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04.06.2013 Blog Comments

OpenStack — Red Hat, IBM, HP, Intel and others step up their commitment

If an open source IaaS cloud software technology did not exist, the leading server-side vendors would have needed to invent one. Fortunately for IBM, HP and others, Rackspace and NASA did the work. The result … OpenStack.

In early 2012, Domicity began writing about the market dynamics driving server-side vendors to adopt OpenStack at a rapid pace (link to some of these posts here:  OpenStack — Propelled forward by cloud market dynamicsOpenStack vs CloudStack — place your bets; and OpenStack momentum continues.)

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Enquire about Domicity’s IT company competitive analysis consulting services

Click here for advance notice of Domicity’s upcoming IT company strategy report.

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To offset a doomsday scenario, the big vendors needed an open source IaaS technology. By late 2011/early 2012, fear was mounting that enterprise IT shops would replace much of their infrastructure hardware, software and services with virtual machines, rented on an as-needed basis from AWS, Microsoft, Google or other proprietary public clouds.

OpenStack offered the traditional IT vendors an open source solution to divert demand away from AWS and the others by allowing the big vendors to offer their enterprise customers hybrid architectures that integrate a range of cloud types — private, managed, and public — all integrated using OpenStack at  the IaaS layer.

Now, the big server-side vendors are taking over OpenStack’s development.

Building clouds that are better alternatives to Amazon, Microsoft, and Google requires OpenStack to have comparable or better capabilities. Several large supply-side IT vendors are contributing technology and programmer resources at an accelerating rate to make sure this happens.

The table below, with data provided by bitergia.com, shows the top 10 contributors of “commits” (changes to source code) and the number of code authors from each company for each of the past three OpenStack releases: Essex (April, 2012); Folsom (September, 2012); and Grizzly (April, 2013).

 OpenStack contributors by release

From the table we can see several interesting trends:

  • Rackspace’s declining control over the development of OpenStack
  • Red Hat’s accelerating commitment and influence, because OpenStack can become an important bookend to Red Hat’s open source Linux and KVM businesses
  • IBM’s increasing influence and involvement, along with other large server-side vendors including HP, Intel, and VMware (EMC) (It has been hugely important that IBM and HP, the companies with the two largest enterprise customer bases, have both chosen to make OpenStack the keystone of their hybrid cloud strategies.)
  • The lack of code contributions by other big vendors, including: Dell, Cisco, Oracle, Fujitsu
  • With the exceptions of IBM and HP, the dearth of high-level participation by system integrators and outsourcers such as Accenture, Capgemini, CSC, Tata, Infosys, Wipro, and HCL.

A new era for OpenStack

The table shows the most active contributors of manpower and code to OpenStack’s technological maturation. There is also a much broader list of suppliers including Cisco, Dell, AT&T, Suse, Ericsson, Juniper, NEC, NetApp, and Yahoo! which, although they are not significant code contributors, are providing management talent and funding to the consortium.

In the past, the development of OpenStack was primarily driven by fear … the fear that server-side vendors will lose significant profits to AWS and other proprietary public cloud operators.

Domicity believes that OpenStack has moved into an new era. The consortium now perceives an opportunity to create a large new market for OpenStack-based clouds among enterprise IT shops. The growing manpower commitment by the large IT vendors to OpenStack code development, and the increase in consortium membership by other server-side players, signals that the competition for a share of this opportunity is well underway.

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Marc Brien, VP Research, DOMICITY Ltd.
Posted by Marc Brien, VP Research, DOMICITY LTD.
Domicity has been publishing reports that analyze the strategies and operations of global I.T. and electronics leaders for more than two decades. Find out about Domicity’s latest report. In addition to published reports, Domicity consults on the strategies & operations of I.T. companies and market trends, and advises government on economic development and investment attraction opportunities.

15.04.2013 Blog 3 Comments

Samsung versus Intel continued

Last week’s post presented information on which to base an analysis of the Samsung versus Intel struggle. This week Domicity examines these differences and some significant implications for the broader IT industry.

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Enquire about Domicity’s IT company competitive analysis consulting services

Click here for advance notice of Domicity’s upcoming IT company strategy report.

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Samsung versus Intel — structural differences

Merchant market component sales account for just 35% of Samsung Electronics’ total revenue. This contrasts with Intel, which generates virtually all its revenue from merchant market component and related software sales.

Intel currently gets 93% of its revenue ($49.4-billion in 2012) from microprocessors and other logic devices. By comparison, Samsung Electronics generates an estimated 18% of its merchant market component revenue from logic devices — some $11-billion in 2012. It is Samsung Electronic’s market-leading memory chip and flat panel display businesses that push its total merchant market component revenue past Intel. (Another significant component business, producing lithium ion batteries, is run by a sister company to Samsung Electronics — Samsung SDI — which claims market leadership with FY2012 Lithium Ion battery revenue approaching $3-billion.)

Samsung has succeeded in developing a $30-billion business in flat panel displays for the merchant market, with a comparable volume supplied internally to Samsung divisions. This demonstrates how the company’s downstream product businesses help shape, and are in turn shaped by, its component operations. Strength in flat panel displays helps power Samsung’s competitiveness in televisions, computer monitors, mobile phones, tablets and notebook PCs. The company has further strengthened its position with the purchase of 3% of Sharp, which is a leader in production of very large — over 60-inch panels. Meanwhile, Intel has chosen not to turn its attention to the flat panel display market or to lithium ion batteries.

Samsung’s market-leading 35% share of the global memory semiconductor market helped deliver an estimated $19-billion in revenue in 2012. By comparison, Intel’s NAND flash memory business only generated about $1.5-billion.

There’s more profit in logic

Samsung is particularly intent on taking processor market share from Intel to boost both the revenue growth and profitability of its merchant market component business.

Although smaller, Intel’s logic-centered business has been able to closely track the revenue growth of Samsung’s merchant market sales over the past five years. Samsung needs to take significant Intel market share to change this dynamic. An even bigger attraction for Samsung is undoubtedly the much greater profitability of Intel’s business. Intel ’s 2012 operating margin was 27.4% (on operating income of $14.6-billion) compared to a less impressive 11.4% for Samsung’s merchant market component operations (on operating income of $6.8-billion).

Samsung vs Intel: Exynos versus Atom processorsSeveral key market dynamics are at the heart of the battle between Samsung and Intel for leadership in logic devices:

  • The rise of the ARM architecture — Low-power ARM processors from multiple suppliers are becoming increasingly pervasive, to the point where an ARM executive recently suggested Intel should abandon its x86 line and put its massive production capacity behind the ARM architecture. Despite much investment in its Atom low-energy architecture, Intel holds less than 1% of the market for mobile processors. ARM processors from Samsung, TI, Qualcomm, nVidia and others rule the smartphone and tablet market, as well as in hard drives, major swathes of consumer electronics, and other areas. And ARM is threatening to expand into PCs and servers. Intel will not abandon its Atom architecture and transfer its loyalties to ARM anytime soon. But Intel has to worry about Samsung’s use of ARM as a vehicle for growing its client-side and server-side processor businesses. Samsung has been boosting its US processor R&D investment and hiring engineers away from struggling AMD. And Samsung is gearing up for a deep dive into 64-bit ARM-based server processors, a likely prelude to a plunge into server, storage and networking systems for data center operators.
  • Production technology — Over the years, Intel has cited a consistent lead in semiconductor process technology as a critical weapon in its battle to maintain processor market leadership. The market is transitioning to FinFET, a new generation of transistor technology, designed to increase performance for very fine linewidths. Intel was first to commercialize FinFET-based technology in the third (Ivy Bridge) generation of its x86 processors. However, at the end of 2012, Samsung announced a 14-nm FinFET process for making advanced ARM processors for itself and ARM foundry customers, such as Qualcomm.
  • Comparative R&D budgets — R&D may be Intel’s greatest strength. The comparative income statement above highlights why Samsung will not have an easy time displacing Intel as the processor market share leader. Intel spends as much money on R&D to support its logic-centered semiconductor business as Samsung Electronics does for all nine of its component and downstream product businesses.
  • Apple — Samsung is the dominant producer of ARM-based application processors used in arch-rival Apple’s smartphones and tablets. This represents a key part of the estimated $8-billion in components that Apple purchased from Samsung Electronics in 2012. The increasingly intense competition between the two in smartphones and tablets is inducing Apple to wean itself off Samsung-made processors (as well as the large amount of semiconductor memory and flat panel displays supplied by Samsung to Cupertino). Samsung provides some 80% of Apple’s ARM-based logic and Apple is said to want to reduce this dependency to 20% by 2017. There was speculation that Apple would transfer most of its ARM foundry business to Intel. But instead, it appears that Apple has chosen TSMC as its Samsung replacement. If Apple’s ARM business had gone to Intel, it would have made it virtually impossible for Samsung to make up significant logic market share against Intel.

