HP’s and IBM’s Numbers Show a Faceoff–On NFV?

HP reported its results and the numbers were favorable overall, with the company delivering year-over-year revenue growth for the first time in three years.  The only fly in this sweet ointment was that the great majority of the gains came in the PC division, which saw a 12% increase in revenue that management attributes to a gain in market share.  Even HP doesn’t think that sort of gain can be counted on for the future, and so it’s really in the rest of the stuff that HP’s numbers have to be explored.  To do that it’s helpful to contrast them with IBM’s.

HP revenues were up a percent overall, where IBM’s fell by two percent.  At HP, hardware revenues were up overall and software was off, where IBM’s were the opposite.  Both companies saw revenues in services slip.  For HP, the PC gains were a big boost for hardware (and IBM doesn’t have them any more), but the industry-standard server business also improved for HP and IBM is selling that business off to Lenovo.

It’s hard not to see this picture as an indication that IBM is betting the farm on software, and I think that the Lighthouse acquisition and the deal with Apple reinforce that view.  IBM, I think, is banking on mobility generating a big change in the enterprise and they want to lead the charge there.  HP, on the other hand, seems to be staying with a fairly “mechanical” formula for getting itself together, having announced no real strategic moves to counter IBM’s clear bet on mobility.  The major reference to IBM on HP’s call was the comment that HP’s ISA business benefitted from IBM’s sale of that line to Lenovo.

One bets on hardware, one on software.  One focuses on transformation in a tactical sense, and one on the strategic shifts that might transform the market.  Both companies took a dip in share price in the after-hours market, so clearly the Street wasn’t completely happy with either result (no surprise).  Which bet is the better one?

I think that hardware is a tough business these days, no matter where you are.  The margins are thin and they’re going to get thinner for sure.  You can divide systems into two categories—ISA and everything else—and the former is going to get less profitable while the latter dies off completely.  Given this, you can’t call hardware a strategic bet.  But, every cloud sale, every NFV deployment, every application deployment, will need hardware to run on.  If HP can sustain a credible position in the ISA business as IBM exits, it becomes the only compute giant that can offer hardware underneath the software tools that will create the cloud, NFV, maybe even SDN.  HP, who has not only servers but some network gear as well, is in a position to perhaps be a complete solution for any of these new applications.  IBM will have to get its revenue from software and services alone.

But it’s software and services that are likely to drive the revolution.  If IBM is guessing right about the future of mobile devices in empowering workers, they could tap into a significant benefit case that would drive integration and consulting revenues as well as software.  They could shape the next generation IT paradigm.  The question is whether they will do all of that, given that in the near term they’re not likely to gain much from the effort.  It’s always been a challenge to get salespeople to work on building a business instead of making quota in the current quarter.  Can IBM do that?

Interestingly, the 2015 success of both companies might depend on the same thing, something neither of them is truly prepared for—NFV.  Neither IBM nor HP mentioned NFV in their calls, but NFV may be the narrow application of a broad need that both IBM and HP could exploit to improve their positions.

NFV, in its ETSI form, is about deploying cooperative software components to replace a purpose-built appliance.  This has some utility in the carrier space, but most operators say that capex savings from this sort of transformation wouldn’t provably offset the additional complexity associated with orchestrating all these virtual functions.  What’s needed is a broader application of management and orchestration (MANO) that can optimize provisioning and management of anything that mixes IT and network technology—including cloud computing.

IBM and HP are both betting big on the cloud.  If the cloud has to be agile and efficient, it’s hard to see how you could avoid inventing most of the MANO tools that the ETSI ISG is implying for NFV.  Thus, it’s easy to see that a vendor with a really smart NFV strategy might end up being able to improve operational agility and efficiency for all IT/network mixtures, and boost the business case.  NFV might actually be critical for cloud services to support mobile productivity enhancement, both in making the applications themselves agile and efficient and in managing mobility at the device level.  MANO is the central value of NFV; make it generalized and you have a big win.  But it’s probably easier to generalize something you have than to start from bare metal, and it’s hard to say what HP or IBM has already.

HP had a strong NFV story in its OpenNFV positioning, but operators still tell me that there’s not much meat to this beyond OpenStack.  IBM has a much better implementation—SmartCloud Orchestrator is a TOSCA-based model for cloud MANO that could be easily converted to a complete MANO story—but they have been so silent in the space that most operators say they’ve not had an NFV presentation from IBM at all.

It’s my view that MANO is the point of greatest risk for HP, and not just in NFV.  If IBM were to come out swinging with SmartCloud Orchestrator even as it’s currently structured, they could claim better operationalization of all virtual-resource computing.  That gets them a seat at a lot of tables.  Furthermore, it would make it harder for HP to link its own hardware exclusively to network and cloud opportunities.  If you can drive the business case for the cloud, you can probably assume you can sell all the pieces to the buyer.  If somebody else (like IBM) drives the software side, it’s in their interest to commoditize the hardware part—throw it open for all comers to reduce the price, raise the ROI, and marginalize others who might want to control the deal.

I’m not trying to say that NFV is the answer to everyone’s fondest wishes.  I’m saying that wish realization will involve a lot of the NFV pieces, so it would be easier for someone who has NFV to stick quarters under a lot of pillows than it would be for somebody who has nothing in place at all.  Watch these two companies in their positioning of MANO-like tools; it may be the signal of which will emerge as the winner in 2015 and beyond.