Hewlett-Packard’s NetServer Division - #3 to Get Ready, or #4 to Go?

  • Written By: R. Krause
  • Published On: March 27 2000



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Vendor Genesis

Hewlett-Packard (HP) was formed in 1939 by Bill Hewlett and David Packard, starting out in the famous garage behind Mr. Packard's house in Palo Alto, CA. The first product was a resistance capacity audio oscillator, an instrument used to test sound equipment. HP continued to grow through design and production of instruments and test equipment.

HP's first entry into a computer-related business was in 1958, when it acquired a graphics-recorder business. This grew into HP's printer business, one of the world's largest. HP continued to expand its product portfolio, including medical devices and analytical instrumentation, primarily through acquisition.

In 1999, Hewlett-Packard decided to split the company into two separate companies. The computing-products retained the name Hewlett-Packard; the new company, called "Agilent Technologies", encompasses the test and Measurement (T&M), chemical analysis, medical, and semiconductor product lines. Because of this split, the revenues and earnings figures for 1999 do not "map" (vis--vis trends) to 1998. In

1966, HP developed its first computer, the HP 2116A. This product was originally designed as a test and measurement equipment controller. This eventually led to the development of the business-focused HP 3000 minicomputer in 1972. In the early 1980's, Hewlett-Packard produced the HP-85, their first PC, and in 1986 HP introduced its first Reduced Instruction Set Computing (RISC) machine.

Hewlett-Packard now provides personal computers, printers, workstations, notebook computers, and servers. There are three different server product sets, using three different architectures:

  1. The HP 3000 series, which uses the MPE operating system

  2. The HP 9000 series, HP's Unix product line, running HP-UX (HP's Unix version) on PA-RISC architecture

  3. The HP NetServer series, their Intel-based, Windows NT-focused servers

Although the first two products are interesting, and the HP 9000 is a high-performing Unix system, we will be discussing only the NetServer in this Note.

Hewlett-Packard derives approximately 85% of its revenues from product sales, with the remaining 15% coming from services. The markets in which HP competes include desktop PCs, notebook PCs, workstations, printers, storage, and servers.

HP is the world leader in printers, and is a key player in all the other markets mentioned. HP's revenues for fiscal 1999 were approximately $42.4 Billion, with income of approximately $3.5 Billion. Growth rates for the 1998-1999 period are not applicable due to the HP/Agilent split. However, in years prior to the split HP's revenue growth was approximately 11% per year, with income growth approximately 12% per year. Income grew faster than revenue, a trend we expect to see continue post-split.

Vendor Strategy and Trajectory

Hewlett-Packard's corporate computing philosophy is to provide reliable solutions to whatever computing needs customers might have across the spectrum of architectures. These architectures include the Intel x86 architecture, Unix (their HP-UX servers), and their proprietary PA-RISC architecture. With the exception of IBM and possibly Compaq, HP has arguably the broadest set of computing solutions available in the market today.

HP has been a leader in some market areas, including workstations and Unix servers, but has been relegated to fourth place in market share (both US and worldwide) for Intel-based servers. Although fourth place is usually not a bad showing, this is a relatively poor result. HP formerly had third place, and the "Big Four" (Compaq, Dell, IBM, HP) control approximately 75% of the Intel-server market, which means that fifth place is effectively "nowhere".

HP's product strategy is to provide high-availability, high-reliability solutions. This is highlighted by their "Assured Availability" program, which is a joint effort between HP and Marathon Technologies and is discussed later in this Note. In addition, HP has provided redundant systems (power, cooling) in their NetServer line for close to five years, highlighting their commitment to reliability. HP is trying to increase market share by combining their reliability focus with their ability to deliver multiple OS/architecture solutions throughout the enterprise .

Vendor Strengths

Availability/Reliability/Manageability

HP provides reliable systems and servers, enhanced by their "Assured Availability" program, which uses the "Endurance" configuration developed by Marathon Technologies. For the appropriate price, the program will guarantee availability up to 99.999% annually - in other words, five minutes of downtime per year. We get nervous when we see the phrase "up to XX%" (because it does not state the minimum guarantee), but we appreciate HP's willingness to provide the service for NT servers, especially considering NT's reputation for lack of robustness. HP has also focused on designing in hardware reliability through redundancy. As mentioned above, their servers were among the earliest adopters of redundant power and cooling for small servers (i.e. those running Windows NT), features that have become standard in the industry.

HP's management tools (OpenView and Top Tools) are well known through the industry. In addition, other vendors (including Dell) have at times included HP's products in their own offerings. It should be noted, however, that OpenView is not universally loved - some feel it is difficult to use.

Packaging

HP has earned a reputation for designing servers which make it easy for the customer (or service tech) to upgrade or replace components. HP's design team(s) generally pay attention to ergonomic issues, such as judicious use of color coding, good labeling and "mapping" of functionality into an effective means of presentation.

