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May 2002

Commodity supports soap, not computers

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By John R. Wolff

Commodity computing is exactly the kind of poor thinking that HP is in the grips of right now, and why the company is getting deeper into trouble by raising its exposure to commodity products.

There is nothing wrong with being in a commodity business in an industry that has slow technological movement. Food and soap are not likely to require large amounts of expensive R&D to stay ahead of the competition. But these commodities seem to have little relevance when talking about computers and software. Even in the case of low-end computers, which are not manufactured by the company selling them, there needs to be some R&D to keep up with changing standards and related technologies.

By definition, a commodity business is one where your products are not distinguishable from your competitors’ products, except for the package design they are delivered in. Once the package is thrown away upon consumption, you just have the plain product left with no particular value-added features compared to the competition.

Commodity products have low margins that cannot support much R&D and other overhead. Success is based primarily on price and volume formulas. This model is very vulnerable to any innovation suddenly introduced in the marketplace by a competitor which can upset the competitive landscape. Food and soap don’t have to worry a lot about this; high technology does.

Where is this commodity concept “proven” for high technology and computer companies? UNIVAC was #1 in computers for a while in the 1950s. They lost focus and did not invest in R&D, so IBM, a company that got its start making butcher scales – it’s true — and keypunch equipment later, and computers much later, came along and ate their lunch. Now skip ahead to the 1980s. IBM was #1 in PCs, and what happened? Compaq came along with a cheaper manufacturing and marketing model and became #1. Then Dell came along with an even cheaper manufacturing and marketing model and became #1, until whoever is next.

These are all relevant examples of growth companies in the high technology industry of computers that “owned” and even created their markets. For some reason “ownership” didn’t do them a lot of good in the long run.

Hewlett-Packard was nobody in the computer business in the late 1960s; I know because I worked there. This was a company that purchased computers from Digital Equipment to control their instrumentation and testing products. IBM “owned” every part of the computer market except minicomputers. IBM thought that minicomputers were not legitimate computers worth much competition, leaving it to the DECs and HPs of the world.

How did HP go from being nobody to the #2 computer manufacturer in the world without “owning” any part of the computer market? The answer was innovation like the HP 3000, quality of support and service, and R&D investment that produced the RISC chip years before anyone else had it or understood the importance of it. These things were made possible by the higher margins commanded by innovative HP products.

If you don’t make much money on the software or hardware, what’s left? Only services. One of HP’s big complaints about the HP 3000 “ecosystem” is that there are too many users that were “mere owners,” and not enough direct “customers” (under services contracts). How did that happen? Probably the biggest part of that answer is through loss of contact with the customer — no HP sales people (unless the customer was very large indeed).

High-end products require heavy sales and an operating system commitment, whether it is a proprietary HP-UX or a highly customized Linux. Products as expensive as Superdome require a customer confidence in HP’s management vision and a reliable commitment by the vendor to its products and customers.

Customer loyalty works both ways. It is the foundation of the relationship between vendor and customer in mission critical environments. HP has disturbed this foundation, not just with the HP 3000 decisions, but more fundamentally with the Compaq purchase and apparent commodity strategy in its irrational quest for #1 market status at the expense of customer loyalty. This will affect customer decisions throughout the entire HP product line.

John Wolff is Vice President/CIO of LAACO, Ltd. which owns and operates self storage businesses and private clubs in the western US. He worked for HP in the software development lab in Cupertino from 1968 thru 1974 when the HP 3000 was conceived and introduced.