Microsoft and HP: Eyeing Their Next Move

Now that Oracle has completed its Sun acquisition, HP and Microsoft renew their alliance. Partners are watching to see if and where they fit in the great game among the giant IT vendors.

Though they've been partners for 25 years, it's not every day the CEOs of Microsoft and Hewlett-Packard Co. gather to make a public announcement. Yet that's what Steve Ballmer and Mark Hurd did just six weeks ago when they said they were investing $250 million in next-generation data center technology.

Even more striking, Ballmer and Hurd positioned this particular alliance as the most important technology and go-to-market effort to date by the two companies. While it remains to be seen whether it lives up to the grandiose expectations they have set, the deal calls for collaborating on a model that ties together infrastructure and applications and marries both companies' technologies including the HP line of servers, systems management software and network gear with Microsoft SQL Server, SharePoint, Windows Server, System Center, Hyper-V and its new Windows Azure cloud services.

The goal with Windows Azure and SQL Azure (which went live in January) through this alliance, is to ultimately enable public and private cloud offerings with technology from Microsoft and HP for companies of all sizes. Private cloud offerings could be delivered with a combination of software from both companies on the ProLiant server and HP storage platforms, the companies indicated.

"This is breakthrough stuff for us," Hurd said on the Jan. 13 conference call. "It's a different thing than you've seen from the two of us before. I guarantee you Steve and I would not be on this phone call if this was just another press release from HP and Microsoft. This is the deepest level of collaboration and integration and technical work we've done that I'm certainly aware of; we're talking about aligning big parts of our go-to-market capability."

"If you simply take the Sun box, do nothing to it, and just resell it, and that's all you're really doing, then at that point we think we are better off going direct to the customers."

Larry Ellison, CEO, Oracle Corp.

That go-to-market capability will manifest itself in a 10-fold increase in investment in its channel partners through added support, readiness, incentives and co-marketing efforts, Ballmer said. That will be delivered through the Frontline Partnership, a structure both companies have used to bring joint, bundled solutions to customers. With Frontline, any channel partner with a Microsoft Partner Program ID number and an HP PartnerOne ID can log in and use resources of the shared program.

So far however, only 32,000 partners are technically part of Frontline, a small fraction of Microsoft's roughly 400,000 partners and HP's 150,000. And many of those Frontline partners are lukewarm about it. "It's hard to ascertain what the Frontline piece means," says Brandon Harris, vice president for HP Solutions at Bloomfield, Mich.-based Logicalis Group, a $1 billion solution provider with operations in the United States, United Kingdom and Latin America.

"The partners who really understand the value of leveraging the partner programmatic elements from Frontline really seem to like it," says Gartner Inc. analyst Tiffani Bova. "There's also the school of thought that it adds an additional layer of complexity to the partnering relationship."

Time will tell how much comes from the latest pact and whether some of the automation and dynamic IT capabilities co-developed by the two companies will cut into the managed services business of their partner networks. Microsoft and HP are also bolstering their relationship on the heels of Oracle Corp. closing it's $7.4 billion acquisition of Sun Microsystems Inc.

Oracle CEO Larry Ellison has already guaranteed that he will wreak havoc on Sun's channel following remarks that he intends to take the top 4,000 accounts direct, while putting the rest of its partners on notice. "If you simply take the Sun box, do nothing to it, and just resell it, and that's all you're really doing, then at that point we think we are better off going direct to the customers," Ellison said during a strategy briefing on Jan. 27, the day the deal closed.

While observers agree Microsoft and HP are reacting to their newly bolstered rival, some partners wonder if the latest pact is just another press release, though. On the surface, it doesn't seem that different from any other alliance, says Gregory Brewer, managing member of Vowire LLC, a Brighton, Mich.-based Frontline partner. "The proof is always in what they do," Brewer says. "Where they need to put wood behind the arrow would be the tactical mechanics of the Frontline piece of it." HP says those pieces will be forthcoming but declined comment, though the company did say the benefits would be phased in over time.

While HP and Microsoft emphasize the $250 million is incremental on top of existing investments, the companies are not breaking down how those funds will be used. That leaves channel partners wondering what they're going to see from those funds -- and when. "It's a big chunk of money," says Ross Brown, Microsoft's vice president of Worldwide Partner Sales. "What HP and Microsoft put in is being matched by our subsidiaries. Think of it as 50-50 HP-Microsoft and 50-50 corporate and subsidiary."

