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HP eager to replace brittle IT

Data center profits from mobile and population explosions

Going to war with Cisco and EMC

Donatelli said that the merged ProCurve and 3Com switching businesses were also profit centers. ProCurve switch sales, he said, rose by 42 per cent in the third fiscal quarter ended in July, and that sales of 3Com products were ahead of plan. Donatelli trotted out the high-end A12500 modular switch as an example of how HP was going to make money, saying that the product had more switching capacity and burned less energy than the main competitive product (from Cisco, but he didn't say that), but that HP could sell it for 35 to 40 per cent less than Cisco and still make twice the average margins that HP gets across all the products.

Cisco went to war with HP by entering the server business, and HP intends to turn it into a networking and server price war. HP is the dominant server maker in terms of shipments, with more than a third of the total, and is the number two player in networking now, with over 24,000 customers and over 5,000 certified networking techies. And, as HP itself showed earlier this week - and no doubt timed for the securities analyst meeting - companies can purge Cisco switches from their data centers, as HP has just done.

Donatelli said that HP believes that ESSN will have a total addressable market (TAM) for 2013 of around $115bn, with $50bn coming from servers, $35bn coming from storage, and $30bn coming from networking gear. Assuming that HP can boost its networking share to something akin to its server share (roughly a third of the networking TAM, and probably not attainable by 2013 unless HP really cranks up the price war) and do the same for storage (theoretically possible but tough), then this infrastructure business could be the most profitable part of HP, standing alongside printer ink. That was the plan behind merging with Compaq, after all. In a sense, the server business is like the printer ink and the various devices are the cheap devices that burn up the ink. It's just that they serve up pages instead of printing them. (And, luckily for HP, people still want to actually print lots of stuff, too.)

Storage has been somewhat problematic for HP, Donatelli conceded, but with the acquisition of 3PAR, the company had a modern, flexible, scalable, and resilient storage product that can complement its BladeSystem Matrix machinery. Donatelli had nice things to say about the Ibrix X9000 scale-out NAS, the HP Labs StoreOnce de-duplication appliances, and the LeftHand P4000 scale-out SANs, but is clearly much enamored with the 3PAR arrays, as was Lesjak.

The thin provisioning, automatic storage tiering, multi-tenancy, shared-memory architecture, and built-in workload management and load balancing in the 3PAR arrays are years ahead of the competition, according to Donatelli, and therefore justify the $2.4bn the company paid to acquire 3PAR in a bidding war with rival Dell. And will allow HP to do a better job taking on EMC in the external disk array racket without relying on rebadged Hitachi arrays gussied up with some HP software features. (Oracle killed its OEM agreement with Hitachi, and it would not be surprising to see HP eventually do the same, once the 3PAR product is ramped up many years from now.)

Both HP's services business and printing business are somewhat less tightly coupled to the core IT bits extending back from devices through switches to servers and storage. But services is the filling in the IT cake and printer ink is the icing as far as HP is concerned, and the company has every intention of becoming more of a player in services and holding its number one position in printing as people move from analog to digital formats.

Ann Livermore, who runs HP's Enterprise Business group, which includes the Enterprise Services group and the ESSN hardware group added together, said that the services TAM would be $640bn by 2013, with a compound annual growth rate of between four and six per cent between 2009 and 2013. None of HP's services businesses - outsourcing, application services, technology support, or business process outsourcing - would grow particularly fast, but that the services market was huge and fragmented. The biggest player, IBM, had only 7.2 per cent of the 2009 TAM according to Livermore, with HP getting 4.5 per cent and well ahead of Fujitsu, Accenture, and CSC. The trick, Livermore said, was not just to take on IBM but to develop expertise to take on niche services companies that were tapping into lucrative areas. (Or perhaps to buy them.)

The other trick, and one that will not make HP employees happy, is to cut costs. HP is going to try to remove costs from Enterprise Services such that as it enters 2014, it has an annual run rate of cost savings of $1bn and can pass through between $500m to $700m to pretax earnings. ®

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