HP, Microsoft enter integrated-systems era

Hewlett-Packard and Microsoft's partnership announcement on Wednesday was greeted with a lot of skepticism among analysts I know.

In part, this is just general skepticism about the I-love-you-you-love-me sort of pronouncements that permeate the IT industry. Press releases are cheap. It also reflects that the teleconferences given by HP and Microsoft on Wednesday, in the words of CNET's Ina Fried, offered "more adjectives than details about the three-year, $250 million deal." (Fried does add some details about specific planned integration work between the two companies that they alluded to but didn't get into details about on their call.)

However, I'd like to touch on another aspect of this announcement that, at some level, is independent of how much meat is here. That's the fact the announcement happened at all. It says a great deal about how the system vendor landscape is reconfiguring.

Back in the day, every system vendor pretty much did it all. Even a midsize player had a semiconductor fab, designed and manufactured disk drives, bent sheet metal, wrote operating systems and middleware, had their own networking protocols, and even sold a certain number of applications in areas like office automation. In the parlance of business strategy, computer companies were largely vertical in nature.

This changed in the 1980s. The change occurred most famously and obviously in the PC space with companies like Intel and Microsoft providing products that many different system makers used. (Former Intel CEO Andy Grove describes this shift in his book, "Only the Paranoid Survive.")

Server makers have shifted toward a far more horizontal structure as well. For example, no North American system company still makes disk drives, and the number of proprietary Unix variants is much reduced from the old days. The reasons for the change are numerous but include a customer desire for interoperability and reduced lock-in, as well as the economies associated with products and technologies that could be leveraged across an entire vendor ecosystem rather than just one.

There remain aspects of the old vertical industry among the larger vendors, most notably at IBM. However, many of the largest IT vendors are most associated with one or two areas.

Like most things in life, though, there are trade-offs. Horizontal products mean that someone needs to assemble the vertical computing stacks from processor to the application (or, really, business outcome) into what customers really want. And those vertical stacks often don't end up working as well as they might have because a lot of the fitting and connecting happens after the products are already designed in, at least partial, isolation.

Thus, we're seeing something of a pendulum shift back toward more integrated players. Oracle's impending acquisition of Sun Microsystems is the most obvious example. But Cisco Systems' foray into blade servers and its increasingly tight and cozy relationship with storage vendor EMC (which in turn has made its VMware acquisition a much more integral part of its strategy) also reflects the changes going on in the industry.

Which brings us to Microsoft and HP.

One aspect of a horizontal industry is that the horizontal vendors are arms merchants; they sell to everyone and don't play favorites. That's an ideal, of course; some partners are always more equal than others because they're more profitable or have an historical relationship of some sort. Nonetheless, the public message from an HP or Microsoft is almost always that they love all their partners equally.

Thus I find it more striking than it might seem at first glance that HP and Microsoft made this announcement and repeatedly called each other "preferred partners." That's just not how things are done in the industry as it's existed over the past decade or two. It's a clear signal that the times are changing.