Merger may complicate Microsoft relations

The deal doesn't just bring together two computing giants--it also attempts to join two companies that have very different relationships with Microsoft. Compaq is considered Microsoft's premier partner, the hardware company that has helped the software giant on a number of new technologies and initiatives.

By contrast, HP typically has been a more independent agent. Microsoft and the new HP will undoubtedly work on a number of new projects, but the relationship, at least initially, may not be as cozy as it was with Compaq.

"From the tactical perspective, (HP) will be a more difficult partner for Microsoft to deal with in the short run," said Forrester Research analyst Charles Rutstein. But strategically, "nothing changes," he said. "Microsoft will continue to work with Compaq and then the combined entity."

"One of Compaq's greatest strengths is their ability to partner, with Oracle, with Microsoft and others," said Technology Business Research analyst Lindy Lesperance. "They've been very good at building strong alliances and being able to leverage them pretty well."

A smooth transition for the two computer makers--particularly the ironing out of differences in their manufacturing and distribution processes--will be important for Microsoft, which is banking on the imminent Windows XP operating system to boost fourth-quarter sales. According to PC maker sources, companies selling through stores can begin shipping Windows XP systems Sept. 17 for sale on Sept. 24.

Any problems that the No. 2 and No. 4 PC makers encounter in getting their systems to market could affect Windows XP, analysts warned. Sales teams at the new HP are likely going to have battle propaganda from rival PC companies.

"Every competitor worth their salt, especially Dell and IBM, is going to spread fear, uncertainty and doubt," said Summit Strategies analyst Laurie McCabe.

A Compaq representative declined to comment on how the merger could affect its relationship with Microsoft. Microsoft representatives did not immediately respond to a request for comment.

Compaq's origins may explain its differences from HP. While HP's roots are in proprietary technology, Compaq founder Rod Canion focused on compatibility with the IBM PC. Throughout its 18-year history, Compaq has steered product development to industry standards established for Wintel PCs--those compatible with Microsoft's Windows operating system and containing Intel chips.

By contrast, "HP as a company has a certain way of doing things--they call it 'the HP way,'" said Guernsey Research analyst Chris LeTocq. "It will be interesting to see if these two approaches can be merged."

"Yes, (the merger) is going to have an impact on the business relationship with Microsoft," said Context analyst Jeremy Davies. "It is going to be a substantial change for Microsoft because they're going to be talking to different people."

Over the years, Compaq has fostered a long-standing partnership with Microsoft, so much so that a former Compaq executive testified for the software giant during its antitrust trial with the Justice Department and 18 states.

Compaq also has been Microsoft's lead development partner on a number of PC-related devices, such as the MSN Internet appliance and the forthcoming Tablet PC. The Houston-based computer company also is the undisputed leader in Microsoft Exchange installations.

"Exchange is another place HP has been trying to be," LeTocq said. "HP moved away from its messaging system to focus on Exchange. It's done everything but roll over for Microsoft, and, frankly, Compaq has been the anointed one."

Playing second fiddle
That HP couldn't surpass second-rate status is not for a lack of effort on its part, said IDC analyst Al Gillen. "HP has been trying to be a premier partner with Microsoft for a long, long time," he said. "If you go way back to when Digital (Equipment) came out as the premiere partner, Hewlett-Packard came out, 'We're trying to be here, too.' The chronic challenge for HP is being perceived in Microsoft's eyes as not as important a partner as Compaq was."

Part of the problem comes from the differences in how Compaq and HP have run their businesses. Compaq's industry-standard approach made the company's products more attractive to software developers, "where Compaq partners better than almost anybody else," Lesperance said. Besides building bonds with Microsoft, Compaq's approach led to strong ties with Oracle and other software developers willingly cooperating on system sales--particularly servers.

This worked for Compaq even after the company acquired high-end proprietary server technologies from Digital and Tandem, Lesperance said. HP proved a less cooperative partner.

"HP are unwilling bedfellows with Microsoft, aren't they?" asked Davies. "I'll never forget the analyst conference in Bermuda about four years ago when one of the chief execs from HP walked around with a coffin with Microsoft and (Windows) NT on it."

At the time, HP focused more on Unix and had bet against Microsoft's Windows NT business operating system.

Three months later, HP embraced NT, Davies said. But the relationship has in some ways remained contentious. "It's only been about four years that HP has even embraced Microsoft, while Compaq, that's been their life," he said.

More recently, HP has tried to work more freely with Microsoft in the high-end server market, but the companies have fought over customers, analysts say.

Trying to be delicate, LeTocq said: "The cooperative relationship between Microsoft and HP in some of its high-end accounts has been strained."

Compaq's success with its iPaq Pocket PC handheld computer has only contributed to the strained relationship between HP and Microsoft. In some ways, iPaq has come to be identified with Microsoft's Pocket PC software, while sales of HP's Jornada Pocket PC handheld have lagged behind.

HP has griped about how its Jornada has often been given second billing to the iPaq. The Jornada was first to market and was available months earlier but did not have all the features of the iPaq, such as a 16-bit color display. As a result, Microsoft often touts the Compaq device and has been using it in most of its demonstrations.

"Compaq came out with a press release saying they had sold their millionth iPaq Pocket PC," Lesperance said. "Right about the same time, Microsoft came out with a press release saying they had sold their millionth (handheld) operating system. So it tells you how well HP has been doing selling Jornada."

The Compaq-HP merger has also thrown into question several pending deals. In the wireless arena, Compaq and IBM have been working to put IBM's Lotus Notes messaging software onto the iPaq. But with the merger, the deal may be in doubt. The two companies were supposed to announce the deal at the upcoming Cellular Telephone and Internet Association.

Gillen sees HP scooping up the iPaq, the MSN Web Companion and Tablet PC development as a good thing.

"Those are areas where Hewlett-Packard doesn't have a lot of presence, so it isn't that HP's not interested in those areas--they just don't have the products," he said. "It is probably viewed as a major coup for HP, to get a hold of that technology and pull it into the portfolio."

Staff writer Richard Shim contributed to this report.