HP has designs on IBM in software battle

Successful at selling hardware, HP wants to make a bigger splash in the software arena, but with longtime rival IBM intending to do the same, the company faces a difficult battle.

HP and IBM directly compete in several technology markets, with each having strong points. For instance, HP in 2006 became the largest computer company in terms of revenue, with sales increasing 6% to $91.7 billion, compared with IBM's year-end total of $91.4 billion. Yet for the first quarter in 2007 IBM came out ahead of HP in x86 server sales, according to Gartner, with about 1.6% more market share than HP. But HP topped the market for blade server sales, and the two vendors tied in second place behind EMC in the computing storage business, according to IDC.

In the competitive world of software, HP is going to have to change the way it sells to customers, increase its services revenue and expand its expertise into areas such as security and storage management to succeed, particularly against Big Blue, which has a large software portfolio and a battle-tested sales force.

"We are seriously committed to taking the leadership position in software," said HP CEO Mark Hurd this week at the company's HP Software Universe customer conference in Las Vegas. "Management software is evolving into a category as important as database or ERP, and it's a category looking for leadership. This is what we are going to be great at."

HP's challenges start with simple numbers. While the $4.5 billion acquisition of Mercury Interactive fast-tracked HP to being the sixth largest software vendor in the world, IBM sits at No. 2 on the list, just behind Microsoft. Also challenging HP's software goals is IBM's equal pursuit of the market. Executives at IBM say Big Blue is looking to increase its software market share by acquisition and OEM agreements. IBM bought 13 companies in 2006 and expects more in 2007. In the OEM arena, IBM recently expanded its deal with Cisco whereby Cisco will use IBM software to help customers manage their networks. IBM has signed more than 4,500 deals with companies to use its software in their products

In the long term, IBM wants software to represent about 50% of total its profit — an increase from 40% last year, IBM executives said recently. Software accounts for about 20% of IBM revenue, but generates 40% of pre-tax earnings, according to industry reports. At HP, software last year represented less than 2%, or about $2 billion, of the company's total revenue of about $90 billion.

To catch up with IBM, HP will have to continue to grow its business. HP has completed or announced some 20 software buys since Hurd came on board in April 2005 and says it will also continue to buy technology. The company has also shifted its R&D focus away from hardware to software.

"Ultimately looking at the business as a percentage of revenue, it will take a long time until HP Software becomes an equal [to IBM] from this metrics comparison," says Stephen Elliot, director of enterprise systems management at IDC. "There are other ways to win at the software business: disruption, savvy deals and the improved utilization of HP channels [services, hardware notably]. IBM is clearly good at this, specifically via their services utilization."