Expect the Samsung versus Intel battle to heat up

Intel is a superb competitor and has proven it knows how to hang onto market share, generating handsome profits in the process. On the other hand, Samsung poses the greatest-ever threat to Intel’s market position. This threat is compounded by the rise of ARM and the opening it provides to Samsung to take client-side and server-side processor market share.

In 2012, Intel saw total revenue shrink by 1.2%. Operating income declined 16.6%. Over the same period, Samsung’s component revenue grew 4.2% and operating income rose 18.2%. The decline in PC demand is negatively affecting both companies, but Samsung has been more successful at catching the transition to smartphones and tablets. Intel is moving to catch up with a new mobile strategy, introduced at the 2013 Mobile World Congress (MWC) in late February.

As the broader electronics/IT market transitions to low-power processors, we expect the race for logic sector dominance to go to Samsung within 10 years, unless Intel can make Atom a vastly more popular market solution than it is to date.

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Posted by Marc Brien, VP Research, DOMICITY LTD.

Domicity has published reports analyzing the strategies and operations of global I.T. leaders for more than two decades. Find out about Domicity’s latest report. In addition to published reports, Domicity consults on the strategies & operations of I.T. companies and market trends, and advises government on economic development and investment attraction opportunities.
10.04.2013 Blog 2 Comments

Samsung versus Intel: the processor wars heat up

The Samsung versus Intel prizefight in processors is light on media coverage in comparison to the Samsung versus Apple battle covered in our previous post. Nevertheless, Samsung’s threat to supplant Intel is real and Domicity believes it could have a greater long-term impact on the broader electronics industry.

Samsung Electronics is looking to beat Intel in processors and in the extended logic chip sector. In addition to feeding Samsung’s appetite for new revenue and earnings, greater strength in processors will make it easier to grow global market share in the company’s broad range of downstream products.

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Enquire about Domicity’s IT company competitive analysis consulting services

Click here for advance notice of Domicity’s upcoming IT company strategy report.

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Samsung versus Intel is a battle of titans

The overall scale of Samsung Electronics’ components operation stands head and shoulders above any global producer, including Intel.

Samsung’s components business not only generates merchant market revenue from other electronics producers at an annual run rate of approximately $60-billion, it books an additional $60-billion in internal sales to other Samsung operating units. (Note: currency conversions in this post are at the rate of 1150 Won = US$ 1.)

A cornerstone of Samsung’s strategy — borrowed from Japanese leaders — is to use strength in memory, logic, flat panel components, and lithium ion batteries (made by a sister company in the Samsung Group), to power success in all six downstream electronics product operations: mobile phones and tablets; PCs and printers; infrastructure equipment for cellphone carriers; digital cameras; TVs and related visual display products; refrigerators, washing machines and other “digital” household appliances. Says Dr. Stephen Woo, head of Samsung’s logic (System LSI) business, “We believe the right component DNA drives the discovery of what’s possible.”

In addition to driving competitiveness in current businesses, strength in components will be key to Samsung’s move into other market segments such as data center systems or medical electronics.

The sale of components into the merchant market is central to Samsung’s larger strategy. These merchant market sales generate economies of scale and force the company to keep on the leading edge of technology.

 

Comparison of Samsung and Intel 2012 Income Statements

 

Samsung versus Intel, Merchant Market Component Revenue

Samsung versus Intel, Merchant Market Component Operating Income

Samsung Component Revenue by Sector

Intel Revenue by Sector

The table and graphs above provide a basis for analyzing the business model differences that underpin the Samsung versus Intel struggle. Part two extends the analysis.

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Posted by Marc Brien, VP Research, DOMICITY LTD.

Domicity has published reports analyzing the strategies and operations of global I.T. leaders for more than two decades. In addition to published reports, Domicity consults on the strategies & operations of I.T. companies and market trends, and advises government on economic development and investment attraction opportunities.
01.04.2013 Blog 4 Comments

Samsung versus Apple: Dueling business models

Samsung versus Apple in smartphones, tablets and other cloud access devices is a battle that is increasingly inflaming the imagination of the business press and other industry observers. It is also interesting to watch the changes that the struggle is driving in the Samsung and Apple business models.

The ascent of Samsung Electronics is something we have been analyzing for a long time. Domicity’s report, The Rise of Korea in the Electronics Market, was published back in 1988. Even then, it was clear that Samsung was a breed apart and would become a significant thorn in the side of the global IT and electronics establishment.

After defeating the Japanese leaders in both semiconductors and consumer electronics, an emboldened Samsung is now intent on biting into Apple’s share of the smartphone, tablet and PC markets. Samsung is clearly causing Cupertino problems, as evidenced by a rolling series of Apple lawsuits against the Korean behemoth.

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The Apple business model

Apple and Samsung Electronics are vying for the same prize using significantly different business models. Apple’s is a classic virtual integration model, with a high proportion of the inputs for its products sourced from external suppliers. Samsung is currently the most vertically integrated supplier in the electronics market, particularly focused on building price-performance competitiveness through internal development and supply of key component inputs.

Take a look at the table below which compares the Apple and Samsung income statements for the four quarters of calendar 2012 and at the graph which compares each company’s cash from operations over the past five calendar years.

Apple has been able to keep R&D and Cost of Revenue expenses relatively low as a proportion of Revenue by outsourcing most aspects of the hardware piece — component production as well as assembly. Outsourcing hardware provision radically reduces the amount of money that Cupertino must lay out for R&D and capital expenditures.

Margins are kept high by focusing on a few sleekly designed premium-priced products. These are designed to effectively showcase its highly-featured, proprietary software architecture. Demand for Apple products is skilfully stimulated through leading-edge advertising and promotion and a sales strategy that has turned the company’s glossy retail outlets and reseller counters into one of the places to be.

One quibble with the Apple business model … it is high risk.  All of the company’s relative handful of eggs are in the consumer cloud and the cloud access device basket.

Apple’s level of risk is beginning to increase. Its outsized profits and growth are attracting fierce competition from: Google and the Android ecosystem, Microsoft and its Windows partners, and last but far from least, Samsung. The Korean giant has placed a large foot in both the Windows and Android/Chrome camps. It is also promoting its products as the lead mobile platform for the newer Tizen (promoted with Intel) and Ubuntu Linux operating system alternatives.

 

Samsung vs Apple Income Statement Comparison

Samsung vs Apple Cash from Operations

The Samsung business model

Apple has made focus a virtue. The company gets virtually all its revenue from cloud access devices, plus related peripherals and services.

The Samsung business model is more cautious. Following in the footsteps of a strategy pioneered by NEC, Sony and other Japanese producers, the Korean leader’s strategy features a high level of vertical integration through a strong semiconductor and components business.

