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HP eager to replace brittle IT

Data center profits from mobile and population explosions

Analysis The top brass at Hewlett-Packard – which became the largest IT company in the world two years ago and will likely stay there because IBM no longer cares for the title – want a bigger piece of the ever-changing IT pie. And they think they have a plan to not only do that, but also to grow the pie over the next several years.

As El Reg reported on Tuesday, the rousing message of growth and prosperity from HP's security analysts meeting in San Francisco was not delivered by a new president, CEO, or chairman, but by CFO and interim CEO Cathie Lesjak and the top lieutenants running its services, system, PC and printing divisions plus the top sales guy. And they seemed pretty confident that HP already had the right strategy to capitalize on IT sales in our companies, in our homes, and indeed wherever we go in this increasingly mobile world.

Lesjak began her presentation with lots of demographics that justify HP's continuing enthusiasm about peddling consumer devices and seeking to control the "experience" that users have as they use applications from various handheld devices and PCs. Unlike IBM and Oracle, HP wants to be in the low-margin PC business and bought Palm eagerly to control the kinds of devices that a large and growing portion of the world's population things of as their primary way of computing and communicating.

It's no wonder at all that Cisco, the networking giant, has expanded into servers, partnered for systems software, created or bought its own unified communications and web meeting applications, and is looking at adding its Cius business tablet to the mix. Cisco sees the future of IT the same way that HP does, and indeed the way Apple does: You want to own as much of the hardware and software underpinning an online experience - from the handheld, notebook, or desktop computer back to the data center and out again - as you possibly can.

The demographics, said Lesjak, are unavoidable. The world's population will grow nearly 20 per cent, to 7.8 billion, between now and 2025, bringing another potential 1.2 billion electronic gadget customers into the world. There are 1.8 billion people connected to telecom networks and the internet today, and this number is growing fast thanks in large part to smartphones and other relatively cheap devices. There are 4.6 billion mobile devices, 1.3 billion PCs, and 500 million PCs serving those 1.8 billion people today.

Not only will there be more people in the future, but the citizens of Earth are urbanizing at a tremendous rate, with cities adding 60 million people each year. That's four Shanghais every dozen months (just to make the number more real). While Lesjak did not talk about how the established economies are going to have issues with preserving their middle class, and thus (in theory) making people in those economies choose what they spend on more carefully, HP's research says that the global middle class is exploding from 440 million today to 1.2 billion by 2030. That middle class is going to want online services enabled by high tech, and they are going to buy not one, but multiple devices to access these services.

Which, of course, is why HP bought Palm in April for $1.2bn. Todd Bradley, who used to be CEO at Palm and who also ran PC maker Gateway's operations, has been running HP's PC biz for three years and there is perhaps no one better to give a coherent strategy to HP's client devices. Some will run webOS, which HP will tightly control and not license as Palm did to try to make itself more relevant.

There's no good reason a whole family of devices - some of which might be shaped like a PC and many of them that will not - cannot be created for a new generation of end users who think of the internet as their computer. That said, Bradley told analysts that as far as HP's prognosticators could tell, PC makers will ship some 500 million PCs in 2013 (real PCs) – and about two-thirds of them will be notebooks. But he also said that by 2013, nearly half of Personal Systems Group's revenues would be outside of the core Wintel PC business.

Lesjak said that the increasing number of mobile devices were putting a strain on already brittle back-end systems humming away in the eight million data centers and server rooms of the world, which are jam-packed with 32 million servers, 31 million terabytes of disk storage, and 1.2 billion Ethernet switches. By HP's reckoning, there are some 7.8 million server rooms in the world with under 1,000 square feet of space - you are probably near one as you read this - with 170,000 ranging in size between 1,000 and 20,000 square feet and another 14,000 with more than 20,000 square feet of space.

HP is best known for its PCs and printers, but there is not much direct money here, and Bradley and his peers know it. Yes, as Bradley said, the PC supply chain allows HP to wring suppliers for better prices on components that are used in hardware and software, but the back-end systems and the services that HP hopes to wrap around them are where the real money is.

Dave Donatelli, a transplant from EMC who runs HP's Enterprise Systems, Storage, and Networking business, said in his presentation yesterday that this supply chain leverage has enabled HP to cut hundreds of millions of dollars from the group's costs last year. The company's VirtualConnect integrated networking for blades also helped HP boost profits as well as sales, explained Donatelli. With VirtualConnect, the links to switches for servers and storage in BladeSystem blade servers are virtualized, which means you can more easily reconfigure the links but it also means customers buy less hardware. The thing is, customers will pay a premium for VirtualConnect, which has arguably caused the resurgence in HP's blade server sales after taking a whipping a few years back from Big Blue, and that means more money on the bottom line for HP. Donatelli showed a stack of 217 parts that would be needed to link up a rack of servers, and how two VirtualConnect switches could replace all of these parts, save customers $185,000 per rack (60 per cent of the networking costs chopped for the rack), and still give HP margins that are twice as high as what HP gets overall.

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