Lippis Report 178: Nearly 2 Years after HP Buys 3Com for $2.7B, It Has Very Little to Show for IT: Can HP Make It in Networking?
Back in November of 2009, I wrote Lippis Report Research Note 136 titled “HP Plans to Acquire 3Com Accelerating a New IT Convergence Era.” In that Research Note, I wrote
“When 3Com is fully integrated into HP what kind of networking revenue and market share can HP gain? ProCurve + 3Com is approximately $2B of revenue now. With the existing product lines can HP generate $5B, $10B or more of network revenue over five years? Time will tell.”
Well after nearly two years, HP Networking or HPN’s North America (NA) layer 2/3 Ethernet switch market share by revenue is nearly the same, bouncing between 5% and 6.1%, according Dell’Oro, with HPN’s Q2CY11 NA switch revenue share being down to 6%. Considering HPN’s limited results after significant investments in sales, channels and marketing, including its “proof-of-concept” plus “A Catalyst for Change” Cisco Trade-in program, not to mention engineering investment, the question is can HP make it in networking? We attempt to answer that question in this Lippis Report Research Note.
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Market Share Analysis: 2% Growth Comes from Asia and RoW
HP had approximately 6% WW (Worldwide) layer 2/3 Ethernet switch market revenue share with its ProCurve product line before the 3Com acquisition, according to Dell’Oro. Post 3Com acquisition, HPN’s WW Ethernet switch revenue market share rose to approximately 10%, thanks to 3Com’s 4% share contribution, and stayed that way for three quarters until Q1CY11 where an additional 2% was gained thanks to increases in APR (Asia and Pacific Rim) and RoW (Rest of the World) theaters, according to Dell’Oro. In short, HPN’s NA switch market share has been flat since it acquired 3Com. From a WW switching perspective, HPN’s share of ports has also been flat with 20% share in Q1CY10 to 20.2% share in Q1CY11, according to Dell’Oro. In this same period, NA share of ports has been on a steady decline but with HPN maintaining share thanks to gains in APR and RoW.
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In short, in nearly two years, HP gained 2% of WW layer 2/3 Ethernet switch revenue market share, all of which came in Q1CY11 and held during Q2CY11, according to Dell’Oro, and is directly attributed to APR and RoW markets. Its bright spots are in routing and WLANs, which increased 2.5% and 2.2% in revenue share, respectively, between Q1CY10 to Q1CY11. Its IPS/IDS revenue share has been steadily declining, losing .3% share over the same period.
Yes, it’s very difficult to gain share in an established market as HPN has discovered. HPN’s value proposition has been grounded as a lower cost alternative to Cisco, a firm that’s greater than 20 times HPN but sells architected solutions.
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Huawei Could Shut Down APR and RoW
HPN’s growth is coming from APR and RoW theaters, which is understandable considering that HP obtained H3C, the once Huawei/3Com joint venture (JV) when HP acquired 3Com. Remember that Huawei and 3Com entered into a JV back in the early 2000s called H3C with the hope that H3C could produce lower cost networking products that 3Com would sell in NA while opening up the Chinese market. In Lippis Report Research Note 16, Bruce Claflin, 3Com’s then President and CEO, had hoped that H3C would deliver success much like Amdahl did over IBM in the 1980s and 1990s when Amdahl gained huge market share from IBM in the Front End Processor (FEP) business by offering similar products priced well below IBM.
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Fast forward to late 2006 when Huawei agreed to sell its stake in H3C to 3Com. Huawie had a non-compete agreement with 3Com post the sale of its stake in H3C, which has since expired, allowing Huawie to more aggressively and organically pursue the Ethernet switch market. And it has, as in early 2011, Huawie announced a new Enterprise Business Division.
Surprisingly H3C’s massive product portfolio has not made it into the HPN NA channel, partly explaining HPN’s flat NA share growth. H3C’s products were to be HPN’s competitive advantage. More alarming for HP, however, is the prospect that Huawie’s Enterprise Business Division will bring its enterprise product portfolio right to H3Cs Asian customers, cutting off HPN from this bright spot. Also when H3C was partly owned by Huawei, the Chinese government was tremendously supportive of H3C, but since H3C is 100% owned by HP, the Chinese government has no incentive to support H3C and will more than likely shift its support to Huawie when its Enterprise portfolio is ready. The danger here is that in the quarters to come, HPN’s APR and RoW market could start to dry up. Much of the future growth for H3C had been pinned on continuing its China dominance. But wait it gets worse.