HP Channel Challenges
Yet over the years HP has had a turbulent relationship with its partners, dating back nearly a decade when the company acquired Compaq Computer. It has had ongoing changes in its channel program ever since. While Allison Watson has been Microsoft's top channel exec since 2003, HP has seen turnover in its channel ranks. Most recently, HP channel chief Adrian Jones was promoted to Asia-Pacific vice president for HP's Enterprise, Storage, Servers and Networking in October. A search is still on for his replacement, according to an HP spokesman.

HP makes no secret that the deal will also be a boon for its services business, which now has thousands of feet on the street from the former EDS, which it acquired in 2008. "As HP needs to make that EDS acquisition work, there needs to be some synergy between the hardware side and the integration side, and a really obvious thing is to provide a richer bundle of support and integration services," says Directions on Microsoft analyst and RCP columnist Paul DeGroot.

Moreover, one former longtime HP channel rep says his former employer has decimated its field channel sales force over the past five years.

"Since I have left HP, they have taken the entire channel organization off the table," says the former employee, who works for another technology company and asked not to be identified. "There were sales engineers that were out there that were assigned to a territory. Their whole job was to support the channel activity and all of those got laid off in 2008." An HP spokesman denies the company is paring back its channel sales force. "We don't have any plans to pare back sales coverage for partners; in fact, we're adding people," the spokesman says.

Promising Possibilities
Meanwhile, Frontline partners are hopeful that this pact is a sign of better things to come from both HP and Microsoft. "I hope they can do some good work together. They're just two monster companies and it just seems they are just beat to the punch in so many areas," says Tracy Butler, president of Acropolis Technology Group, a Wood River, Ill., Frontline partner, referring to the likes of Apple Inc. in client-based devices to VMware Inc. in virtualization, among others. These days, Butler says his relationship with Microsoft is better than with HP.

"Our partnership with HP is not as strong as it used to be," he says. "We primarily sell HP because it works well and it doesn't cost us to sell and from a Microsoft standpoint, it's going down that same path." Butler says he's too small to be on HP's radar but that product sales represent about 10 percent of his revenues at best.

Yet both HP and Microsoft, which have more shared partners than any other two companies, could ultimately see a new class of products and services down the road from this latest initiative, a promising possibility, according to observers.

"The two companies need each other, I've kind of had that perspective for a long time," Logicalis' Harris says. DeGroot argues while that's true, Microsoft may be the larger beneficiary of HP's enterprise clout. "To some extent I think this announcement is more important to Microsoft than it is to HP," DeGroot says.

Adds Ovum analyst Tony Baer: "Microsoft competes on a very rich third-party ecosystem, but they do not have the same enterprise robustness that you would associate with a Sun or with an IBM. "

Forrester Research Inc. analyst James Kobielus says both companies can benefit by lending their intellectual capital to take on IBM and Oracle. "Microsoft has a strong BI stack," Kobielus says. "Look what Microsoft brings to the table there, and their transactional database, SQL Server, and their big-market global presence." MySQL could become a threat to Microsoft over time, if Ellison makes good on his promise to beef it up and target SMBs.

Indeed Hurd said the companies are targeting "very deep levels of integration. We are talking about now optimizing machine capability around SQL Server, we're talking about packaging that up from an availability perspective, from a performance perspective, being able to align logistics capability around it, being able to align our implementation capability, our serviceability capability, talking about bringing 11,000 people and optimizing that to benefit the customer. It doesn't mean things we've done over the years haven't been great, it's just the natural evolution of deeper and deeper levels of integration."

Ballmer underscored the effort is focused on what he repeatedly described as a tightly integrated model for tying "infrastructure to applications" and allowing companies of all sizes to run those applications on public and/or private clouds. "It is absolutely cloud-driven," Ballmer said. "The fact that our two companies, Hewlett-Packard and Microsoft, are very directed at the cloud is the driving force behind this deal at this time."

The pact is also important as both companies look to fill gaps among each of their enterprise data center and cloud efforts, says RedMonk analyst Michael Cote. "The urgency comes as HP and Microsoft each are seeing broad challenges from IBM, Cisco, VMware and Oracle-Sun," Cote explains.