Corporate Viability

HP went through some tough times in the late 1990s, including a number of fiscal quarters where they underperformed market expectations. As recently as mid-1999, when new CEO Carleton "Carly" Fiorina was hit with some significant earnings problems, HP looked to be thrashing about and its stock was pummeled. However, Ms. Fiorina has managed to restore Wall Street's confidence in HP, and earnings have rebounded as well.

Breadth of Offering

As mentioned earlier, HP is one of the two or three companies which can supply computing hardware and software across the entire spectrum of needs. This means it can provide a set of products for a heterogeneous environment, rather than being limited to an Intel-only or a Unix-only offering. Although IBM has a clear advantage vis--vis breadth, Dell's standard offerings are more limited, and it is unclear whether Compaq can combine its various acquisitions effectively enough.

Price/performance

HP is paradoxical in this area. For some time, HP's price/performance story was primarily confined to its Unix servers. NetServer performance, although reasonable, had typically cost more - in some cases significantly more - than offerings from Dell and Compaq. A typical example is the transaction-processing benchmark of $/tpmC - HP's previous submission in January, 1999 (the most recent one until the release of the LH 6000) provided 23143 transactions per minute (tpmC) at a five-year cost of $26.87 each. This compares poorly to a similar Compaq system, which delivered 22478 tpmC for $18.84 each. This translates to a premium of nearly $200K. [Note: Although the TPC-C benchmark is not the sole test of value, it is pervasive enough that Intel and Unix vendors submit frequently.]

However, with the recent release of the six-processor LH 6000, HP has beaten Dell (the former leader) by almost $1/tpmC, approximately seven percent lower than Dell's best mark. [Lower is better.] Although it is unwise to extrapolate the performance of an entire product line from the results of a single system, these latest results are a sign that HP is now more focused in this area. This is a "good thing" for both HP and its customers, but customers should monitor this closely over the coming months to see if the trend continues.

Vendor Challenges

Intel Reliance

For a number of years, HP has relied on Intel to provide Main Logic Boards for its servers. These boards are generally slightly modified versions of Intel "vanilla" boards. Like Dell, HP relied heavily - although not completely - on Intel for a lot of the "innards" for the eight-CPU servers released last year. Although this path means HP does not need to expend as much of R&D money as when they develop a product entirely internally, we question the long-term viability of this strategy. HP might consider weakening the bonds, as Dell claims it has.

Mixed message on performance

As with price/performance, HP is paradoxical. HP talks a lot about performance, but the published results (prior to the release of the LH 6000) indicate this is not one of their key strengths. In addition to a spotty submission record to benchmark groups such as the TPCC (no Intel-based server submission between January, 1999 and March, 2000), the performance figures have not provided a compelling story. For example, HP touts the performance of the new LH3000, but the only benchmark results are for the MAPI Messaging Benchmark (MMB) test and are average at best. [A Pentium III/733 MHz system giving an MMB of 15,000 vs. 14,600 for a January, 1999, Compaq ProLiant 7000 with Xeon/450MHz is hardly an earth-shattering result.]

There is nothing wrong with not being at the top of the heap in performance, but making it appear that one is on top by "judicious" use of comparative data is not a tactic with which we feel comfortable. If HP can continue to produce results on a par with those of the LH 6000 (tpmC for a 4CPU only 1% lower than Compaq's best result), we will modify our position.

Weakening Market Position

Although HP has not "fallen off the radar screen", its revenue market position dropped from second to fourth in 1999, and its WW unit sales share decreased from ~14% to 12.5%, and its US unit sales share lost even more[Source: IDC]. Its Intel server market position was passed quite easily by Dell, and it is now viewed by some almost as an also-ran. We believe part of this is due to HP's reliance on selling through value-added resellers (VARs). Dell has gone from nowhere to second place, primarily on the strength of its direct-sales model. Compaq, seeing its former dominance dissipate, is trying to emulate this. HP currently sells only three models (out of nine manufactured) through direct online sales to general customers. (HP has a special direct selling program for "named global accounts"; our focus here is on the everyday customer, not special situations.)

Compaq has estimated that a VAR/channel distribution can result in a cost differential of almost 15% - either higher prices or reduced profits. With an already-high price/performance position, HP cannot really afford the extra $$$. HP must either reduce costs or increase functionality to overcome negative perceptions.

Vendor Predictions

Despite the shrinking market share, HP will not disappear from the Intel server space. The division has problems to overcome, but the products are generally solid enough that the market will want to keep them around. We expect HP to continue to be a serious competitor in the Intel space in three years (75% probability).

HP has done well with its focus on reliability and availability. However, it will find that the market is less willing to pay a high premium for increased uptime. Dell has shown that high reliability and high customer satisfaction can be delivered for a lower cost. This has generated (and continues to generate) price pressures on the competition, including HP. Dell does not offer the breadth of products that HP does, which translates into some heterogeneous environments being better suited for HP than Dell. However, Dell is extremely aggressive in the pursuit of sales, so this may be a false sense of "security" for HP. We therefore continue to see the need for HP to address pricing and distribution. (80% probability).

