This article from NYTimes.com has been sent to you by [log in to unmask] More on Walter Hewlett's opposition to the merger. [log in to unmask] /-------------------- advertisement -----------------------\ Share the spirit with a gift from Starbucks. Our coffee brewers & espresso machines at special holiday prices. http://www.starbucks.com/shop/subcategory.asp?category_name=Sale/Clearance&ci=274&cookie_test=1 \----------------------------------------------------------/ For a Hewlett, Merger Raises a Basic Fear January 28, 2002 By STEVE LOHR There is something else worrying Walter B. Hewlett. In his letters to shareholders and filings with the Securities and Exchange Commission, Mr. Hewlett has explained his fight against Hewlett-Packard (news/quote)'s planned purchase of Compaq Computer (news/quote) largely in terms of two fears. He says he is worried that the merger would dilute the prominence and value of Hewlett's lucrative printer business and that big mergers in the fast-moving computer industry are inherently too risky and destined to fail. But in his more detailed conversations with money managers and industry analysts Mr. Hewlett has expressed another, perhaps more fundamental fear - that the combined companies' strategy for sharply increasing sales to large corporate customers runs a serious risk of stumbling down the same path as the troubled personal computer industry. People Mr. Hewlett has talked to say he worries that the chip maker Intel (news/quote) and particularly the software giant Microsoft (news/quote) will reap the rewards while systems makers like Hewlett and Compaq struggle to make a profit. If shareholders approve the Hewlett- Compaq merger, despite opposition from members of the founding family like Mr. Hewlett, the combined company plans to try positioning itself as the leader in making larger computers from industry-standard technology - mainly Intel's microprocessors and Microsoft's software operating system. Such industry-standard computers have increasingly been employed as the data-serving hubs in corporate networks of PC's, connecting users to office printers and shared data files and delivering Web pages to desktop machines. Yet industry-standard servers have not yet made major inroads into the corporate data centers, which typically handle a company's electronic transactions, manage its operations and house its most valuable data. In the data centers, the computing workhorses are mainframes and big machines that run Unix, an industrial-strength operating system. Carleton S. Fiorina, the chief executive of Hewlett-Packard, and other board members argue that there is a huge, profitable business in making industry-standard computer systems as they improve and move steadily into the heart of the data center. And big systems sales, they say, are the entrée into corporate accounts, giving the supplier an edge in follow-on sales of software and services. But Mr. Hewlett, who remains on the Hewlett board despite his renegade status, has told fund managers that the strategy seems a risky rerun of the PC industry, in which only Intel and Microsoft can ultimately benefit. One fund manager quoted Mr. Hewlett as saying: "I don't think that space is defendable." It seems a strategy, he recalled Mr. Hewlett saying, that is based on risky partnership with Microsoft in particular, based on the assumption that it will win in data-center computing as it did on the desktop. Since Mr. Hewlett declared his opposition in November, two months after the deal was announced, he has issued statements but has not spoken publicly on the subject. He declined to comment for this article. Mr. Hewlett's view contrasts sharply with the consensus of the rest of the Hewlett-Packard board, based on interviews with other directors. "Walter has identified an important issue - the dominance of Microsoft in the desktop operating system market," said George A. Keyworth II, a longtime Hewlett board member. "But we're talking about building a new business, taking the lead in a whole new generation of computer systems which will be the platform for the next-generation Web." The new computer systems are ones using new Intel chips designed to process data 64 bits at a time, or double the current standard of 32-bit processing. The new chip architecture holds the promise of systems that benefit from the low-cost, high- volume economics associated with the PC industry yet are able to handle big, data-intensive computing workloads now more typically performed by Unix machines or mainframes. One of the big, new uses is expected to be processing so-called Web services. Such services mainly involve clever software, being developed by Microsoft and others, intended to automate all kinds of everyday individual and corporate arrangements - from checking personal data and making a doctor's appointment to monitoring a company's inventory and automatically reordering stock through the Internet. Hewlett-Packard has an edge over competitors in making systems based on the new Intel chips, called Itanium, because Hewlett engineers worked with Intel on the design. As a result, Hewlett gets access to the technology first. And the three major operating systems that Hewlett markets - Windows, Linux and the its own flavor of Unix - will all run "natively" on the new chips. Computer systems using the Itanium chip architecture will not begin shipping in volume until later this year, and it is uncertain how quickly corporate customers will accept the machines. But barring unforeseen setbacks, most analysts expect the Itanium-class machines - and the software written to run on them - to represent a major shift in the industry over the next several years. "It should be a huge opportunity for us," said Richard A. Hackborn, a former Hewlett executive vice president, who is a Hewlett board member and a former board member of Microsoft. Compaq is headed in the same direction, technologically. "Industry- standard servers are eviscerating the low end of the server market, and moving up to the middle tier," Michael Capellas, the chairman of Compaq, told industry analysts in New York on Friday. "That will continue, and the Web infrastructure will continue to be driven by industry-standard servers" running Windows or Linux, a variant of Unix that is distributed free. Industry analysts say that opportunity looms for a combined Hewlett- Compaq, but they also agree that Mr. Hewlett has a valid concern. "Windows Itanium is going to be a very powerful force in enterprise computing, and they can make world-class systems," observed Martin Reynolds, a research fellow at Gartner Inc. (news/quote) "But you've got to look at the economics of servers going the same way that PC's did." The reigning champion in the PC business, of course, is Dell Computer (news/quote). Its lead has been built on streamlined procurement, inventory management and direct marketing expertise. But that is a very different business model from the one used by Hewlett-Packard, which supports an army of engineers and spends heavily on research and development. Ms. Fiorina argues that viewing the server market from the perspective of today's desktop PC market is a mistaken analogy. The more apt comparison, she says, would be with the early days of the PC industry, when the machines were not commodities and there was ample room for innovation in systems design and innovation. "We're just at the beginning of Windows in the data center," she said. "Windows in the data center requires software tools, support and services to deliver real enterprise solutions for corporate customers." If Hewlett-Packard can gain a leadership role in a new generation of servers, Ms. Fiorina says, that should be a significant advantage in realizing its strategy of being a broad supplier of hardware, software and services to major corporate customers. The tradition in the industry, after all, is that big computer systems sales open the door to all sorts of other business - the model that has served I.B.M. (news/quote) so well over the years. The strategy behind the merger is for Hewlett-Packard to be the lower- cost alternative to I.B.M. in big corporate accounts. Its industry-standard server vision, relying on Intel, Microsoft and to some degree the Linux community, is crucial to that game plan. But a former Hewlett executive, echoing Mr. Hewlett's concern, says the server strategy, like the merger itself, is a big risk - though he thinks it could succeed. "The path to differentiation by betting so much on industry-standard servers will require the company to be much more nimble," he said. "You have to keep developing the surrounding software layers, specialized chip sets and expertise that add value to the Intel processor and Microsoft operating system. Otherwise, Dell will eat you from behind." http://www.nytimes.com/2002/01/28/technology/ebusiness/28HEWL.html?ex=1013234295&ei=1&en=aba7ce0fe08e80a7 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact Alyson Racer at [log in to unmask] or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to [log in to unmask] Copyright 2001 The New York Times Company * To join/leave the list, search archives, change list settings, * * etc., please visit http://raven.utc.edu/archives/hp3000-l.html *