busy on the ground trying to find the best way to sustain growth. Dell, for one, has tweaked its business to now operate into four units - public-large enterprise, services, and consumer and small and medium business units and the firm seems to be benefitting from this reorganisation. "We want to be more vertically focused (on specific industries rather than technology)," Dell says.
As HP and Dell continue to search for new avenues to drive growth, it is hard to avoid questions around India's role in their larger plans. And, both firms are engaged in a fight for top spot in the Indian PC market, separated by around 0.5 per cent in the last quarter (Dell briefly overtook HP, only for the latter to regain the lead), even as they square off for a greater share of the market for technology services.
Dell had crossed a billion dollars in revenue a couple of years ago and is targeting $2 billion soon, says its chairman. He believes it has made some inroads into this market. For instance, the deal with Max Healthcare, where it combined its legacy business of PCs with its newer services unit to completely take over the hospital chain's IT operations. HP has had some issues integrating EDS, of which Bangaloreheadquartered MphasiS is part. But with its dominance of hardware, it has run into a situation of 'co-opetition', something that Apotheker, CEO of business software firm SAP until February 2010, says is very common in the industry. Still, with HP putting an increased focus on aspects such as real-time analytics, its partners are unlikely to be very happy, facing competition from the behemoth from unfamiliar quarters.
As customers get more demanding and nit-picky with what the likes of Dell and HP have to offer, the tech giants have their task cut out. HP may be king of the hill for now. But as George Colony, founder and CEO of Forrester Research, an information technology analysis firm, said in a recent interview to Bloomberg, Apple is all set to outpace IBM and HP to the top of the revenue pile by 2013.
"They'll be bigger than IBM next year, and they'll be bigger than HP the year after that." If that is indeed the case, Apotheker has an extremely difficult job at hand. A rampaging Apple and a growing move towards enterprise consumerisation, could also give Dell many more headaches, too.