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HP storage: What went wrong?

HP's storage group has had an abysmal week - from court battles to user dissatisfaction to weak earnings. What does the company have to say about this?

By all accounts, Hewlett-Packard Co.'s storage division has had a miserable week. First it got slammed in the courts for infringing on EMC Corp.'s patents. Then users to whom SearchStorage spoke with about this case said they weren't counting on this technology from HP anyway. And, finally, HP reported weak storage earnings, while the rest of the company appears to be doing just fine.

What happened?

Regarding the numbers, HP blamed pricing pressures for the drop in its storage earnings reported this week. The company announced $897 million in storage revenue for the quarter -- up 7% sequentially but down 3% year over year. Overall, HP reported revenue of $20.1 billion, up 12% year over year and 3% from the previous quarter.

During a conference call with analysts, CEO Carly Fiorina said the slip was due to HP dropping its prices in anticipation of introducing new products later this year. She said she expects these new products to get the company back on track.

But the picture appears to be darker than Fiorina admits. Shebly Seyrafi, an analyst at Merrill Lynch & Co. Inc., said in a note to investors Wednesday that HP lost market share during the quarter. "We believe that HP is losing share in the midrange to both Network Appliance and EMC. We hear that HP was already pricing aggressively (to clear out inventory,) so it's unlikely there will be additional price aggressiveness. HP is still suffering from a loss of focus in storage at the current time," Seyrafi said.


HP is losing share in the midrange to both Network Appliance and EMC

Shebly Seyrafi
analystMerrill Lynch

According to several different studies, this lack of focus is filtering through to users. Ken Male, founder of research firm TheInfoPro Inc., based in New York, said mindshare among HP users "dropped significantly" among those he interviewed for his latest study. Male spoke with more than 200 senior storage managers at mostly large companies across the U.S. and Europe between October 2003 and January 2004.

Users' chief concerns about HP were poor technical support, unclear competitive positioning and an inconsistent management strategy, according to Male. "Users said they would hear that HP was going to support certain tape technologies, for example, and then the company would backpedal three months later. There was a lot of waffling going on."

Male's report quotes one user, whose identity is kept confidential in the report, saying, "We are switching because of their lack of vision. HP has good products and innovation, but their vision is lacking and technical support is shaky at times. On the NAS side, they didn't bring a product to the market."

Male added that concern about the rate of high-level executives leaving and the lack of a coherent storage strategy post-merger has caused many users to question their commitment to HP. The key faces that have left the company in the past 18 months include Howard Elias, formerly general manager of HP's network storage group; Mark Sorensen, formerly vice president of software in the network storage division; and Mark Lewis, previously vice president of worldwide marketing and solutions at HP and formerly head of Compaq's storage business.

In August 2002, our sister publication, Storage magazine, asked between 490 and 635 storage managers who their primary vendor for disk subsystems would be moving forward. About 26% said they were HP users, but only 19% anticipated still using HP by March 2004.

More recent research from Robert W. Baird & Co. Inc. supports the same conclusion. Baird interviewed CIOs, CTOs and IT managers from 81 midsized to large firms during late February through April 2004. It asked them which storage vendors they planned to spend more or less on in 2004 and why.

HP had the largest number of users among the group, but was also cited as the least likely vendor with whom they would spend more money in 2004. The report keeps the user's names and companies confidential. One user is reported to have said, "The new Enterprise Virtual Array (EVA) is nothing but trouble; HP is doing the right thing; however, it gave us a free one!" Another user is quoted saying, "They just don't have their acts together." And a third said, "We use HP because they're entrenched; largely because the devil you know is better than the one you don't."

How does HP feel about all this?

Bob Schultz, senior vice president and general manager of HP's network storage solutions group, touched base with SearchStorage on Thursday. "The question of focus comes up a lot since we folded storage and servers together … The reality is customers buy solutions. I haven't found a customer yet who doesn't buy servers," he said.

Industry analysts said that's not a good enough reason for many people. They said that HP is selling to users who care less about best of breed and more about getting a good price. "That seems to be users who are less aggressive in adopting the technology, buying less storage, not as far along in storage networking and so on," said one industry watcher who requested anonymity.

Shultz disagrees. HP is still innovating and outdoing its competition on many fronts, he said. He pointed to the fibre attached technology adapted (FATA) drive the company announced in April and will ship in the summer that lets users split low and high cost drives across the same platform. Regarding other innovations, he said that unlike competing products, HP's archival software, which it picked up with the acquisition of Persist, is focused on the more difficult task of restoring data, which is more important than just storing it. And he also mentioned the company's support for serial attached (SATA) drives in its entry-level MSA family of arrays. "We call this My-first-SAN, as the focus has been on making it simple and affordable," he said.


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