There was a time when “synergies” were a big thing in tech. The notion of a company as a one-stop shop was considered to be both a plus from a sales efficiency perspective and a means of creating pull-through by artfully constructing feature lists on loosely related products. No more, apparently. The Street has been looking at big tech companies as pits of dross mixed with gold, and they want the two separated to create shareholder value.
HP has just decided to stop resisting Street pressure and split off its PC and printer business from its enterprise/service business. The theory is that the latter, untied from the drag of low-margin and low-growth products and benefitting from undiluted management attention, would be able to shine. It’s a nice theory, but it’s got to be proved in execution, and that may be harder than it looks. There are two issues HP must face; shareholder value in the near term and the operational success of the units in the longer term. How these go will depend on some key points raised, but not yet answered, by the breakup announcement.
Let’s start with the point about the “drag” of the low-margin business. PCs and printers are in fact low-margin and that’s probably not going to get better. But they’re also a cash cow, and HP could in theory have used some of the cash to sponsor M&A that might have helped its enterprise, cloud, and NFV aspirations. Thus, while HP’s commodity products do hurt margins in the short term, they can fund expansion. At the least, this suggests that HP might have better waited a bit and organized its product line on the enterprise side before it jumped.
The issue of management focus is also ambiguous at best. It’s not like PC/printer types were running the enterprise and services businesses as sideline hobbies, after all. Yes, senior management was balancing attention between the two units, but how much attention will the splitting up and its aftermath eat? Anyway, I think the main point is that lower-level executives and planners are doing most of the heavy lifting in the enterprise/services space and they are already dedicated to that task.
But the big question is that “shine” thing. What exactly is HP supposed to do on the enterprise and services side? The classic Wall Street proposition is that HP will focus on “the cloud”, of course, but private cloud is interesting to enterprises to the extent that it reduces costs, which means reducing revenue for vendors like HP. Winning there would therefore likely result in losing. The big opportunity in the cloud is most likely to come from service providers, so HP should be thinking about how to harness that sector.
One way would be to recognize that the conceptual model of NFV is really a model of efficient orchestration and management of cloud-based resources, not necessarily just the creation of service features using cloud or other hosting. HP has a pretty good NFV approach, and it wouldn’t take much for the company to turn it into a very good cloud story.
Complex applications, even if they’re deployed on static resources, need tools like DevOps to insure that all the pieces are correctly installed and connected. If you add to this the need to deploy on virtual resources, optimization of hosting based on user location or resources, and management of dynamically assigned components that might even be shared among applications, and you need something really sophisticated. Arguably NFV is the most complex of the current applications of management/orchestration but I’m not sure that IoT and even dynamic point-of-activity services won’t rival NFV in that regard. And these applications take management/orchestration out of NFV/operator domains and put it squarely in the purview of the enterprise. HP could take the lead here.
“Could” is the operative word because, of course, there was nothing preventing HP from jumping into this vision with both feet even before the notion of splitting the company came along. Whether the split makes the execution of a full cloud vision easier or not, it likely makes it essential because it’s hard to see how the enterprise/services segment is going to shine any other way.
It nets out like this. In the short term, there is a risk that the “old” HP, the PC/printer unit, will be subject to selling pressure as shareholders unload that portion of their stock, hedging against inevitable commoditization. In the long term, it’s hard to see how the PC unit doesn’t get sold off to somebody, likely on less favorable terms than HP was prepared to accept earlier. If IBM’s brand can’t pull you through in PCs, who can? Probably not HP (or Dell, for that matter).
For HP-Enterprise, the risk is in the long term. There’s no clear way for the breakup to facilitate improvement in HP’s server position either with enterprises or in the cloud. Same with software, which means that services are an uphill battle. The company has strong assets it could play, as I’ve said, but it could have played them at any point in the last year just as easily. Which means it’s not easy for them to play those assets for some reason, and they have to fix that quickly. The Titanic broke up before it sunk.
There’s another point to consider here, which is how this kind of breakup pressure could spread. Cisco has been another target of Street interest in breaking out high-growth elements of a product line from lower-growth pieces. HP’s news has already raised the Cisco point among some Street types, and the issue won’t die away easily. The problem is that while there are always “high-growth” areas that you can point to, they often prove to be no-growth areas or have very limited total addressable market. Telepresence, for example, was a darling of the Street when it was first raised by Cisco. How well would Cisco as a pure telepresence play have done? So maybe there’s something to be said for symbiosis, huh?