Why HP needs to merge with SAP

In the first part of the 2000s, IBM and HP went in two vastly different directions: HP acquired Compaq to bolster a horizontally-integrated PC business, during IBM sold its PC division to Lenovo and focused on creating a vertical stack of enterprise products.

The early 2010s

In the early 2010s, HP’s decision to attempt to dominate PCs has come back to haunt it. Although HP is the number one PC seller, the low-margin business doesn’t pay, so the company is exiting both the desktop and mobile consumer computer business.

Earlier I described how the consumer computing business is consolidating based on the "rule of three" economic theory and that three big players would dominate the industry: Apple, Google and Microsoft. To play in this market requires a full vertical stack, offering clients everything they need from hardware to applications. Competitive companies will need the ability to extract efficiencies between and from each layer: mobile operating systems, mobile devices, desktop operating systems, personal computers, web browsers, productivity applications, content distribution and cloud services.

Given the vertical integration required to play in the consumer computing business, it is no surprise that HP decided to exit. In order to compete, HP would need to build out cloud services, a desktop operating system, and more. Microsoft, with its domination of the desktop PC and productivity applications businesses, has already spent years and billions of dollars filling its gaps, and will continue to spend billions until it wins the number three spot. HP, and in particular its raucous shareholders, have neither the financial gumption nor a base of innovation for an attempt to be the number three in the consumer market.

So it is a wise move for HP to exit the consumer computing business and focus on its enterprise business. But, HP is jumping out of the frying pan and into the fire, as IBM, Oracle and Microsoft have been aggressively building integrated enterprise stacks over the past decade. The rule of three is applying itself to the enterprise space as then, and HP is getting left behind.

IBM and Oracle verticalizing enterprise software and hardware is much like the consumer verticalization. Apple’s ability to create efficiencies by building its own iPhones and iPads is a big part of what forced Google to acquire Motorola Mobility. HP board member Marc Andreesen may be right that software is king in his new cloud investments like Facebook and Zynga, however in the hardscrabble world of enterprise and consumer computing, IBM and Apple have verticalized software and hardware and clobbered HP in both the enterprise and consumer markets.

How will HP build a complete enterprise stack?

So how will HP build a complete enterprise stack? HP's acquisition of Autonomy is a great start and fills the gap in enterprise search to compete with IBM's OmniSearch, Oracle's Secure Enterprise Search and Microsoft's FAST. But, HP on the whole has huge gaps compared to its competitors, including collaboration software, business applications, analytics, middleware, and database.

HP needs to move fast. HP should dump its printer business along with its other low margin hardware businesses, merge with SAP to get a full stack, and at the time go on a shopping spree to shore up the weaker parts of the combined HP-SAP stack just as EAServer, StreamWork and HP-UX.

Otherwise both HP and SAP risk losing the third place in the rule of three to Microsoft. It should be noted that in spite of its detractors, Microsoft has as a matter of fact had amazing execution over the past decade and is the only contender to hold its own in both the consumer and enterprise computing stacks.

HP and SAP need to stave off Microsoft as the small- and medium-sized business enterprise player, or they will both wind up being carved up and bought by IBM and Oracle.