HP defends Compaq servers from IBM, Dell

The PC business was a very important part of Hewlett-Packard’s (HP’s) Compaq acquisition, but one of the main drivers behind the deal was Compaq’s server business, in both Intel-based and Unix computers.

The server market is changing as the large Unix machines that have run so many critical applications for so long are looking expensive and cumbersome to many IT managers when compared to smaller and less expensive servers running processors from Intel.

The one-way, two-way, and four-way Intel servers are nowhere near as powerful as some of the huge Unix boxes by themselves. But several Intel boxes networked or clustered together can provide as much processing power as one of the larger machines, for lower maintenance and acquisition costs.

Compaq’s server business dominated the market in 2001, according to research from Dataquest. Compaq shipped a little more than 1 million units in 2001, compared to HP’s 430,000 units and Dell’s 711,000 units. While a dual-brand strategy allowed the post-merger company to keep customers happy on both sides of the fence, sheer numbers dictated that HP would adopt the Compaq ProLiant, based on Intel’s Xeon processor.

HP’s server business prior to the acquisition was in a state of decline, and it was an easy decision to embrace the ProLiant, said analyst Gordon Haff of Illuminata, in Nashua, N.H.

“HP was one of the more innovative companies in pushing Intel-based rack-mounted servers, but other companies like Dell and Compaq took a lot of their ideas and put them into products with better cost structures and better distribution channels,” he said.

Compaq had always been focused on its Intel server products, while the phased-out Netserver business was just another product line at HP, Haff said.

One user who had relied on the Intel-based Netserver product had no problems migrating to Compaq’s ProLiant product when it came time to replace his company’s older servers.

“We haven’t seen any degradation of products or services. We did see the obsolescence of some HP server lines, but we expected some to go away,” said Ken Parchinski, chief technology officer at Automated Resources Group in Montvale, N.J.

The Unix server market is unsettled, although rumors of its demise might be premature, according to analyst Vernon Turner of IDC, who spoke at the IDC Directions Conference in Boston last month. Sun Microsystems, IBM, and HP still do significant amounts of Unix business in the data center, with large companies unwilling to change their time-tested Unix applications without a compelling reason to migrate to a new operating system or processors, especially in an economic downturn, he said.

But prior to the merger, both HP and Compaq had decided to adopt Intel’s Itanium processor rather than continuing to develop their own processors for data center servers. Itanium is recognized as a powerful chip, but has a brand new instruction set, and a relatively small number of applications that support it.

“When you come up from the Xeon space, Itanium looks attractive. But when you come down from Alpha, you have serious concerns about the power for the dollars,” said Hal Kuff a vice president of technology and HP user at wireless technology distributor Tessco Technologies, in Hunt Valley, Md.

HP has several challenges ahead if it is to maintain its Intel server market share lead gained through the acquisition, and successfully transition its large Alpha and PA-RISC user base to Itanium, Turner said. The Alpha processor was developed by Digital Equipment (DEC) and is used in servers running the Unix and OpenVMS operating systems. PA-RISC chips are used in HP servers running HP-UX.

“We think we’re doing the right things around Itanium. We have a very compelling performance story, and we’re doing a lot of work with ISVs,” said Mary McDowell, senior vice president and general manager for industry standard servers in HP’s enterprise services group (ESG). HP refers to servers with processors from Intel as industry standard servers.

Linux will be a key driver in the server market, especially among the one-way, two-way, and four-way Intel servers where HP’s market share leads the pack, Turner said. HP will be forced to counter the moves of its rivals, as Dell will continue its growth patterns due to its low-cost model in this market, and IBM will have to aggressively go after this market to balance its Intel-based product mix with its Unix servers, he said.

But HP is a very different company from either of those two. “They are being pinched at the low end by Dell, and they have a big glass ceiling above them called IBM that has been executing better,” said Charles King, research director at The Sageza Group, in Mountain View, Calif.

Dell’s low-cost model allows it to offer its customers similar Intel-based servers to HP and IBM’s products at a lower price. Because Intel servers are not all that different across different manufacturers, price is often the main buying factor, users say.

“I’ve looked at HP, but they are rarely in the range of Dell. There might be one or two extra features that they offer, but Dell always has the better deals. If I can get the same server for a fraction of what HP is offering, it’s a no-brainer,” said Arturo Castellanos, director of Web Services at GeoPassage, an online travel company based in Austin, Texas.

Many companies played HP and Compaq off each other when soliciting bids for new systems prior to the merger. Now that the two companies have merged, Dell is often brought in as that competitive bid.

“In that context a lot of clients are paying more attention to Dell not just in the PC arena but in servers and storage, and now printing,” said Ed Broderick, principal analyst at Robert Frances Group in Wappingers Falls, N.Y.

HP thinks it can distinguish itself through easier-to-manage servers and helping its customers out through its services division, McDowell said. “(Products that are) cheap to acquire are nice, but we want to provide value throughout the life cycle,” she said.

ESG’s bottom line could still use some work. In the first quarter of its fiscal 2003, the server and storage group lost $83 million, an improvement over last year’s first-quarter loss of $129 million.

“The group certainly needs to turn around. We’ve improved the cost structure by $1 billion, and we’re making progress toward achieve the right balance between driving revenue growth while keeping costs down,” McDowell said.

One thing HP seems to have done very well in the post-merger period is integrating the technical support teams from the various Compaq and HP product lines.

Users praised the merged company’s technical support staff, admitting they weren’t sure how the technical support staffs would fare under the merger, but were pleasantly surprised.

“We suffered the loss of one of our primary data centers due to a water main break, and had the occasion to test the new HP last October. We were very impressed by the responsiveness and the resources that HP was able to bring to bear from storage to Alpha servers to Intel servers, and by how quickly the two cultures and operational entities merged,” said Tessco’sKuff.

“From a call center or help-desk perspective, they’re outstanding. From a support issue, we had a minor hardware problem, and they were all over it. I always get a good solid technical person on the other end of the line, as opposed to some call centers with sales and marketing people,” said Dave Hogan, senior vice president and chief information officer with the National Retail Foundation, a trade association based in Washington, D.C.

HP’s success in keeping technical support afloat can be tied to the lessons learned when Compaq purchased Digital, said Kristi Browder, president of the large HP user group Encompass in Chicago.

“The company learned from its mistakes in shuffling DEC people aside when Compaq bought DEC. They have done a very good job of integrating Compaq people with HP people, which is only good for the industry. They were dealing with more of a PC company, and HP’s experience in the enterprise helped us get there,” she said.

Ashlee Vance in San Francisco contributed to this report.