Dell and HP Rumors Suggest Accelerating Disruption in the Tech Sector

The Twitter feed never ceases to gain my attention.  Dell reportedly explores going private while news gets out there might be potential suitors for HP’s EDS and Autonomy business units.

The two-pronged market disruptor generically called the "Consumerization of IT" that drives the business market towards simplicity and/or “Utility Computing” sledge hammers conventional wisdom in multiple business segments.  It starts with the continued erosion in hardware margins exacerbated by the new IT provisioning pathway of the Cloud with its “as-a-Service,” metered permutations.  As hardware profit potential collapses, many different business entities seek asylum in adjacent routes to market.  VARs become MSPs, for example in a very compressed time period to do now on their small scale what IBM has been doing ever since Lou Gerstner taught that Elephant to dance.

In the middle then, between Best in Class IBM and small businesses sustained by hardware resale margins sit a series of hardware entities with various challenges.  Dell and HP appear to be the first to face this challenge while analysts sit and wonder whether entities such as NCR, Unisys, and Teradata will be able to take the impending hammering to their business operations from these inexorable market forces.

Within this context, then, what does it suggest about the rumors swirling around Dell and HP in the Twittersphere?

1. Dell would seem to be trying to protect itself from a hostile takeover bid.  It likely has modeled out different scenarios tied to the extent traditional IT provisioning shifts over to the cloud.  Forecasting the rate of attrition to the cloud remains anybody’s guess, and to that end TBR has just launched a new report series called SourceIT calibrating this three dimensional disruptor in per industry reports starting with retail.  It will come from the top of the customer stack and from the bottom and vary by industry to make the forecasting a three dimensional challenge.  The new factor happens to be the bottom up adoption, making customer erosion akin to Napoleon waging a war on two fronts.  In past disruptions, it has usually come from Fortune Accounts downward.  Being able to scale IP down market, then, becomes a critical best practice against consumerization/utility computing.
   
   IP development has not been a Dell competitive differentiator.  It has been scaled distribution of volume products bypassing the distributor middleman for margin capture.  This is a tough, tough transition for any company, and Dell likely realizes the short term hits will be severe and wants to do it in private in hopes of coming out of the transition as a standalone entity knowing its stock price will take a beating during the process.
   
   If it embarks on this transition while public, opportunistic entities with scaled commodity distribution best practices could become aggressive suitors for an unwilling partner.  To that point, then, Dell seems to be sensing it is prey for a wildebeast and is trying to hide better inside the herd to avoid getting gunned down. 
   
   
2. HP has challenges across multiple fronts and breaking up the conglomerate might be the only course of action against the backdrop of consumerization/utility computing.  The challenge, becomes, though, what to shed and why?  For firms in challenging downturns, the strong performing assets become the pieces suitors seek as value plays.  For the selling firm, however, shedding profitable entities to generate cash can be akin to a balloonist holding onto the ballast and letting the air out in an effort to gain altitude.
   
   It ain’t gonna work.  Just ask W. Michael Blumenthal who in 1986 masterminded the merger of equals between Burroughs and Sperry to form Unisys. 
   
   So the HP rumors certainly seem more far-fetched assuming HP has righted its managerial ship after what, to be kind, has been a very tumultuous period in its existence.

At the end of the day, these rumors may be all for naught.  We know consumerization/utility computing will consolidate hardware-centric vendors as various business models up and down the distribution chain become dehydrated from evaporating hardware profit pools.  The consumerization/utility computing hammer has already hit Software and the “as-a-Service” model which smashed traditional pricing metrics over the past ten to fifteen years. 

 

But consumerization/utility computing will not stop there.  It is coming after services and it will come after it hard in the next couple of years.  It was in days past that large firms could hide bodies over in services as margin models shrank and required headcount attrition.  But services automation strips labor out of what has previously been the labor intensive piece of IT business models.  

So price competition will hit services hard.  It will change deal structures.  It will demand nimbler “prospect to close” practices for shorter deals.  It will heighten the challenge of staffing workloads based on shorter, more volatile contracts.  Most importantly, though, services firms will have to determine ways to take custom developed IP and scale it to embed into existing services products to strip yet more labor out of their services delivery model to defend its installed base downmarket in a very vicious and unforgiving cycle.

And it all starts with hardware centric vendors and their margin challenges.  That top tier hardware vendors are rumored in the Twittersphere to be looking to go private and to shed core assets suggests the consumerization/utility computing sledgehammer has commenced shattering conventional business models and the firms who live by them.

Distributor Downturns Could Be More Than Macroeconomic Factors

Avnet’s 1Q13 earnings release for the September-end quarter does not auger well for IT spending.  The Technology Solutions group that sells servers, storage, networking and related products to end users and to computer resellers saw revenue drop 15% year-over-year to $2.2B and miss the low end of the expected revenue range by a couple hundred million.  EMEA dropped the furthest at 18%, followed by the Americas at 16% and Asia at 6%.  (Read TBR Analyst Krista Macomber’s take on the announcement here.)

