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HP's New Risky Business

Ray Le Maistre
12/12/2012
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HP Inc. (NYSE: HPQ) has unveiled a new pay-as-you-use networking equipment offer to communications service providers (CSPs) that aims to help lift the capex burden from the CSPs and their enterprise customers while generating new business streams for HP. (See HP Unveils Network Advantage Program .)

But as HP executives admitted here in London today, it's a risk for the giant IT vendor, albeit a calculated one. And the company does have some assets that, to a certain extent, mitigate the risks: It has the financial power to entertain the model; it has the product set around which CSPs can build a service offering; and it has a reference customer from day one in the form of Swisscom AG (NYSE: SCM), with the added bonus for HP that it seems to have developed a better engagement model, for the Swiss operator at least, than arch rival Cisco Systems Inc. (Nasdaq: CSCO). (See Swisscom Buys Into HP's Utility Vision.)

The HP FlexNetwork Utility Advantage Program (thankfully not known as FUAP) is based on the following concept: Enterprise users want to upgrade their networks but don't want the capex burden; and CSPs want to offer a broader range of flexible managed services that meet the ever-changing demands of their enterprise customers.

So HP is prepared to provide enterprise networking equipment to CSPs, with no upfront payment, that can then be installed at enterprise locations depending on the end user's needs. The enterprise, once it has agreed a managed services contract with the CSP, then pays only for the ports it uses in any given agreed timeframe (for example, per month) and the CSP then pays HP based on the volume of ports activated.

In this way, says HP, the enterprise does not have any capex costs associated with the managed services it is using (so freeing up the capital it would normally spend on new hardware) and the CSP doesn't have capex costs associated with the managed services it provides using the HP networking gear.

"We are prepared to share the costs and share the risks with our [CSP] customers," stated Nick Watson, vice president of sales, at HP's EMEA Networking division, during a media briefing in London Wednesday. "We're confident this offer is really strong and we expect it to work [in our favor]," he added, noting that this is absolutely not an equipment leasing arrangement.

"Enterprises have always looked at networking as something that sits on the balance sheet as a capital expenditure and a lot of budget is sucked up" simply through investing in the network assets required to keep a business running, stated Mike Banic, global VP of marketing for HP Networking. "But that means there is a lot of under-utilization, a lot of stranded assets that are paid for but not being used," added the HP man.

Model approach
With enterprises and CSPs now becoming more familiar and comfortable with the pay-per-use model, HP believes there's a real opportunity for CSPs to provide their corporate customers with a broader range of flexible IT services that reduces costs and inefficiencies.

So are CSPs interested? Apart from Swisscom, Watson says HP is targeting the "top five" telcos in Europe to become program partners. "We are at an advanced stage with two other operators in Europe and part way along with another two," he said, adding that the model is being taken global by the vendor.

And is it much different from rival offers? In August 2011 Brocade Communications Systems Inc. (Nasdaq: BRCD) launched its Brocade Network Subscription service, which has roughly the same model for its router products. (See Brocade Sells Router Subscriptions.)

The main difference between HP's offer and Brocade's, said Watson, is that "we have a customer."

That was fightin' talk, so we contacted Brocade. Its director of global communications, John Noh, retorted that HP is "grossly misinformed. The fact is, Brocade is seeing good interest among our customers in key targeted segments such as CSPs, data center hosting providers and federal government for our Brocade Network Subscription Services. As to your question specifically, we have already announced customers who have acquired our networking equipment through Brocade Network Subscription," including Rackspace Hosting (NYSE: RAX) and Denver-based hosting company PeakColo.

Maybe there's something in this pay-as-you-go lark, then....

— Ray Le Maistre, International Managing Editor, Light Reading

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