The components sector feeds multiple downstream product markets.  Samsung Electronic’ s strength in flat panel displays, plus memory, logic, sensors, LED light sources, lithium ion batteries (through a sister company) drives competitiveness in a range of downstream product units: mobile phones, tablets, and PCs; laser printers and MFPs; infrastructure equipment for cellphone carriers; digital cameras; TVs and related visual display products; plus refrigerators, washing machines and other “digital” household appliances. Strength in components will also enable expansion into new fields such as medical electronics, or even data center hardware.

The upshot is that instead of getting all its revenue from cloud access devices and related services, like Apple, cloud access devices and related markets only account for a bit more than half of Samsung’s total revenue.

Samsung overpowered its Japanese competitors over the past twenty years by outspending them in most areas of the value chain, in particular R&D, capital expenditures, marketing and promotion, sales channels. The company is now leaning on the same formula in its fight with Apple. Even though revenue levels for the two companies were comparable, in calendar 2012 Samsung spent:

  • $10.0-billion on R&D to Apple’s $3.6-billion
  • $29.5-billion on selling and administrative costs (SG&A), which included $11.3-billion for advertising, promotion and other marketing expenses; by comparison Apple’s SG&A spending was $10.3-billion for calendar 2012, with approximately $1.0-billion for advertising
  • $20.0-billion on capital expenditures versus $10.4-billion for Apple

While it is true that Samsung’s spending in these areas is spread across all of its main business lines, it is also true that a growing proportion of resources are being devoted to the universe of cloud access devices and related software, peripherals and services, where Apple plays. As well, some of the capital spending and R&D money that is invested in other business lines, notably the components businesses, strengthens Samsung’s competitiveness in cloud access devices. Investment in broadband mobile phone infrastructure helps Samsung learn which direction cell phone operators want to take wireless networks.

Samsung’s business model comes with a cost. High spending on R&D and factories for its components and a diversified range of downstream products provide long-term stability. But it also means Samsung, at the moment, cannot hope to achieve the same rate of company-wide profitability as Apple, with its tight focus on a narrow set of products. However, if Samsung’s formula works as well as it has in other markets, its heavy investment in R&D, capital expenditures, marketing, and sales channels will steadily sap Apple’s market share and much of its profitability, signs of which are beginning to appear.

Samsung versus Apple: both are having to tune their business models

Like other market players, Samsung is finding Apple’s level of growth and profitability irresistible, causing it to throw some caution to the wind. At the risk of losing a degree of diversification, Samsung is devoting more resources to the cloud access device market and tilting its overall business in that direction.

Samsung’s revenue from smartphones, tablets, PCs, and related peripherals — Apple’s addressable market — grew from roughly 40% of total company-wide revenue in its 2008 December quarter to more than 55% for the same quarter in 2012. Skewing its business model in favor of cloud access devices means that Samsung Electronics is spending even more R&D, capital expenditure and marketing money on related technology, and related supply and demand chain activities.

Competing with Apple is also driving Samsung to invest at accelerating levels in software and cloud-based value-added. One key goal of these efforts is to be able to pull sensor-generated data from all Samsung mobile and consumer electronics products — data that can be sold to various types of business partners. Another goal is to better integrate the universe of Samsung mobile and consumer electronics products, in the manner of Apple’s generally well-integrated product portfolio.

Apple still enjoys a lead over Samsung in cloud access device and related revenue. In calendar 2012, Apple’s revenue was $165.7-billion compared to approximately $90-billion for Samsung across the same universe of products.  But, it is the difference in operating income that really explains why Samsung appears so targeted on Apple’s market share. For calendar 2012, Apple’s operating income was some $55-billion while Samsung’s OI for the similar range of products was less than $19-billion. Apple’s extreme profitability will drive Samsung to continue its focal shift in favor of cloud access devices (and related components, peripherals and services) at the expense of its other downstream businesses.

As the Samsung versus Apple battle intensifies, Apple is also being forced to make some changes. Samsung’s immense strength in semiconductors, flat panel displays, and batteries provides the wherewithal to build superior hardware. It also turned Samsung into Apple’s most important components supplier. Apple reportedly purchased some $8-billion of Samsung components in 2012. Every time Apple sells an iPhone or other product, it puts money in Samsung’s pocket. The reverse is not true.

And the high degree of reliance on Samsung as a components supplier has given its Korean rival a window into Apple’s product development and production plans.

Apple is clearly unhappy with helping to fund Samsung’s assault on its market share and with providing insight into its product planning. Cupertino is countering by becoming more involved in the design of the components in its products (discussed in our next post) and by signing up alternative suppliers to replace Samsung components in its supply chain. This strategy is not without risk. Apple is swapping out parts from the strongest components supplier in the market, in favor of those from lesser suppliers that Samsung has bested. (Nokia is also reportedly working to drive Samsung components out of its supply chain.)

As well, Apple must continue to strengthen its software and cloud offerings in the face of competition from Samsung partners, Google and Microsoft. The doomsday scenario for Apple is if Samsung can grab a significant lead in hardware and if Google and/or Microsoft, develop superior software and cloud offerings. Apple is already experiencing great pressure from Samsung Android phones and tablets. Windows 8 on Samsung PCs, smartphones and tablets may yet become a problem.

In this battle of sharply differentiated business models, Apple has been setting the pace. But Samsung is on the move and continues to impress 25 years after Domicity’s original report on the Korean electronics industry. It does not take too much of a stretch to envision Samsung ultimately overtaking Apple in the race for cloud access device market share leadership. This would be accomplished by offering superior hardware platforms that effectively leverage the cloud software and services ecosystems of Google, Microsoft, and others.

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Posted by Marc Brien, VP Research, DOMICITY LTD.

Domicity has published reports analyzing the strategies and operations of global I.T. leaders for more than two decades. Find out about Domicity’s latest report. In addition to published reports, Domicity consults on the strategies & operations of I.T. companies and market trends, and advises government on economic development and investment attraction opportunities.

 

27.11.2012 Blog Comments

IaaS — Cloud hosters cut into server revenue

Gartner recently released its top 10 IT technology trends for 2013. It’s a good list but absent is the accelerating trend towards adoption of hosted IaaS as a replacement for traditional in-house server-side IT. This onrushing dynamic will roil the market and all major industry players for years to come.

The migration of workloads onto hosted clouds is beginning to have serious implications for traditional purveyors of server-side infrastructure. The likes of IBM, HP, Cisco, Fujitsu, EMC, NetApp and others need to find ways to protect revenue and profit.

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Now AvailableHP in Cloud Computing, Domicity’s initial report in a new competitive analysis series on the cloud leaders. Examines the early cloud building leader’s changing operations and strategies as it strives to replace falling revenue from traditional IT. Click here to order or for more information.

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The graph below shows revenue indices from 2008 through 2012 for two IaaS hosting leaders (Amazon and Rackspace) and for the server-side infrastructure businesses of two traditional IT leaders (IBM and HP).

 

IaaS hosters vs infrastructure leaders

This graph reveals that revenue growth of the IaaS hosters is booming, while the server-side infrastructure businesses of IBM and HP are becalmed. The graph uses indices to permit the comparison of disparate-sized amounts; for instance $20.5-billion for HP in FY2012 versus a projected $1.3-billion for Rackspace in 2012.

The problem faced by HP, IBM and the others is two-fold. Not only are they losing enterprise sector workloads to the cloud hosters, but the largest cloud hosters are increasingly abandoning the servers, storage and networking products supplied by traditional vendors. Following Google’s example, large hosters are installing their own white box equipment, with design and manufacturing help from  producers such as Taiwan’s Quanta and Wistron.

Solving the cloud hosted IaaS dilemma

What can the traditional IT vendors do to respond to this growth in hosted IaaS?

Here are three things …

  • develop private cloud solutions that are more compelling by delivering better price/performance than cloud hosting competitors;
  • use their considerable R&D capabilities to introduce advanced infrastructure products that the white box suppliers are unable to match;
  • establish their own large cloud hosting business to rival those of Amazon, Rackspace and other market pioneers.

