FT : Hurd Saga Reveals IT Battle Lines

Thursday, September 9, 2010

The Mark Hurd soap opera is turning into more than just a diverting tale of a chief executive’s foibles and a board’s willingness to countenance a severe dent in the share price to protect its company’s ethical values.  A month on, the forced resignation of Hewlett-Packard’s former chief has taken a fresh twist.  It is one that speaks volumes about the new battle lines that are being drawn up across the IT landscape.  At the start of this week, Oracle, the biggest maker of the software used in large corporate IT systems, hired Mr Hurd for a senior role at the company.  Less than 24 hours later, Hewlett-Packard the biggest maker of computer hardware – sued to block the move.  Given that close alliances between companies like these have been the foundation on which the modern IT industry has been built, the row highlights a deeper fracture.  A nasty jibe from Oracle boss Larry Ellison, comparing HP’s directors to the “the idiots on the Apple board” who once fired its co-founder Steve Jobs, has rubbed salt into the wound.  Oracle is impatient to carve out new chunks of the tech market for itself.  Along with Cisco Systems, it has moved into the server and storage business against IBM and HP.  Defensively, HP is branching out into networking equipment and has been looking to beef up its software.  Mr Hurd’s arrival at Oracle is a clear sign that companies like these believe the greatest potential for future profitability lies in selling a wider package of software, hardware and services – a fact that Oracle has been only too eager to trumpet this week.  HP’s defensive legal manoeuvre shows that it recognises the threat.

It is not immediately obvious why anyone would want to get into computer hardware like this.  According to tech research firm IDC, worldwide server sales will creep up to $52.2bn by 2013 – but even then, the market will still be nearly 10% smaller than it was in the pre-crash year of 2008. The forces of technological progress all seem to be arrayed against companies in the hardware business.  From the inexorable march of Moore’s Law, which guarantees that computing power will cost less each year, to the spread of virtualisation, which makes it possible to process the same work on fewer machines, most of the value seems to accrue to the tech industry’s customers, not its suppliers.  Behind the pursuit of integration, however, lie two valid objectives. One is to protect the profit margins of a company’s core business.  With competition spreading, these are about to come under attack as never before. The IT industry’s traditional way of defending margins has been to lock its customers in with proprietary technologies.  But that game ended after the tech bust a decade ago, when the balance of power swung back towards the customer.  Since then, the spread of open standards has made it easier to shop around for products. Selling integrated bundles of technology is one response to this.  Even if the technology tie-in is weak, the single sales and support channel helps.  Having all the weapons in the IT arsenal at their disposal also gives suppliers more options in pricing their products. The second purpose of vertical integration is to compensate for slowing growth in core markets by moving into new fields.  In the jargon of the business, it’s all about winning a larger “share of wallet” from customers. The twin pursuits of market share and margin protection are not always compatible objectives – one reason why Wall Street feels in two minds about some of the diversification.  But even if margins are shaved, the increase in overall profit dollars should compensate.

The victims in this process are likely to be those companies that can’t protect their flanks from the all-out attack of expansion-minded rivals.  That helps to explain the extravagant bidding war over storage company 3Par that ended last week in a victory for HP.  The loser, Dell, may have been spared from over-paying, but at the cost of seeing its strategic options narrow.  Short of outright acquisition, tech companies are quickly coming to rely on fewer but closer alliances.  EMC, the largest maker of storage equipment, recently tried to make up for its lack of breadth through a joint venture with Cisco.  As the loose partnerships on which the industry used to rely harden into competing blocs, old friendships will get jettisoned – a fact of which Mr Ellison seems only too well aware.  The Oracle chief accused HP earlier this week of “making it virtually impossible” for the two companies “to continue to cooperate and work together in the IT marketplace”.  Given his own recent actions, it’s hard to believe that this wasn’t the conclusion he had in mind all along.

Reference : The Financial Times, Sep. 9th 2010

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