Peas in a Pod or Night and Day?
HP and IBM are not Nearly as Similar as You Think
By Roger L. Kay
Quite often these days, people compare the results and business models of IBM and Hewlett-
Packard (HP) as if they were direct competitors. In truth, they do compete in several key areas,
notably enterprise hardware and services. But in other ways, they are very different beasts.
Under Sam Palmisano, IBM has transformed itself into an enterprise services-led company,
with that division accounting for $39.3 billion or 38% of the company’s $103.6 billion revenue in
2008. HP, by contrast, even with the EDS acquisition, derived only $22.4 billion or 18.9% of its
$118.3 billion fiscal 2008 revenue from services. In many cases, IBM’s services division pulls
the company’s other groups along in its slipstream. When an IBM services sales team wins an
enterprise customer with a complex set of requirements, it is often able to bring the hardware,
software, and financing divisions along as well.
Services have a way of smoothing out a company’s revenue picture. Long-term signings create
a huge pile of deferred revenue, which comes in handy during lean years like this one. IBM’s
financials reflect the steadying nature of its large services business.
One area of extreme contrast between the two companies is software. HP’s software group
contributed only 2.5% of revenue in 2008. In contrast, IBM’s software division represented
21.2% of revenue. Software can be a high margin business and greatly contributed to IBM’s
overall profitability in 2008, allowing it to garner pre-tax earnings of 21.5%. HP’s pre-tax
earnings were only 10.0%.
The difference in the two companies’ earnings is more than a matter of cost management. HP
CEO Mark Hurd is a master of cost cutting. No, it is in the fundamental nature of the firms that
the difference lies. HP’s earnings are heavily weighted by commodity businesses. PCs, which
contributed 35.8% of HP’s revenue in 2008, are a low-margin business. Much of the intellectual
property in the PC business is commonly licensed by a horde of competitors, and margins are
only going down further from here. IBM sold its PC division to Lenovo in 2005, getting out from
under an increasingly commoditizing industry.
HP’s printer division is in many ways its best-performing group. While growth has slowed in
recent times, the printer group continues to dominate competitors, and the company was able to
extract a healthy 15.6% operating profit from its $29.4 billion fiscal 2008 revenue. This group
represents HP’s anchor to windward. Much of the profit in printers comes from consumables
(ink), a conscious strategy on the part of the company: sell the printers inexpensively and the ink
will become the gift that keeps on giving.
Despite printers, however, HP derives less income from more revenue than IBM. And while
winning the revenue sweepstakes confers bragging rights, shareholders generally prefer
profits. While HP has relied in recent times on cost cutting to achieve its profit goals, IBM
continues to invest its strong cash flow in profitable growth. Cost cutting can only go so far and
does not point the way toward the future.
Both companies are formidable players in the IT business, and each has its own strengths, but
for too long observers have been treating them like peas in a pod when, in fact, in many ways
they are night and day.
© 2009 Endpoint Technologies Associates, Inc. All rights reserved.
Packard (HP) as if they were direct competitors. In truth, they do compete in several key areas,
notably enterprise hardware and services. But in other ways, they are very different beasts.
Under Sam Palmisano, IBM has transformed itself into an enterprise services-led company,
with that division accounting for $39.3 billion or 38% of the company’s $103.6 billion revenue in
2008. HP, by contrast, even with the EDS acquisition, derived only $22.4 billion or 18.9% of its
$118.3 billion fiscal 2008 revenue from services. In many cases, IBM’s services division pulls
the company’s other groups along in its slipstream. When an IBM services sales team wins an
enterprise customer with a complex set of requirements, it is often able to bring the hardware,
software, and financing divisions along as well.
Services have a way of smoothing out a company’s revenue picture. Long-term signings create
a huge pile of deferred revenue, which comes in handy during lean years like this one. IBM’s
financials reflect the steadying nature of its large services business.
One area of extreme contrast between the two companies is software. HP’s software group
contributed only 2.5% of revenue in 2008. In contrast, IBM’s software division represented
21.2% of revenue. Software can be a high margin business and greatly contributed to IBM’s
overall profitability in 2008, allowing it to garner pre-tax earnings of 21.5%. HP’s pre-tax
earnings were only 10.0%.
The difference in the two companies’ earnings is more than a matter of cost management. HP
CEO Mark Hurd is a master of cost cutting. No, it is in the fundamental nature of the firms that
the difference lies. HP’s earnings are heavily weighted by commodity businesses. PCs, which
contributed 35.8% of HP’s revenue in 2008, are a low-margin business. Much of the intellectual
property in the PC business is commonly licensed by a horde of competitors, and margins are
only going down further from here. IBM sold its PC division to Lenovo in 2005, getting out from
under an increasingly commoditizing industry.
HP’s printer division is in many ways its best-performing group. While growth has slowed in
recent times, the printer group continues to dominate competitors, and the company was able to
extract a healthy 15.6% operating profit from its $29.4 billion fiscal 2008 revenue. This group
represents HP’s anchor to windward. Much of the profit in printers comes from consumables
(ink), a conscious strategy on the part of the company: sell the printers inexpensively and the ink
will become the gift that keeps on giving.
Despite printers, however, HP derives less income from more revenue than IBM. And while
winning the revenue sweepstakes confers bragging rights, shareholders generally prefer
profits. While HP has relied in recent times on cost cutting to achieve its profit goals, IBM
continues to invest its strong cash flow in profitable growth. Cost cutting can only go so far and
does not point the way toward the future.
Both companies are formidable players in the IT business, and each has its own strengths, but
for too long observers have been treating them like peas in a pod when, in fact, in many ways
they are night and day.
© 2009 Endpoint Technologies Associates, Inc. All rights reserved.
Brother From Another Mother
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