HP  and IBM, the two server-side equipment leaders featured on Domicity’s graph are pursuing all three approaches.  For instance, HP is actively promoting its CloudSystem platform for private and smaller hosted clouds. It has laid out a roadmap for next generation hosting technologies with its Project Moonshot and Exascale initiatives. And it is offering hosted OpenStack-based managed and public clouds.

However, the need for speed from the server-side equipment leaders is urgent. Once customers move to someone else’s hosted cloud, the damage will be hard to reverse. The stampede to Apple from Windows should serve as a cautionary tale.

 

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Posted by Marc Brien, VP Research, DOMICITY LTD.

Domicity has published reports analyzing the strategies and operations of global I.T. leaders for more than two decades. Find out about Domicity’s latest report. In addition to published reports, Domicity consults on the strategies & operations of I.T. companies and market trends, and advises government on economic development and investment attraction opportunities.
24.10.2012 Blog Comments

Meg Whitman — the mess I found at HP

There is an interesting similarity between the presentation of HP CEO Meg Whitman to financial analysts in October and the stance of US President Barack Obama on the US economy during the election.

Even though Whitman is an active Republican and Obama the leading Democrat, they have spoken in unison on their respective financial challenges … Despite clear strengths, the company/country was an unholy mess when I found it. My team has identified the problems and we have started to fix them. It will take four more years before we are hitting on all cylinders.

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Domicity’s new competitive analysis report on Hewlett-Packard is a detailed analysis of the industry giant’s operations and strategies as it attempts to move products and services into the cloud to replace lost revenue. Click here for further information.

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Domicity estimates that HP’s problems will result in a cumulative revenue shortfall that exceeds $90-billion between the company’s peak year in FY2010 (ended Oct. 31) and FY2016. (See the graph below.)

We calculate this shortfall as the difference between likely HP revenue for the 2010-2016 period and the company’s potential revenue . Our benchmark for estimated potential revenue is Whitman’s goal for 2016 and beyond of revenue growth at the rate of GDP.  Domicity references International Monetary Fund data for annual growth in real global GDP.

 

Meg Whitman and HP's lost revenue problem

Domicity’s estimated cumulative $90-billion in lost potential revenue for HP between 2010 and 2016 is a pure market share gift to its competitors. Assuming the company were to generate its typical 5% average net margin (net income/revenue), this would represent lost earnings of $4.5-billion. Several more billion in earnings will be lost because the company’s cost structure was built with the expectation of higher revenue than it will achieve.

This anticipated revenue and earnings shortfall is behind much of the 67% decline in HP’s share price that occurred between the end of FY2010 and early November 2012.

Problems Meg Whitman identifies at HP

Rapid CEO turnover tops Whitman’s list of causes for HP’s woes. This turnover created inconsistent strategies and significant performance issues. Left unstated was that Board-inspired turmoil at the top of the HP pyramid — not just CEOs, but numerous other executives — has led customers, employees, partners, and investors to consider the alternatives amid doubts about HP’s ongoing viability as an industry leader.

A more interesting and complex set of problems described by Meg Whitman relate to HP’s acquisitions-based growth program which began in 1999 with Carly Fiorina’s appointment as CEO. Since then, Domicity estimates the company has spent $72-billion on more than 60 companies. As Meg Whitman describes it, acquisitions helped grow HP’s annual revenue from $45 to $125-billion and turned the company into a diversified IT leader with global strength in both client-side and server-side computing, including market leadership in cloud infrastructure.

However, HP’s acquisitions program left in its wake a sprawling, inefficient, difficult-to-manage, behemoth lacking in adequate growth and profitability. A sampling of the litany of problems, identified by Meg Whitman, which trace back to the acquisitions-fueled growth binge, include:

  • Lack of product focus— HP is carrying too many products and services, causing cost and quality problems. HP’s management team is whacking back the number of offerings to concentrate on products that can be winners in the cloud and Big Data era. HP points to these potential winners for particular focus: Project Moonshot hyperscale servers, 3PAR and StoreOnce storage, HP Networking, ArcSight security technology, Autonomy and Vertica data analytics and management, ePrint cloud printing for smartphones and tablets, cloud services, Windows 8 tablets and hybrids.
  • Out of date IT applications — HP suffers from poor underlying technology to support the sales and human resources functions. The Whitman team has opted for Saleforce.com for sales support, Workday for human resources, and Compass for workforce management duties in the services business, and is rolling these out on an accelerated basis.
  • Lack of geographic focus — HP operates in 166 countries but more competitive focus will be placed on the 14 countries that deliver 80% of its revenue, with particular attention paid to China.
  • Poor management tools — According to Meg Whitman, “I’ve worked at probably, I don’t know, 8 major companies in my career and I’ve never seen a business that is less instrumented”. The company will beef up metrics and dashboards to identify which business lines are off target in which geographies.

A cynic might say that the Meg Whitman presentation was crafted to improve her chances of hanging onto the job for four more years by stressing CEO turnover as a leading problem and by seeking to reduce expectations for HP’s medium-term performance.

Domicity’s take is a little more forgiving. Whitman’s analysis of problems and planned solutions was forthright. However, less MBA-speak — metrics, dashboards, heat maps — and more talk of breakthrough technologies and human resources initiatives to enthuse HP’s shell-shocked workforce would be welcome.

Meanwhile, each month that management continues to wrestle with HP’s operational problems presents competitors with opportunities to peel away key customers, business partners and employees.

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Posted by Marc Brien, VP Research, DOMICITY LTD.

Domicity publishes reports analyzing the strategies and operations of global I.T. leaders. Find out about Domicity’s latest report. In addition to published reports, Domicity consults on the strategies & operations of I.T. companies and market trends, and advises government on economic development and investment attraction opportunities.

 

 

08.10.2012 Blog 1 Comment

HP services — where profit prospects are better

Long-term profit prospects are better for HP services than for its personal device businesses — PCs, workstations, tablets, as well as smartphones, a segment which HP recently announced it will eventually re-enter.

As Domicity showed in the previous post, thanks to the EDS acquisition, annual revenue of the HP services sector has grown to nearly match HP’s PC-dominated Personal Systems Group. However, the services business has been much more profitable than the PC business. Cumulative operating income from services will total almost $20-billion for the period FY2009 through 2012, compared to about $8-billion for the PC-dominated Personal Systems unit.

As we discuss below, not all is well with the services business. But the problems should be fairly short-term, beginning to turn around in mid FY2013. By contrast, growth and profitability problems in the device business appear more structural and intractable.

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Domicity’s HP in Cloud Computing report provides a detailed analysis of the industry giant’s business and strategies as it moves into the cloud. Click here for further information.

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The profit problems in HP’s PC/tablet business emanate from a value chain that is largely out of the company’s direct control. Microsoft and others handle the software; Intel and others provide components and subsystems; ODMs and contract manufacturers do the production and much of the design; logistics companies fulfill orders; resellers carry out much of the sales and support activity.

Outsourcing and offshoring of the value chain constrains HP’s potential for innovation compared to device competitors such as Apple and Samsung. HP can plunge with both feet into the Windows 8 opportunity, but most of the profits will still flow to Microsoft and other partners.

HP could potentially drive more profit into its PC business model by shipping a cloud offering with each of the millions of access devices it sells. However, it may be too late to compete with consumer and SMB cloud services from the likes of Box, Google, Apple, Microsoft, Salesforce.com, Samsung and Dropbox.

Premium pricing for transformative product technology may be the best way for HP to generate better device profits. Potentially transformative blue sky technologies include: Aurasma augmented reality, which  HP acquired with its Autonomy acquisition; HP Labs’ memristor non-volatile semiconductor memory; and flexible ultra-thin plastic displays.

However, commercializing these technologies to generate profitable differentiation will be challenging.