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Huawie is threatening to hijack Bruce Claflin’s and now HPN’s low cost networking value proposition and use it for its own advantage. First Huawie will more than likely go after the H3C installed base in Asia then onward to NA and Europe. One possible scenario has HPN competing with Huawie as to who is the lowest cost provider of networking. This would push HPN up market and force it to change its value proposition to an architected solution, where it will find Cisco. HPN has started to move in this direction with its recently announced FlexNetwork Architecture. This scenario would, in essence, squeeze HPN between Huawie on the low end and Cisco on the high end. If networking gets into a price war game, Huawei could out low price HPN and that should be the major concern to HPN as it represents an estimated $800 million a year in revenue.
But Huawie will face stiff headwinds in NA as Huawei has a credibility problem with most North American buyers. IT business leaders know it as a low cost provider and that Cisco did a good job of raising the visibility of how Huawei tried to steal intellectual property source code. Therefore, while Huawei could have some impact in NA, the most immediate opportunity for Huawei enterprise is in China, specifically the install base that H3C had built.
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Lacking Data Center Network Strategy and Products
HP certainly has product to support one of the most comprehensive data center visions in the industry. HP has servers, storage, a huge services group and network products. HPN’s FlexNetwork architecture is an interesting vision if an IT architect wishes to extend a fabric across an entire campus, branch and data center but the underlying architectural detail and products are missing. The A12500 series has been available for two years, but not in NA in any great numbers. HPN recently said that it will be available in the 2H2011. The new A10500 data center switch was announced in May but is scheduled to ship some time in the second half of 2012. HP’s networking strategy in highly virtualized data centers is limited to its Virtual Connect product. HPN’s data center networking share according to Infonetics, and UBS is estimated at 6% versus Cisco’s 81%. This is where the networking market is at its hottest versus HPN’s strong hold in education and low cost networking.
For a company with the portfolio size of HP and its strength in data centers, it’s curious that HP is the only mainstream network vendor that doesn’t have a good data center fabric story. Cisco clearly does, as does Brocade, Juniper, Extreme, Dell/Force10, Arista Networks, Alcatel Lucent, IBM, Mellanox, etc. HP doesn’t, and it’s surprising, considering its large position in the data center market. It would be refreshing to hear HP communicate what a unique HP data center architecture looks like tied into mainstream industry pain points.
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How Can HPN Win?
How can HPN turn this around and participate in an effective way, utilizing its deep assets of broad product line, services, software, support, brand, financial strength and low price points to bring value to both customer and shareholders? Certainly HPN has product but it needs to bring the H3C products to NA and wrap the services group around them. HPN needs high performance and low latency 10GbE and 40GbE data center switching products since 10GbE represents some 25% of the total Ethernet switch market and growing, according to Infonetics. HPN recently announced a family of Top of Rack (ToR) switches called the 5830-switch family targeted for 2H2011 availability, but few details are available. HPN should consider acquiring Arista Networks, which may cost it two quarters of switching revenue but would add between 5 and 10% to its switch revenue and plug a major hole in its networking product line.
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In addition, HPN needs leadership consistency as HPN has transitioned leadership from Marius Haas, previous HPN GM who left HP for KKR in May, to now Bethany Meyer, a marketing executive who is interim SVP and GM of HPN. Bottom line: HPN needs to create leadership stability. The first order of business for whomever is to lead HPN should be to communicate what the unique HPN vision is as it’s still not clear to the market. In short, what is it about the HP data center and HPN that’s going to create a competitive advantage over Cisco, IBM, Dell and Oracle other than low cost. For example, consider Cisco’s data center vision, which is very clear. Cisco’s data center business advantage architecture is a system’s approach that bundles products together to deliver business outcomes.
The above is a straight-line approach to winning an established game, but HP needs to do something big and radical that is out of the box but meets market needs. It could consider acquiring Xsigo, a firm that recently released its server-based fabric as an alternative to processing at the network layer. This could be an approach that disrupts what networking actually is in the data center. HP would best be served to develop a compute centric view of the world. Clearly some IT business leaders will buy into this model while others may not, but one thing is certain and that is data center computing buyers tend to be closer to the CIO, offering HP a potential competitive advantage.
HPN needs to develop a new vision for computing and networking, and deliver it via a bold strategy and vision that’s disruptive rather than “we sell cheaper than everybody else.” HP has the brainpower and financials to develop a disruptive approach to data center networking; they just need the thought and executive leadership. In short, HPN needs to lead this industry and not just be a fast follower.