HP Roars Into Software Services

Change and evolution are the only constants for companies that want to stay on top.

Hewlett-Packard (NYSE: HPQ  ) has announced its move into cloud computing and, in turn, software services -- a segment that has contributed less than 3% to the company's total revenues so far. The move makes a lot of sense when we know that CEO Leo Apotheker happens to be a former CEO of business software maker SAP (NYSE: SAP  ) . The world's largest technology company in terms of revenue, HP is definitely looking to exploit a relatively new area in information and technology, and possibly be a pioneer for new industry standards.

The foundation
It's little wonder that HP never gave up in its bid to acquire cloud-computing company 3PAR, despite the rival bid by Dell (Nasdaq: DELL  ) , which eventually pulled out. The result? HP acquired 3PAR for $2.4 billion, well above the initial bid of $1.2 billion, last September. Let's face it, there is a dearth of quality players in the storage market.

Cloud computing has the potential to change the way businesses store information. Cloud computing is not a new phenomenon. We already use it through services like Facebook, Gmail, Twitter, and blogs, but businesses have been slow to take it up.

It's the benefits that are immense. The mobility, scalability and cost-effective features that this service offers are yet to be exploited by businesses at large. HP is entering the market at just about the right time.

The competition heats up
The company plans to develop a platform rather than simply host a set of programs or provide storage space. This definitely looks exciting. The competition is going to heat up. Amazon.com (Nasdaq: AMZN  ) and Rackspace (NYSE: RAX  ) will now face a newly emboldened competitor.

Still, what really caught my attention was how Apotheker, during a March press conference, sidestepped questions about competition. A new term was coined to deal with customers-turned-competitors -- coopetition -- from cooperation and competition. This is basically with reference to Oracle (Nasdaq: ORCL  ) , which acquired Sun Microsystems in January 2010 and had since become a direct competitor.

The only thing that matters, Apotheker says, are his customers. The professionalism that he exhibited augurs well for the company. A leadership that knows where to draw the line in a cutthroat industry is what matters. Bear in mind that this was Apotheker's first public appearance since taking over as CEO last November.

The bonus
At the event, the company also announced a 50% increase in dividend payouts from $0.08 to $0.12 per share. This is a good sign that the company wants to return profits back to shareholders. The steady margin gains the company has seen over the past few years has definitely played its part in this move.

It will take some time before HP can establish itself as the market leader in storage solutions. Since the company intends to bring out its own Internet "cloud" product, there will be research and development costs, which might overshadow its revenues in the near future. Yet it should not be interpreted as a weakness. Also, with plans to introduce its own application stores (to be launched sometime next year), the company is positioning itself to gain in the long run.

The final difference
The move into software and services from primarily being a hardware producer is an opportunity for unprecedented growth. It takes a bold CEO to be behind such a move. To move out of its core business requires courage. As aptly put by Isaac Asimov, "No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be."

Isac Simon does not own shares of any of the companies mentioned in this article. Rackspace Hosting is a Motley Fool Rule Breakers choice. Amazon.com is a Motley Fool Stock Advisor selection. The Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On May 06, 2011, at 4:49 PM, abondegas wrote:

    "Co-opetition" is hardly a new term. It has been a fact of the market for years- as an example, IBM sold it's disk drive technology for years to competitors- knowing full well that the power of IBM's sales and marketing teams could outmarket and outsell the competition- and they could make money off them at the same time.

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