Problems and solutions in the HP services sector

The HP services sector also has problems, but they appear much more solvable, with the solutions leading to a path toward growth and operating margins near or above the HP average.

The HP services business is really two different sectors — Technology Services and Enterprise Services.

Technology Services carries out product integration and support activities. The core of Technology Services was contributed through HP’s 2002 acquisition of Compaq. Formerly part of Enterprise Services, Technology Services has been attached to the Enterprise Group that sells HP’s servers, storage, networking, and systems management software.

Technology Services is currently generating revenue at an annual rate a little below $11-billion. Revenue growth has been flat the past several years, but this unit could begin growing again now that it is integrated with the product business. Technology Services is highly profitable, delivering an operating margin of 28% in the first three quarters of FY2012. This is nearly three times management’s current operating margin goal of 10% for the entire company.

Enterprise Services delivers consulting, applications, and outsourcing services to large enterprises. The core of Enterprise Services was picked up with the 2008 acquisition of EDS.

The Enterprise Services business is under heavy pressure at the moment due to internal management issues and because several large accounts are reducing their business with HP. Enterprise Services revenue (not including Technology Services) totaled $24.9-billion in FY2010, HP’s most recent peak year. This will decline to some $22-billion in FY2013. Operating margins will decline to 3% from the 10% that was posted in FY2010. They are expected to increase back to about 9%, close to the HP corporate-wide target, once new leadership at Enterprise Services brings in a range of planned reforms.

HP ascribes roughly half of Enterprise Services’ revenue decline to the loss of business due to several “runaway” services accounts. The rest primarily relates to poor management, in particular decisions that removed most profit and loss responsibility from account managers. HP has put in new leadership at Enterprise Services that is remedying the accountability problem, rationalizing staffing and bricks and mortar, as well as bringing in advanced labor management systems. All of these measures are expected to get revenue and profit growing again.

In making the case for why HP services is a significantly more valuable business over the long-term than the company’s business in PCs and other client devices, it is worth pointing out that Technology Services generates an operating margin more than four times that of the PC/tablet business. The operating margin of Enterprise Services has fallen below that of the PC business, but management expects it will get back to nearly twice the PC rate in fairly short order.

Furthermore the cloud offers HP services several more reliable paths to profitable growth than exist with the PC/tablet business, including:

  • Building cloud hosting data centers for enterprises, telcos and other service providers — Here, HP is already a leading contender and is developing  technology to deliver more data center throughput per dollar and per watt of energy than the competition. Additionally, HP is a leader in the open source OpenStack movement and if OpenStack maintains momentum it will boost both HP’s private and hosted cloud businesses.
  • Providing cloud hosting services from HP data centers — HP is building out global capacity to host the needs of a full range of customers, from outsourcing the IT shops of large enterprises in a managed/trusted cloud format, to providing Amazon-style public cloud services for application developers and a range of cloud-based businesses.
  • Developing cloud-hosted businesses through HP business units — HP’s own cloud-based businesses hold the potential to boost company profits. These include: SaaS versions of HP’s IT management software; cloud-hosted data storage and analytics using the Autonomy and Vertica acquisitions; cloud-based print-on-demand products; vertical clouds for industries where the company has developed or acquired specialized intellectual property; cloud hosted enterprise software from SAP, Microsoft and other HP partners.

HP has the broad customer base and the technological capability to develop innovative cloud-based services offerings. The challenge is to grow these businesses faster than its legacy services deteriorate.

Here is some good news for HP. The market appears to be moving in its direction, away from labor-intensive “your mess for less” outsourced applications and infrastructure services, and towards HP’s strength in data center-based services.

The past is often prologue. HP services has outperformed its PC business in recent years. Domicity expects it to be a more valuable business in the future.

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Posted by Marc Brien, VP Research, DOMICITY LTD.

Domicity publishes reports analyzing the strategies and operations of global cloud computing leaders. Find out about Domicity’s latest report. In addition to published reports, Domicity consults on the strategies & operations of I.T. companies and market trends, and advises government on economic development and investment attraction.

 

 

 

07.10.2012 Blog 1 Comment

The HP PC business is the issue

There have been illogical rumors in the media recently that Hewlett-Packard is shopping its services business. HP CEO Meg Whitman recently moved to spike these rumors. She has assured everyone that the company is heavily committed to the services business, as indeed it has to be if HP is to remain a major player in server-side computing.

Instead, Domicity believes it is the PC business, not services, that poses the longer term structural problem for HP.

Most of the company’s PC/tablet value chain is controlled by others, so that HP has relatively little scope for boosting profitability significantly. This is not the case in services. HP controls a high percentage of the value chain in its services business and can leverage the market’s transition to the cloud to develop higher-margin services and a more efficient services delivery model.

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Domicity’s HP in Cloud Computing report provides a detailed analysis of the company’s business and strategies as it moves into the cloud era. Click here for further information.

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The most recent bout of hand-wringing over the state of the services business broke out in the run-up to HP’s announcement of its 3QFY2012, which ended July 31. Management says it was forced to take a $9.2-billion charge against goodwill and intangibles due to under-performing acquisitions. About $8-billion of this goodwill impairment was ascribed to the 2008 “patch over” of EDS.

Why did HP take the goodwill write-down? The company’s share price has deteriorated significantly over the past two years. As a result, the goodwill on the balance sheet has been carrying for significantly more than the market value of the company.

At the time of the write-down on Aug. 8, goodwill and intangibles related to acquisitions totaled just under $55-billion, while HP’s market value had fallen to $39-billion.

There is a certain logic behind the notion that if a company does not thrive after making acquisitions, then the acquisitions must have been ill-advised.

However, in this case, Domicity does not believe that EDS or most of HP’s other recent acquisitions are the main drag on market value. A portion of the services sector will post a very bad year in FY2013, as we discuss in our next post. But the sector is forecast to regain momentum after that.

Domicity believes that the HP PC business is the bigger long-term drag on the company’s profitability and market value. (As with services, much of the PC business was picked up by acquisition, the controversial 2002 purchase of Compaq. However, that acquisition also contributed more profitable server-side assets: the core of HP’s x64 server business, the Tandem and DEC server architectures, systems management software, a strong equipment integration and support services business, and some networked storage products.)

The HP PC business, the real profit laggard

The table below compares revenue and operating income performance for HP’s services business, EDS, and the Personal Systems unit (primarily PCs) over the past decade, including Domicity’s estimate for FY2012 (ending Oct. 31).

 

The HP PC business is its biggest problem

This table shows:

  • the services business and the PC business now have similar revenue
  • EDS allowed HP to more than double its services revenue while maintaining pre-acquisition levels of profitability (profitability will drop off further in FY2013, but is expected to begin to recover after that to ultimatel return to FY2011 operating margins)

Furthermore, HP had the good fortune of purchasing EDS’ $22-billion in revenue for $13-billion; just 0.6 times revenue.

See our next post for more about the relative importance of services versus PCs to HP’s future.

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Posted by Marc Brien, VP Research, DOMICITY LTD.

Domicity publishes reports analyzing the strategies and operations of global cloud computing leaders. Find out about Domicity’s latest reportIn addition to published reports, Domicity consults on the strategies & operations of I.T. companies and market trends, and advises governments on economic development and investment attraction.

 

13.09.2012 Blog Comments

Amazon and Google — which business model works best?

Amazon and Google, who would you rather ownAs businesses, Amazon and Google have things in common. However, their differences determine which company has the more advantageous business model.

Both companies are entirely cloud-based, founder-led, high-profile brands which compete in consumer, SMB, and large enterprise markets. They are active in the cloud as well as in cloud-access devices. Their annual revenue is broadly comparable.

For cloud mavens, another interesting point of similarity is that both Amazon and Google are striving to build up significant businesses selling machine cycles from their cloud platforms — IaaS and PaaS — to replace or supplement the internal IT shops of enterprise customers.

Despite these similarities, Amazon and Google differ radically on at least one important score — how they attract the bulk of their revenue.