In the call Avnet representatives indicated the drop was fairly even across all industries.  Avnet also noted that some technology segments were up, such as virtualization, storage, networking and security.

That pretty much, as Avnet indicated, leaves servers in the tank.

Avnet went on to talk about seasonality and delayed orders near the end of September.  They talked of a negative book-to-bill in the quarter that had climbed back into the positive (or above “1”) in the first three weeks of this quarter.

I have to wonder if such talk is just whistling past the graveyard, however.

As I wrote here about distributors, there’s a fundamental shift going on in the way commercial customers acquire and manage IT that seriously calls into question the core distributor value proposition.  Listen to any analyst relations pitch at a major IT vendor these days, and you hear very similar variations on the select few themes of  cloud, mobility, big data (analytics) and security.   

The soon-to-be released TBR 2012 Cloud Professional Services Study offers some data points suggesting shifts in IT procurement patterns have considerably more to do with the cratering of core iron such as servers than the inability of European and American politicians to get off the dime and solve their structural deficit problems. 

Yes, weak macroeconomic factors play a role, but it looks to be more pervasive than that.  Consider the following:

1. Cloud utilization rises.  IT departments move out of the proof of concept phase, deciding cloud has a role in their IT departments by a 2:1 margin.
2. Backward compatibility to their legacy applications which they want to migrate over to the cloud represents their biggest concern.
3.  There’s a huge jump in consideration of all “as-a-Service” offerings, with IaaS consideration/evaluation in the mid 80s.

Put that all together and you can expect a big jump in cloud adoption.  It puts the server rapidly over into commodity status and into the land of “build your own” for the large IaaS vendors.

Now consider these points:

1. Meg Whitman has entered the public confessional booth and acknowledged HP’s challenges will take several years to correct.  The hardware-centric giant has some big hurdles ahead of it.
2. IBM’s System and Technology Segment reported a 13% drop in revenue, with their high end System Z dropping 20% (and admittedly due for a technology refresh).
3.  In the call, Avnet officials talked about their revenue performance being in line with their major suppliers indicating the shortfall came more from macro factors than any self-inflicted missteps in the market place.

There’s been rumblings of the so-called “paradigm shift” in IT procurement patterns for quite some time.  The reseller channel has been struggling, with analysts expecting there to be considerable fall out within the channel as the need for the base hardware delivery, integration, maintenance, and support services wanes.  ISVs have a much better shot at migrating over to MSP status than do VARs, as the challenge will be in software tech support rather than in hardware "break/fix" maintenance and repair.

At least to the external world, the Avnet executives did not seem alarmed.  But adding up the recent results from the likes of IBM and HP, coupled with the recent TBR research into cloud adoption, and it looks to be the start of another cyclical transformation in this utterly fascinating industry that is going to wreak havoc on reseller enterprises.

Random Thoughts on The Silver Anniversary of Black Monday

The upper left panel of The Wall Street Journal made mention of the 25^th anniversary of Black Monday, October 19^th, 1987 when the Dow dropped 508 points to lose 22.6% of its value.  A comparable drop today, per the Journal, would be over 3,000 points.

I instantly recalled several key things.  Personally I recall my ex-wife, then newly pregnant with our first child and understandably exhausted all the time, calling me from her job as a supervisor in the telephone brokerage group at Fidelity Investments.  I recall our parents, children of the depression, and their reactions.

And I recall my mentor/boss at the time who about a decade later appeared on the cover of BusinessWeek telling me now was a great time to pick up Ford and GE stock as it was ridiculously low priced.  Now was not the time to sell, he told me.  It was a little like “camping in a rainstorm.”  Just stay inside the tent, hope to stay dry, and wait for the weather to clear.

In the aftermath, it came out technology had played a role.  Computerized trading that fed on itself exacerbated the problem.  It was a lesson learned on the ways in which technology automation increased the velocity of commerce.  We’ve seen it in all sorts of ways.  Inventory turns represents one.  The talk of the collapse of the middle class represents another.  We have fewer middle class jobs as technology automation renders moot the need for the labor.  Fewer middle managers need to aggregate computerized reports when we have real time dashboards and predictive analytics.  In one technology company where I have provided consulting and market research services for decades, the number of individuals employed in market analysis functions dropped from 160 to 40 while the company revenue climbed.

 

Recently the cratering of the housing market can be linked to the notions of derivatives and tranches undoubtedly concocted with leading edge technology driving the calculations and equations.  

