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HP takes new tack on e-commerce

HP is seeding companies with investments or offering business agreements that create long-term clients and even sales conduits to gain from e-commerce.

Hewlett-Packard is cutting deals with an eye toward the future rather than the present.

Call it HP's new way.

Under an innovative strategy for the conservative computing giant, Hewlett-Packard is seeding companies with investments or offering business agreements that create long-term clients and even sales conduits. The goal is to gain a stronger foothold in the infrastructure of the Internet--and profit from that position.

Before HP hatched the new plan, the company simply sold computers and support contracts, said Nick Earle, chief marketing officer of HP's enterprise computing solutions group. Now HP wants to make sure it gets a cut of the money changing hands because of the Internet--either by getting HP hardware into the infrastructure or by garnering HP a percentage of the proceeds.

The Palo Alto, California, computing giant has already begun utilizing three new options that feed into HP's e-services plan, Earle said: giving away HP hardware in exchange for a slice of a company's revenues; taking an equity stake in a company that then promotes HP hardware for its own products; or simply buying the company and taking over its revenue stream.

"They're trying to take their existing business model, freshen it up, and leverage it dramatically," said Goldman Sachs analyst Laura Conigliaro. "One of the ways is by really inserting themselves into a lot more partnerships with a lot more interesting companies."

"Part of it is a lot of bucks being thrown into an ad campaign, which I think is actually pretty effective," added SG Cowen analyst Richard Chu. "HP has had a lot of technology that's relevant, but it's all been pretty hidden under the covers."

Added Conigliaro, "In the old days, partnerships centered around Microsoft and Intel. The new partnerships and relationships really have a lot more to do with modern, Internet-driven companies."

One example of the new strategy is with HP's $35 million stake in BroadVision.

BroadVision makes software that customizes Web sites according to each visitor's behavior. The $35 million investment in the company will go toward improving the software so it works well on HP computers, by incorporating HP security models, for example. Meanwhile, HP made the investment by buying licenses to the software, which HP will sell along with servers so companies can use it to do things such as set up online catalogs.

Another example is with HP's agreement to run Ariba's network to connect businesses that need each other's products and services. HP is giving away computer systems for the service and running Ariba's site. In return, "We get a paid percentage of revenue," Earle said.

"We're turning hardware and software revenue into an annuity stream. That's very attractive if you're a security analyst," Earle said.

The giveaway strategy will involve some Windows NT servers, but the majority will be Unix servers, Earle said. "Unix has much better scalability and availability," essential attributes in the Internet arena, he said.

The overall strategy could be good for HP's Unix system revenues, which have been down for the last two quarters, hurt by product transitions, Chu said.

Brown Brothers Harriman analyst William Milton wrote last week that it appears sales of high-end HP servers are down for the current quarter. "The server business is only about 15 percent of HP's revenue mix, in our estimation, but it represents a significantly higher percentage of the profit mix," Milton said.

HP's acquisition of Open Skies, though it predates the new Internet push, illustrates the buyout facet of the new HP way. Open Skies provides the back-end software used to sell airline tickets online for United Airlines, Virgin Express, Southwest Airlines, and several smaller airlines, and HP gets revenue for each transaction, Earle said.

The new directions are part of HP's effort to reinvigorate itself to catch "chapter two" of the Internet story, Earle said.

Before, "We didn't have a clear direction or a clear business strategy," Earle said. Since HP developed its new e-services plan, though, things are moving faster. "We're motoring. I've been in HP 18 years, and I've never seen HP move so quickly. It's like a startup."

However, Conigliaro cautioned that the process is likely to happen "very gradually," and Earle acknowledged that "we don't expect immediate miracles."

New kid on the block?
HP also acknowledges it's not in first place when it comes to e-commerce. "Sun clearly has the momentum in the Internet space," Earle said.

However, Sun is closed to non-Unix methods. "They're not talking about a world in which Microsoft exists," he said.

"IBM and Sun are most closely identified with various aspects of the Web, and they've done a great deal to earn that identification," Conigliaro said.

While Chu agreed that Sun has the lead, he said HP is by no means to be counted out of the game.

"HP many many years ago was a conservative company. That's the image it's had," Chu said. "That's not necessarily the correct image. This is becoming more agile, more responsive in a different sphere."