"HP and Microsoft can fill a lot of holes in each others' strategies," Cote says. "If they deliver on these optimizations and these go-to-market initiatives are promising, they can help each other out." While HP recently launched its own cloud initiative in December (see the news story, "HP Extends Public, Private Cloud Portfolio". Cote says it doesn't have the cloud ecosystem that Microsoft has. Meanwhile, Microsoft can gain from HP's enterprise hardware, storage, networking and systems management expertise.

Simply put, the two companies effectively positioned themselves as preferred partners to bring together the next wave of integrated IT infrastructure tied with applications, advanced cloud technologies and new data center automation capabilities. And the timing reflects huge changes on the competitive landscape facing both companies.

Competitive Landscape
VMware, the leading provider of virtualization software, is run by top former Microsoft execs, notably CEO Paul Maritz and COO Tod Nielsen. In addition to virtualization, the company is stepping on Microsoft's turf in a big way, recently acquiring Zimbra, provider of the leading open source e-mail platform -- signaling a move to go after Microsoft's Exchange and Business Productivity Online Suite (BPOS) business. Microsoft could also face a challenge with Oracle, which intends to release its own Web-based productivity suite called Cloud Office, the next version of Sun's OpenOffice package (see "Oracle Plans to Take on Microsoft Office"). The move comes as Microsoft gets ready to release Office 2010.

In addition to announcing a virtualization pact with Cisco and NetApp to provide their own next-generation data center technology, Cisco is going after Microsoft's Exchange, SharePoint and Office Communications Server business with its WebEx platform. And once a strong HP partner, Cisco last year announced its plans to target the high-end server market with HP responding in kind by extending its networking business with its acquisition of 3Com Corp. -- turning close partners into heated rivals.

Logicalis' Harris says if nothing else, HP's latest pact with Microsoft ensures they will work together for the next three years. "The last thing I'd like to see them get into is a situation like HP and Cisco got into, where they were very friendly with one another and all of a sudden they [became] mortal enemies," Harris says. "I'd hate to see the HP-Microsoft relationship turn into something like that."

Yet from HP's perspective, it can't afford to alienate VMware, which it has a relationship with as well. Many customers still prefer VMware's hypervisor stack, which still has a substantial technical edge over Microsoft's Hyper-V, and they expect it to be well-integrated with hardware, DeGroot says. "VMware is the leader. If HP wants to be in the data center, which linked to virtualization, those two companies have to work together," he says. "Hurd is too smart to put all his eggs in one basket. Microsoft needs this, Microsoft does have to ensure that people who want to have a virtualization offering don't require a lot of tweaking."

As HP continues to work with Microsoft rivals VMware and Teradata Corp., Microsoft also has ties with HP competitors such as Dell Inc., EMC Corp. and IBM Corp. Big Blue recently announced its intentions to bundle Microsoft SQL Server 2008 R2 Parallel Data Warehouse. It remains to be seen whether the two will drift apart following the latest HP-Microsoft deal, particularly as IBM looks to go down market with its own apps, gets more aggressive with its Lotus suite and forges closer ties with two other key threats to Microsoft: Amazon Web Services and Google Inc., key cloud platforms that will compete with Windows Azure.

Meanwhile Oracle with Sun looms large on both companies. Ellison talked up a strategy with Sun's assets that ties all components of the hardware stack, from silicon, operating systems, and middleware to applications. "This notion of vertical integration we think delivers huge value to customers, giving them systems that cost less, run faster, more reliably and more secure," Ellison said, describing Oracle's goal of providing a modern-day architecture based on the model once established by IBM.

Every player is trying to come up with their own vertically integrated stacks, says Ovum's Baer. But he questions whether customers will buy into it. "I don't necessarily think that the market really is demanding that vendors fill every single check box, because I don't think they want to lose their negotiating power that best-of-breed allows them. What they do want is to reduce the complexity of best-of-breed, and I think that's what these stacks are an answer to."

Microsoft and HP also are aiming to marry both companies' respective systems management offerings. "The fact that they're joining forces on that software isn't in and of itself unique -- both HP and Microsoft have built technology partnerships for their systems management software with other vendors," says Forrester analyst Glenn O'Donnell. "What I think is notable with this is they are really tying this into turnkey packages of applications, where the systems and the management software orchestrate everything happening under the covers."