Google generates most of its money by selling advertising to companies that want access to the millions of eyeballs attracted to the company’s web presence through: search, browser, email, maps, YouTube, news consolidation, financial information, social networking and more.

Amazon generates most of its money by using its cloud platform to sell stuff while taking a cut of the proceeds, just like the old bricks-and-mortar retailers. The stuff that Amazon sells includes a growing array of merchandise shipped from its own warehouses. Along the way, the company began using its cloud-based store to sell the books and other products of outside parties, letting these business partners handle the fulfillment issues. The company reportedly generates better margins from these partner sales than from its own merchandise sales.

(For a broader comparison of business models see Domicity’s recent competitive analysis reports.)

Amazon and Google — whose business model is better?

This compare and contrast is a preamble to the main question: Who has the better business model? Put another way: Which company would you rather find in your holiday stocking?

The following table and graph demonstrate the differences between the Amazon and Google business models.

 

Amazon and Google Income Statement Comparison

 Amazon and Google Cashflow Comparison

Without much fear of spoiling the ending … the answer is Google to the question which company has the better business model. On a dollar of revenue, Google currently generates 11.1 cents of net income and nearly 15 cents of cash flow. Amazon is scrambling for every dollar of profit it produces. On a dollar of revenue it is generating less than a penny of net income and roughly 4 cents of cash flow.

A dollar of invested capital  — total liabilities and shareholders’ equity minus current liabilities — put into either business currently gives back a return through net income of more than 15% for Google and less than 4% for Amazon.

Expect to see Amazon moving in the direction of Google’s business model. For example, Amazon could encourage product suppliers to buy more advertising on amazon.com. To give these advertisers more exposure, Amazon could put up content designed to have consumers spend non-shopping time on the site.  As a for instance, Amazon could induce publishers to put up free video posts by big name authors, or manufacturers to provide how-to information on use of their products.

These days nearly every business seems to want a cloud-based business model, but some models are more profitable than others.

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Posted by Marc Brien, VP Research, DOMICITY LTD.

Domicity publishes reports analyzing the strategies and operations of global cloud computing leaders. Find out about Domicity’s latest reportsIn addition to published reports, Domicity consults on the strategies & operations of I.T. companies and market trends, and advises governments on economic development and investment attraction.
11.09.2012 Blog 1 Comment

OpenStack momentum continues

OpenStack's momentum continues to buildLike a snowball rolling downhill, OpenStack’s momentum continues to build as an open source solution for the IaaS layer in private and hosted clouds.

OpenStack’s growing mind-share comes as a surprise to some industry watchers. The potential for the consortium to fly apart has been at issue, particularly since more than 190-companies and 5,500 individuals are involved at this point.

Yet the software’s momentum continues to be fed by important developments and any lingering governance issues are quickly being addressed.

Learn more about OpenStack as it applies to private and hosted clouds in Domicity’s latest reports .

Some key events in the OpenStack world

1. Folsom, the next version is scheduled for release on Sept. 27 — proponents argue that Folsom will significantly advance OpenStack as a viable Amazon competitor. Brian Akers, über-programmer and HP Fellow, has admitted that the current Essex version is workable, but difficult to install. However, Akers asserts that Folsom will be a “serious” offering that is  “looking very good”.

An important enhancement in Folsom is the formal adoption of the “Quantum” project. Quantum controls network virtualization to enable the development of sophisticated cloud network topologies, providing a standardized interface for building and managing virtual networks that can plug into OpenFlow and other SDN components. In addition to Quantum, other major OpenStack functions are receiving significant enhancement including:  more advanced block storage; simplified configuration and easier upgrades; dashboard enhancements;  and security improvements.

2. VMware becomes an OpenStack consortium member — the work on the Quantum networking project is being led by Nicira, VMWare’s recently acquired network virtualization start-up. Nicira markets itself as “The Network for OpenStack”. Because of Nicira’s key role in OpenStack, there was nervousness when it was acquired by proprietary virtualization software leader VMware.  But VMware was quick to declare that Nicira will remain in OpenStack.

Then, earlier this month, VMware made the jaw-dropping revelation that it wanted to join the OpenStack consortium. It has since been accepted as a Gold Member. At first, it seemed counter-intuitive for VMware to become a high-level member of OpenStack. VMware and Amazon are typically considered to be the two main proprietary counterweights to OpenStack in the cloud. Not so counter-intuitive after all  … OpenStack’s momentum is sufficiently strong that VMware apparently wants to ensure its bread-and-butter virtualization software remains the favorite among  enterprises and service providers who opt for OpenStack as their IaaS software instead of choosing VMware’s vCloud alternative.

The upcoming release of Folsom and VMware’s membership may be the most high-profile events in OpenStack’s recent universe, but there have been a number of others since Essex was released in April 2012:

  • The naming of the top two executives of the foundation that will take over management of OpenStack from Rackspace — SUSE’s Alan Clark becomes Chair and Cisco’s Lew Tucker Vice Chair; official public launch of the foundation is imminent
  • SUSE and Red Hat have both introduced OpenStack implementations that are targeted at the private cloud opportunity among their enterprise Linux customers
  • HP’s OpenStack-based public cloud business emerged out of beta and began charging for cloud compute, object storage, and content delivery network offerings
  • PistonCloud introduced Airframe, a stripped down version of its private cloud implementation of OpenStack as a free way for IT shops to evaluate and become comfortable with OpenStack in a pre-production environment
  • Rackspace ramped up its OpenStack hosting and rebranded itself as “the open cloud company”, signalling the depth of its commitment to OpenStack; Rackspace also introduced a private cloud OpenStack implementation and acquired Mailgun to make it easier for customers to integrate cloud-based email services into applications and websites
  • To increase China’s participation in the OpenStack market, Intel and several Chinese organizations set up a group to focus on the development and support of OpenStack.

OpenStack’s continued progress and market presence gains are good news for those such as HP, Rackspace, Red Hat, SUSE and others that have placed OpenStack at the center of their cloud strategy.

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Posted by Marc Brien, VP Research, DOMICITY LTD.

Domicity publishes reports analyzing the strategies and operations of global cloud computing leaders. Find out about Domicity’s latest reportsIn addition to published reports, Domicity consults on the strategies & operations of I.T. companies and market trends, and advises governments on economic development and investment attraction.

 

16.08.2012 Blog Comments

HP in Cloud Computing: 325-page independent report

Following is the media release announcing Domicity’s 325-page,
60-exhibit strategic analysis report: HP in Cloud Computing
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Contact: Marc Brien, VP Research
Tel:  +1 416 366.5337
Fax: +1 416 849.0640
brien@domicity.com
 
325-page report — HP IN CLOUD COMPUTING

HP banks on the cloud to re-engineer its business model

More information and Table of Contents

TORONTO — Domicity’s newly released strategic analysis report — HP in Cloud Computing — is an independent examination of HP’s strategies to use cloud computing to address profitability and growth challenges.

“HP is moving to overpower financial problems emanating from its PC, printer and traditional services businesses by throwing a net over the entire cloud computing opportunity,” says Marc Brien, VP of Research at Domicity, a Toronto-based IT analysis company. “Strength in cloud infrastructure is being leveraged for HP’s strategic move into cloud hosting.”

HP clawed its way to the top of the client-server market. The company is rolling out a strategy to achieve the same success in the cloud computing era. 

Fuelled by $71-billion in acquisitions and $34-billion in R&D over the last 10 years, HP has managed to generate leading-edge cloud infrastructure technologies which are buying early customer wins in cloud building.

Now, HP is making its move into cloud hosting. The company is bombarding the market with a growing portfolio of IaaS, PaaS and SaaS services delivered from HP’s managed and public clouds.