The next big thing right now radically altering commerce consists of analytics, best represented by IBM Watson.  And IBM Watson follows a very traditional migratory path for expensive, leading edge products.  It started in government and then moved to financial and medical markets.  Government can pay exorbitant sums for the leading edge technology in the interests of national security: I.E.  The “protection of the commons” in the aggregate.  As it becomes commercialized, it migrates down through to areas with critical time value components.  And that, to paraphrase the old Jack Benny line, boils down to “Your Money or Your Life” or the financial and medical markets.

Today the technology industry aims its labor stripping weaponry directly at itself through disruptors such as mobility, cloud and big data that will radically transform the commercial landscape of the technology industry in ways not yet fully fathomed.  Watch earnings announcements of the broad based suppliers such as HP and IBM (as well as some current titans such as Microsoft and Intel).  HP remains too dependent on iron right now, but has means to shift and will have some rough quarters as Meg Whitman finally acknowledged publicly.

IBM has a history of shedding iron and seems well ahead of the curve strategically compared to HP.  It has exited PBXs, typewriters, printers, and PCs.  Lou Gerstner pivoted the company into software and services.  Its road map is clear.  With IBM it is entirely conceivable we will see revenue stay flat for several years while profits climb due to shifting out of product revenue streams with commodity gross margins into value added services built largely around automated delivery mechanisms.  

Labor free services or utility computing, if you will, which will undoubtedly be pervasive on the 50^th anniversary of Black Monday.

And begs the question as to what we humans will be doing with ourselves to make a buck. 

With any luck I will have my faculties and sufficient retirement funds to be able to view it from the sidelines and not as some surly Wal*Mart greeter.

HP’s challenge: PCs and Printers don’t do much for Mobility, Cloud, and Big Data

I have followed HP since the late 1980s and found them an impressive operation.  The last few years have been confusing, indeed, and their current market position has been troubling.  There’s a confluence of market disruptors at play in the technology industry which sits poised for another one of its massive shake outs and upheavals.

Iron-centric vendors will be the most at risk which does not auger well for HP.  We will see the economic downdraft first in the channel, where a number of small business entities competing in the VAR space will be snuffed out as they struggle to transition over to a Managed Service Provider (MSP) business model.  It’s a function of lessening one’s reliance on hardware profits and making it up on subscription-based software and services provisioned out over the cloud.  There’s a cash-flow drain in the transition with which undercapitalized small businesses will struggle. 

Move up the food chain and the pressure on hardware revenue and profits will begin impacting big name vendors.  I will not be at all surprised to see, for example, IBM show a period of flat or even slightly declining revenue performance while maintaining its operating line.  I say this given the solid way in which this company has transitioned from hardware to software and services that goes back decades. 

HP has not been as nimble.  The profits gleaned from printer supplies certainly have kept that company afloat for quite some time, but now the pressures appear too great.  Meg Whitman essentially came out and admitted as much the other day.  Consider the challenges it faces:

·         1. It lacks a solid mobility offering

Mobility means smart phones and tablets in lieu of PCs, and HP has neither at the moment.  It will come out with a Windows Tablet and will be “betting on 8” (Windows8) almost as much as Microsoft.

·         2. Servers face similar threats

HP has been a major player in the server space which also faces competition from IaaS provisioners content to string together racks of generic server boards on low cost, usage-based pricing plans to end customers.  Server demand will not evaporate, to be sure, but neither will it serve as a growth engine to pull a company the size of HP out of the doldrums.

·         3. Cloud, Software and Services drive competitive differentiation

HP simply lacks a fair amount of scale here.  HP made a big bet here, however, picking up Autonomy for $10B and having EDS as a services arm, but this is not where its market reputation lies

For years HP had a well-earned reputation as the maker of very well engineered and reliable technology products.  They were viewed as a diverse manufacturer of piece parts or components with less robust marketing or business-specific knowledge to offer the way IBM can and does with its industry marketing/“Smarter X” orientation.  So HP’s reputation was one for reliable products.

End customers do not want to consider product anymore.  They simply want data access seamlessly provisioned to them.  Yes, they will have on premise hardware as necessary, but the network will increasingly be the computer and what iron located where will process and store company data will increasingly be deemed immaterial to the end customer.  Customers will simply care less about the iron in the utility computing model just as electric customers today do not care about where the electricity they consume gets generated.

And that represents HP’s greatest threat.  That which has been the source of their excellent reputation simply matters less to end customers than it has in the past.  Other vendors have narrowed the performance/reliability gap on the one hand, and customers want less and less of the product under their control on the other.  

Less competitive differentiation and less customer importance.  Ouch.

I personally cannot help but root for Hewlett Packard in these turbulent times.  I first started tracking them as they were late shifting from 16 bit to 32 bit minicomputer architectures.  The external market forces at play today make the necessary transition over to software and services by HP for more daunting a challenge for the company.