We expect HP to continue to form alliances with companies having complementary products, such as the deal with Procom for Network-Attached Storage (NAS) servers (70% probability). HP might consider forming a relationship with (or buying) a load-balancing software company, with the purpose of developing a low-cost pre-packaged cluster solution, similar to Compaq's "Toucan" unit (now called the ProLiant CL380). Although this can be considered a "me too" product, we can see the benefits. HP should also consider a relationship with one of the 1U-high server designers/manufacturers to reduce time to market.

We expect HP to update its product line in a timely fashion, and has already started with the LC2000, the LH3000. However, producing "more of the same" type of products will be insufficient to move NetServers beyond its current spot. When the LPr was released, 1-2 years ago, it was something new and different, with the potential to have a big impact on the marketplace. HP needs to continue in a that vein, and the LH/LT 6000 series is a strong start.

We do not see HP being acquired by any of its hardware competitors - there would be insufficient extra capability to make the deal worthwhile. We do not see HP acquiring any of its hardware competitors. (70% probability of HP staying essentially "as is").

Vendor Recommendations

Improve price/performance

The NetServer product line cannot afford to be significantly higher in price/performance figures than Dell and Compaq. Both of those competitors have better price/performance figures, Compaq has three times the market share, and Dell has the momentum. Status quo is not viable if HP wants to regain third place, or even increase its share percentage. HP must compete head-to-head if it wants to stay in the game. The excellent results for the NetServer LH 6000 indicate HP is trying to remedy this situation; we expect it to continue, but will monitor the situation.

Investigate direct sales (and benefits) more thoroughly

Investigate direct sales (and benefits) more thoroughly As Compaq has discovered (we think), emulating Dell's direct sales model will reap benefits. Reduced pricing will come from at least two areas: reduction of outflow to VARs, and improved return on capital through shorter inventory and production cycles. If HP decides to go through with this, it will take them at least a year to implement it, but the payback will be worth it.

Revamp product line

HP's server products need some updating. The recently-released LH 6000 has posted impressive numbers in benchmark testing, for both performance and price/performance, and LT 6000 has set a new CPU density standard for 4U-high (1U=1.75") rackable systems. Its new mid-range servers, the LC 2000 and LH 3000, are solid but "unexciting" in the sense of groundbreaking new functionality. Unexciting is not necessarily a bad thing, the ability to be rock-solid is underrated. However, in today's highly competitive server market, customers can get stability in a number of places, and are looking for more in the way of features and benefits. The rest of HP's product line is getting a little "long in the tooth" - HP should work on those products next. One way this might be accomplished is through focusing on highly dense packaging. HP has been able to do it before with the LPr server (2 CPUs in a 2U-high rack box), the LT 6000, and their highly dense Rack Storage/12, a unit which set a disk drive density standard which had it ahead of the competition for 1-2 years.

As mentioned earlier, we do not believe NetServers will disappear from the Intel server landscape (80% probability), but they will have a difficult time regaining lost ground. However, we believe they can do it (65% probability) if they decide to make the necessary changes (75% probability).

User Recommendations

Despite the challenges listed above, users should include HP in their Intel-based server selection process. The users with the greatest affinity for HP will be:

Looking for solid systems, not necessarily concerned about TCO

HP produces well-designed systems that contain a fairly standard set of features. Their products are generally solid, with neither ground-breaking functionality nor performance. The LH 3000, one of HP's two new servers, does provide more functionality than much of the competition, For example, its storage and I/O capabilities equal or exceed that of the major competitors. But with the rackable version 1U larger than the Dell PowerEdge 4300, the user ends up losing some "density" of functionality, which increases cost and TCO.

The LH 6000's price/performance is a strong attempt to reverse this trend, but it is only one product - HP needs to ripple this through its entire NetServer line.

Looking for one-stop shopping for a heterogeneous environment

As mentioned often herein, HP has arguably the most diverse product offering outside of IBM. This allows customers to buy from a manufacturer, not just a VAR or consolidator, when they need all manner of computing hardware. Customers should weigh the one-stop benefits against anticipated pricing benefits from a vendor like Dell.

Although Dell (for example) can provide Unix systems as a semi-custom order, it is clearly not their main focus, so the lower upfront price may exact a higher price down the road. Given that HP's Unix servers are considered excellent, and HP-UX is one of the more robust operating systems, customers have less worry when combining Intel and Unix through HP.

In summary: HP's NetServers are solid, reliable products, but have had price and performance shortcomings. Whether the solid results from the LH 6000 will be a one-time occurrence, or become a trend, customers must monitor the situation and factor it into their decision-making process.

 

 
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