HP in Cloud Computing probes the strengths and vulnerabilities at the heart of HP’s developing cloud-based business model:

  • cashing in on OpenStack’s momentum
  • overcoming structural weaknesses since abandoning “The HP Way”
  • targeting wins in Big Data with new cloud architectures
  • using the cloud to solve problems in the services business
  • actualizing technology advantages in the Internet of Things (IoT)
  • deciding the fate of the troubled Printing & Personal Systems Group
  • going head-to-head with Amazon in public cloud
  • generating vertical cloud business from EDS’ intellectual property
  • focusing on a hybrid private/hosted architecture with cloud bursting
  • assembling the financial resources needed to underwrite a successful cloud transition
  • retooling the organization to attract cloud talent

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About HP in Cloud Computing

The result of 8 months’ research, Domicity’s new 325-page, 60-exhibit independent report analyzes the strengths and weaknesses of HP’s strategies and operations. Individual chapters examine: strategic directions and issues; finances; organization, acquisitions & alliances; cloud technologies; private/hybrid cloud; managed cloud; public cloud; cloud-hosted businesses; future scenarios.

 About Domicity Ltd

Domicity Ltd is a Toronto-based IT consulting company. The firm publishes independent, in-depth reports on the operations and strategies of global IT hardware, software and services suppliers. Our clients tell us our IT company strategy reports are the “best in the business”.

19.06.2012 Blog Comments

Apple business model is embraced by Microsoft

Apple business model is embraced by MicrosoftMicrosoft’s unveiling of its two Surface Windows tablets represents another important stage in Redmond’s slow-motion convergence on the Apple business model.

Meanwhile, HP’s former CEO Léo Apotheker is rumored to have been spotted in Paris shouting “J’avais raison” (I was right).

For years, Microsoft denied any interest in following Apple into hardware for client-side devices. Microsoft maintained that it was more than happy to let Windows licensees — notably HP, Dell, Lenovo, Acer, Toshiba, Sony, Samsung — handle the hardware.

But as a wise man once gravely intoned, “The cloud changes everything” … and so it does. Apple is on its way to becoming the most profitable company in history by controlling the hardware and the software for a growing range of cloud access devices, backed up by a consumer cloud.

Like an art gallery visitor viewing an abstract painting, Microsoft looked at the success of the Apple business model and said: “I can do that”. Microsoft had already moved part way towards the Apple business model with its successful XBox games console, a growing chain of retail stores, an online store, and an increasingly well-developed consumer cloud. Other access devices were sure to follow. If Microsoft succeeds with the Surface ARM and Intel tablets, look for Microsoft-brand smartphones, ultrabooks, and even Windows TVs.

Over the long term, is Microsoft better positioned than Apple to prosper in the cloud computing era?

Windows 8 gives Redmond a software platform for cloud access devices that can stretch across the smartphone, tablet, PC, and set-top box/game console continuum. Microsoft is able to compete with iCloud in the consumer market. Office 365, SharePoint and other SaaS offerings give it an entré into the enterprise cloud unmatched by Apple. Microsoft’s enterprise presence is further cemented by Windows Server, enterprise applications, .Net developer framework, and Windows Azure.

The Apple business model may help Redmond’s competition with Google and Amazon

Embracing the Apple business model by controlling more of the extended Windows ecosystem and buyer experience, should improve Redmond’s long-term competitiveness against two other key rivals Google and Amazon. They also are racing to roll out a cloud/cloud access device business model.

Of course, selling hardware leaves Microsoft’s Windows licensees twisting in the wind. They already have difficulty generating even slim margins in the Wintel market. How much harder will it be if box makers have to compete directly with Microsoft?

And why would Léo Apotheker yell “J’avais raison”? When HP’s WebOS tablet and smartphones fell flat and HP was faced with returning to Microsoft’s embrace, Apotheker recommended spinning out the PC group. HP’s board supported the idea, quickly reversed itself and then showed Apotheker the door.

The graph below provides indices for HP’s revenue and net income from 1987  through 2011 (1987 = 100). It helps demonstrate why spinning out the PC business must have seemed to Apotheker like the thing to do. After the 2002 acquisition of PC-heavy Compaq, coming as it did on the heels of the Y2K and dot.com downturns, HP’s net income never returned to the profit track it was on before the company doubled down on the PC market. This remains the case despite dramatic cost-slashing and the acquisition of numerous higher-margin businesses.

 

Microsoft embraces the Apple business model

Domicity argued in our previous post that spinning out HP’s Printing and Personal Systems Group would let management focus on the company’s far more profitable and promising server-side cloud operations. Microsoft’s introduction of Windows 8 tablets just lends further support to this position.

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Posted by Marc Brien, VP Research, DOMICITY LTD.

Domicity publishes reports analyzing the strategies and operations of global cloud computing leaders. Early orders for all Domicity’s I.T. company studies receive a 33% saving. Click here to be notified about the next report. In addition to published reports, Domicity consults on the strategies & operations of I.T. companies and trends, and advises governments on economic development and investment attraction.

 

01.06.2012 Blog 1 Comment

Getting HP back on track

Posted by Marc Brien, VP Research, DOMICITY LTD.

Domicity publishes reports analyzing the strategies and operations of global cloud computing leaders. Early orders for all Domicity’s I.T. company studies receive a 33% saving. Click here to be notified about the next report. In addition to published reports, Domicity consults on the strategies & operations of I.T. companies and trends, and advises governments on economic development and investment attraction.
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HP going off track In what has become customary Hewlett-Packard fashion, after a soft quarter the company announced a major organizational shakeup … all in the hopes of squeezing out some more dollars to fatten next quarter’s earnings report and buy some respect from Wall Street.

As cloud computing buffets the industry, HP’s business model appears to be coming off the rails. Although I was not a fan of many of Mark Hurd’s moves when he was HP’s CEO, Hurd did have a strategy, consistently applied; even if that strategy was insufficient to cause problems for HP’s two most important competitors IBM and Apple.

All the sturm und drang after Mark Hurd’s departure in summer 2010 highlights the need for HP to come up with a new strategy that goes well beyond the short-term appeasement of Wall Street.  HP is a great economic institution with a storied history and its 350,000 employees deserve better.

Here are my gratuitous (in the meaning of “free”, not “unwarranted”) suggestions for some big moves HP could make to get back on track.

2q-results-hp

Pick an enemy — On the server or “cloud” side of the  business, HP is number two after IBM. On the client or “cloud access device” side, it is number two behind Apple. HP may be able to go toe-to-toe with one of these companies, but it is overstretched battling both.

For FY2011 ended Oct. 31, HP generated an unimpressive 9.7% operating margin in its combined PC and printer client-side businesses compared to Apple’s 31.2%. HP’s revenue for the combined businesses declined 1.8% for the year.  Having abandoned its WebOS gambit there is no obvious fix to HP’s profit problem. Even if Windows 8 is a success, most of the profit in HP’s client-side business will continue to go to Microsoft, Intel, and other companies in HP’s value chain.

In HP’s server-side businesses — servers, storage, networking, software, and services — the prognosis is significantly better. The combined FY2011 operating margin was 14.4% compared to IBM’s 19.6% (the two companies report operating margin somewhat differently). HP’s strength in server-side infrastructure and related services should enable the company to improve its position in the lower half of the cloud stack and to accelerate the process of layering XaaS services on top.

In my view, Mark Hurd’s successor Léo Apotheker had it right. HP should divest itself of the PC business and its printer sidekick. The channel, some customers, and analysts will howl, but they will get over it. IBM did well by selling off its PC business to China’s Lenovo and spinning out its printer operation as Lexmark.

Ignore the share price — During the Hewlett and Packard regime, share price was not top of mind. Steve Jobs did not obsess over Apple’s share price. Instead they focused on making exceptional products that customers craved and for which they were prepared to pay a premium. Profit margins were healthy. Now, after each quarter that does not meet with Wall Street’s approval, HP’s top management pulls the plant up to see why the roots aren’t growing.

