November 30, 1999 5:45 PM PST

Hewlett-Packard maps out e-services future to Street

Hewlett-Packard's e-commerce partnerships, central to the company's long-term future, won't pay off until at least 2001, chief executive Carly Fiorina told analysts today.

Under a series of revenue-sharing "e-services" deals, HP typically gives hardware to companies that provide services over the Internet in return for a fraction of the money that business pulls in. "In 2000, [e-services revenue] is insignificant and immaterial," Fiorina said today at a meeting with financial analysts.

But there is an indirect payoff from e-services deals. For example, HP's deals with Qwest will provide about $100 million to $150 million in annual revenue, said Ann Livermore, president of HP's enterprise and commercial business.

Until e-services revenue picks up, HP will focus on growing its existing businesses of selling products such as PCs, servers, printers and digital cameras. That growth will push HP's revenue and profit growth in fiscal year 2000 to levels 12 to 15 percent above 1999, Fiorina said. "When you see our plans for 2000, the vast majority of that [growth] is accelerating growth in our current business," Fiorina said.

E-services are key to HP's effort to reinvigorate itself and benefit more from the rise of the Internet, a phenomenon analysts say has been more favorable for competitor Sun Microsystems. HP and Sun are locked in a battle to sell their servers to companies, with both companies offering discounted hardware, initiating new incentives to fire up the sales force, pushing ahead with new products and taking potshots at each other.

Sun chief executive Scott McNealy has criticized HP's e-services deals, saying HP's alignment with a particular customer of HP products puts HP in competition with other potential customers. Sun takes a more neutral approach, he has said.

Fiorina lashed back at Sun today, saying that HP has plenty of ordinary deals to sell products and that the new e-services deals are "the next big wave of growth." HP can sell better to customers that have mixed Unix and Windows NT environments than Unix-only Sun, she said. And Sun's new sales force compensation plan--which offers as much as a million dollars in stock to top performers--shows that HP is putting the pressure on Sun, Fiorina added.

"I would hope that you would only consider these [e-services deals] unnatural acts if you don't know how to do them," Livermore said to analysts.

Indeed, pressure from HP and from IBM, with its new S80 "Condor" Unix server, has forced Sun to discount its top-end E10000 server 18 percent, said Gartner Group analyst George Weiss.

But even if HP is putting the pressure on, Sun has stolen the wind from HP's sails. "I think their initiative has been taken from them," Weiss said. "Sun's focus on Unix has been very strong and clear. HP was slow to react to Sun as a competitor."

Fiorina recognized how important it is for HP to regain its footing in the Unix market. "It is very important that in the next several months we see the momentum we need to," with the problem fixed within the next year, she said. "We are trying to be candid and realistic that a problem that has developed over several years does not get solved in two months."

Livermore said orders for the Unix systems have picked up in October and November, though "not enough to call a trend yet," she said. Livermore, who is dealing with the flagging North American Unix server sales, fired 250 "nonproductive" salespeople, revamped compensation to offer rewards and punishments, changed management at many levels in the organization, and promoted Karen Slatford as the leader for worldwide sales. In addition, HP salespeople will be able to offer more creative deals to its biggest customers, she said.

Analysts also fretted about HP's two-pronged strategy of offering Unix/PA-RISC systems as well as Windows/Intel systems. The plan is intended to unify HP's hardware line so it no longer has separate computers for Unix and Windows systems. But in the meantime, customers must worry about when or whether to make the transitions.

HP's N-class and L-class servers, introduced earlier this year, come today with HP's PA-RISC chips but in the future will be upgradable to Intel's new IA-64 chips. In addition, a new version of HP's top-end V-class Unix server code-named Superdome, due in 2000, will inherit that dual capability.

"Superdome is a key product" for HP, Weiss said. It will be the first from HP to offer the ability to split a system into several different independent sub-computers, Weiss said. That feature is standard in mainframes but in the Unix market is limited to Sun's E10000--a product initially developed by Cray Research and acquired by Sun.

The ability to split a computer into several pieces is useful to test out new software and was popular with customers who needed to test the Y2K-readiness of their computers, Weiss said.

But the transition from PA-RISC to Intel puts HP customers in a difficult situation. As Morgan Stanley Deal Witter analyst Tom Kraemer said, customers must ask themselves, "Why buy Unix today when I'll be forced to migrate over to Intel?"

Weiss disagrees, saying he doesn't believe the two-pronged roadmap has hurt HP and that customers are comforted by the ability to accommodate both types of chips.

The e-services deals are opening doors for HP. HP sold more Unix servers to power Wal-Mart's coming Internet site. America Online, United Airlines, and Amazon are buying new machines as well, Livermore said.

"Since AOL announced its deal with Sun," in which AOL will buy millions of dollars of Sun hardware, "we have not had a single HP box replaced by one from Sun," Livermore said.

Coinciding with today's meeting with analysts, HP announced a broad agreement that backs its plans to further e-commerce efforts and sell more servers.

The company today made a deal with Amazon to provide servers and strengthen its position in the e-commerce giant's electronics store. Under the deal, Amazon will install high-end HP 9000 V-Class servers and add to its line of products in the Amazon electronics and software store, which includes HP's printers, scanners, digital cameras, PDAs, calculators and accessories.

Further, the firm struck a sales and marketing deal with Amazon that supports HP's consumer products store at Amazon, including participation by Amazon in HP's e-services and advertising efforts.

News.com's Scott Martin contributed to this report.

 

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