HP: following DEC's fate as Microsoft VAR?
Geese and golden eggs
Analysis A story that old DEC hands like to tell is about the time Digital was designing the MicroVAX. Ken Olsen went to the board and told them they could expect the share price to stagnate for a couple of years. Digital Equipment Corporation, Olsen said, would focus all its efforts on putting the VAX onto a chip (from a board) and things in the meantime would be grim. The MicroVAX turned out to be a roaring success, DEC's share price subsequently tripled, and Olsen was vindicated.
Can you imagine a tech CEO telling investors to stew in these post-bubble times? Remember, this is an era when technology is lauded as the saviour of the Economy. No, Wall Street's vultures would have their head on a spike within a week.
DEC could dare do such things, and we forget so easily, because it was the very vanguard technology company: one that made a religion of doing the Right Thing (even if it was late, or over budget), because it knew it could bring great technology to market. At the time, the behemoth IBM had already invented much of this great technology but its management made a point of not bringing it to market... because IBM could make more money from leasing old kit.
Only DEC's inheritance now lies, by the by, with Hewlett Packard. And as HP kicks off its annual OpenWorld summit in Los Angeles today, it's uncanny how closely it is repeating the steps that Digital took, moves that saw it fall from a superpower to a federation of failing businesses awaiting an asset stripper.
When Compaq's bid was accepted by the DEC board in October 1997, an unforgettable (and unsigned) Computergram analysis lamented how it fallen from its status as a tech titan to an overweight "Microsoft VAR".
But in HP's post-merger strategy becoming a Microsoft VAR isn't an accident: it's part of the design.
HP ditched its investment in Precision Architecture RISC, dumped - or more accurately, forgot about - middleware, and now sees its future as a slightly-differentiated Wintel OEM, one with better systems know-how, and greater economies of scale, than Dell. On the last two counts it's almost certainly correct, but it ducks the question of how can sustain its margins as a systems company, the vital margins that are needed to differentiate itself, as it moves closer and closer to becoming a commodity company.
Well, the answer is in the figures. HP's business has taken a bath in the last quarter, in all departments except printing and imaging, and finance. (Printing and imaging accounts for half of HP's operating revenue). PCs and enterprise systems tanked, although it's too early to tell whether this is a brief, post-merger hiccup, or whether it represents the kind of Ratner-effect prompted by Olsen's famous Unix-as-snake-oil gaffe.
Trouble is, HP has given every indication that systems R&D is sacrificial.
So how can we put this simply? Well, no matter how we try, we'll never put it as succinctly as Scott McNealy's barb: that Dell is a grocery store that sells bananas as fast as it can, and that the only value you can put on a banana is a bruise.
This simile deserves to be celebrated as widely as Olsen's "snake oil" aside, and if Scott were to retire today, and spend the rest of his life on a golf course, scratching his balls, he'd know that in perpetuity he'd be celebrated for this fantastic bon mot, which summarizes not only contemporary tech investment, but finance capital's rapacious disregard for technology's golden egg.
Put simply, Wall Street celebrates efficient distribution: it doesn't reward innovation. The reasons for this are fairly simple, even thought they sound a mite portentous.
Capital went digital, fast and first, in the mid-1980s, and logically, it seeks rapid rewards. That's all that money wants to do. Financiers are now under greater pressure than ever to get return on investments, faster than ever, because now they get their asses kicked in real time. That, in a nutshell, is why the world seems poorer and more reductive than ever. Dumb money makes for a dumb culture, and tech is no exception.
Add to the mix the devious financial instruments, such as hedge funds, that were created in the 1980s, and you really have a new generation of finance capitalists that can't, or won't understand the fact that technology innovation requires a long pregnancy. Hey, they got the Internet for free remember, and that was paid for by the US government, so why can't all innovation come for free? Don't the Universities provide a tap, so rich that we can't turn it off? So in turn the young genii celebrate what they know brings rapid returns: commoditized distribution models, such as Dell.
(This is a polite way of saying that finance capital has raped every tech idea it's encountered recently, then hyped it into oblivion - only we're just too damn nice to say so).
So Sun, HP and every other systems company - which has traditionally put its high margins into high R&D spend - is under pressure to Dellify itself.
HP has capitulated. On Tuesday it announced that "5,000 sales professionals" would be retrained as .NET experts. It has no chip, and it has no middleware: it discarded its bold Bluestone acquisition shortly after the merger, and as of this week, bundles BEA with the OS. Capellas declared -shortly after consigning Alpha to a watery grave - that there was no way HP could build a better chip than Intel.
(You should have seen Gordon Bell's reaction to this aside, but journalistic etiquette prevents us from printing it).
Fortunately a few companies defy the logic: Sun, EMC and Apple amongst them. Now here are three, wildly different companies but each maintains a high-margin business and pumps the resulting revenue into R&D. Making huge shared-memory computers (Sun) is difficult; making weird highly efficient storage systems (EMC) is difficult. Neither Microsoft nor Dell will be able to match either in the next three years. Microsoft has the brilliant idea of putting a database in each client. It can't imagine how this will work in large, heterogeneous businesses. Dell will build whatever it's told to, but has no systems knowledge to knit millions of individual client databases. The corporate memory - which is only acquired through years of systems R&D, is in each case almost entirely absent.
You don't need to be a card-carrying Communist to appreciate that capitalism has gone seriously wrong, here. It's all but killed the goose that laid the golden egg.
The free flow of digital capital had some nice side effects - and we're one. It's also had a downside: far too much capital has flowed to production capacity and this means an over-abundance of stuff that won't ever be used, like broadband, or like empty chip fabs, or like... well, you can see the results of oversupply all around you. And it's meant that rapid return models, distributors such as Dell, get rewarded at the expense of innovators; the guys who lay the golden egg.
It's when finance capital gets so cavalier and so careless that it cuts off the air supply to the innovators that we all need to worry. And that's about now. Clues and cures to the usual address please. ®