Most revenue and profit for HP and other old-line server-side vendors still emanates from traditional I.T. businesses. These businesses are fast disappearing into the cloud. Over the next three to five years, HP must radically reinvent itself if the company is to come out the other side of the transition to cloud computing with a healthy organization and income statement. During this period, share price should take a back seat to maximizing the cloud opportunity.

Here are a few starting points for the HP reinvention:

  • sever any connection between compensation and share price for HP management
  • instead, tie non-salary, incentive-based compensation to operational and market-based goals aimed at improving HP’s position in the cloud
  • refocus on products by stocking the Board and the top of the management pyramid with engineers and scientists who have strong cloud credentials, displacing a few of the MBAs and private equity company partners
  • stop spending a majority of cash flow on repurchasing HP shares — $10.1-billion in fiscal 2011 (see Domicity’s previous blog post)
  • use the money spent on share repurchases to finance a successful transition to a cloud-based business model … increase R&D, continue building out a leading-edge network of cloud hosting data centers, make targeted acquisitions, and retool HR policies to restore trust and enthusiasm by re-skilling existing personnel, providing generous buyouts for non-cloud savvy staff nearing retirement, and offering industry-leading salaries to attract new hires with strong cloud credentials.

Just a few big things needed to put HP back on the rails. Get started and let me know how it turns out.

 

29.05.2012 Blog 1 Comment

Five reasons why last week’s HP job cuts are bad business

Posted by Susan Sparrow, President, DOMICITY LTD.

Domicity publishes reports analyzing the strategies and operations of global cloud computing leaders. Early orders for all Domicity’s I.T. company studies receive a 33% saving. Click here to be notified about the next report. In addition to published reports, Domicity consults on the strategies & operations of I.T. companies and trends, and advises governments on economic development and investment attraction.
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HP's job cutsLast week, Hewlett-Packard loudly proclaimed that it will terminate 27,000 people over the next couple of years — an act of ritual sacrifice designed to appease the gods of Wall Street.

The HP job cuts announcement was a transparent attempt to change the channel on media coverage of soft results for HP’s second quarter of fiscal 2012 — revenue down 3% and diluted earnings per share down 24% from the same quarter of the previous year. Wall Street acknowledged the bloodletting with an uptick in the stock and not all the press was negative.

Mission accomplished? Not necessarily. Domicity thinks HP’s decision to use mass layoffs to help fund its transition to a cloud-based business model is a bad decision which will weaken near-term competitiveness. Here are just five of the reasons why …

  1. HP job cuts blunts cloud mindshare momentum — Last month, HP unveiled its broader cloud strategy, Converged Cloud, to generally good reviews and there has been positive media coverage of HP’s public cloud start-up HP Cloud Services. The announcement of “the third largest layoff in I.T. industry history” has instead become the story, rather than HP’s cloud momentum.
  2. The HP job cuts tie the Whitman regime to Mark Hurd — In spring 2010, near the end of former CEO Mark Hurd’s controversial administration, HP carried out a company-wide staff morale survey which revealed that two-thirds of the respondents would happily go to work for another employer for the same salary. After Meg Whitman became CEO, many hoped her administration might begin to return the company to The HP Way, which pioneered the kind of employee-centered, innovation-based corporate culture that now powers Google, Facebook, NetApp and other Silicon Valley neighbours. Instead, it seems the floggings at HP will continue until morale improves.
  3. Some customers will buy less product — If you are a large enterprise choosing between IBM or HP for a big private cloud implementation, the stability of IBM could very well tip the balance. (Yes, IBM is laying off US staff, but in a low-key way.) And many of the people cut by HP will resurface in enterprise I.T. shops. How likely are they to recommend systems or services from HP?
  4. Valuable job prospects will go elsewhere —HP is in a war for cloud talent. Will a hotshot programmer with OpenStack experience join the organization that just trumpeted tens of thousands of job cuts?
  5. There is a better way to find money — Much of HP’s $60-billion annual business selling server-side hardware, software, and services is still bound up with provisioning traditional server-per-application systems. The cloud threatens much of this business. HP currently spends upwards of $10-billion annually to repurchase its shares in order to prop up the share price. We believe this money would be better spent on the transitional changes needed to make HP the leader in cloud computing. In addition to financing the development of new technology and services, a fortified drive for cloud leadership would retrain workers in the new skills needed to develop and sell cloud offerings, while older staff could be bought out on generous terms that would enhance, rather than degrade, HP’s reputation as an employer.
18.05.2012 Blog Comments

IBM SmartCloud and HP Converged Cloud circle the wagons

Posted by Marc Brien, VP Research, Domicity Ltd.

This post is based on research for an upcoming Domicity CORProfile© report analyzing the strategies and operations of a global cloud leader.
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In addition to published reports, Domicity consults on the strategies & operations of I.T. companies and trends, and advises governments on economic development and investment attraction related to the sector.
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IBM and HP circle the wagonsHP and IBM’s lucrative businesses selling server-side systems to global enterprises is under attack from a raft of cloud hosting upstarts. It is a serious concern because, for the two market leaders, these businesses account for a combined annual revenue exceeding $150-billion.

In the face of the accelerating adoption of cloud computing, both companies are maneuvering frantically to negate the risk and put themselves in a position to benefit from the cloud with their IBM SmartCloud and HP Converged Cloud strategies.

Most of the server-side business that IBM and HP enjoy today involves provisioning enterprises with the hardware, software and services needed to run applications on infrastructure controlled by the customer. Customers exercise this control directly through ownership or indirectly through outsourcing contracts.

A plethora of cloud hosters are aggressively trying to use the cloud to convince enterprises that they do not need to control their own infrastructure. Instead, these cloud hosters want to lure HP and IBM customers onto their cloud platforms.

Amazon and Google and others are renting out space on the same cloud platforms they established to run their own businesses. Large telcos are setting up cloud hosting operations. And a diverse group of  cloud entrepreneurs such as Rackspace, Salesforce.com and NetSuite are going after individual parts of the solution that IBM and HP now sell.

HP and IBM are not standing idly by. Both are rolling out defensive strategies that look remarkably similar. Each has begun circling the wagons around their customer bases — offering their clients a continuum of cloud services designed to forestall defections to the cloud “interlopers”. Under their IBM SmartCloud and HP Converged Cloud strategies, each company is selling converged systems that customers can use to build their own private-hybrid clouds. They are actively supplementing their private cloud initiatives by offering a range of external cloud services: hosted private cloud, virtual private cloud, and public cloud.

Both companies are using OpenStack’s open source software for the IaaS layer. Ultimately, this will make it possible for customers to move workloads across different clouds over the lifecycle of an application. OpenStack will also enable peak-period workloads to be “burst” from a customer’s private cloud to HP or IBM’s cloud hosting data centers. (While OpenStack looks like IBM and HP’s cloud software of choice at this point, they will undoubtedly move to offer other solutions that a customer might prefer, such as VMware.)

The IBM SmartCloud portfolio was significantly enhanced on May 16. This followed a major HP announcement on April 10, in which the company detailed its HP Converged Cloud strategy.  Domicity believes that, at this point, both initiatives are primarily rear guard efforts by HP and IBM to protect their existing server-side business from the threat posed by Amazon AWS and the other cloud hosters. Most of these companies cannot offer the same end-to-end range of cloud services that IBM and HP are now rolling out.

In addition to their defensive potential, the IBM SmartCloud and HP Converged Cloud initiatives may also be able to eventually generate significant new revenue streams.

IBM and HP are probably better placed to carry out capital-intensive data center-oriented outsourcing than some of their more labor-intensive outsourcing competitors. IBM and HP should also be able to develop significant businesses helping enterprises use the cloud to boost efficiency or open new markets. As well, the IBM SmartCloud and HP Converged Cloud initiatives should generate important new revenue from cloud-based data storage, management, and analytics as well as from cloud-based security screening of customer infrastructure and applications.