The SEC investigation into Mark Hurd’s departure from Hewlett-Packard (NYSE: HPQ) which eventually led him to the president’s job at Oracle (NASDAQ: ORCL) will be the front page story about both companies. What will get much less press coverage is more important. HP has begun to offer 20% discounts on some of its products if customers move from Cisco to them.
“HP estimates that nearly $9 billion in Cisco networking equipment is approaching end of life or service in 2011,” the company said. “The ‘A Catalyst for Change’ program enables clients to upgrade from existing complex, proprietary and expensive Cisco network gear to simpler, open standards-based HP solutions that deliver up to 66 percent lower total cost of ownership,” HP added.
Cisco has been the primary provider of network hardware and routers for some time. The business is clearly attractive to HP, which has a smaller part of a huge sector. HP may be, however, about to offer deals which cannot be sustained financially. It is a fine example of how companies can sometimes lose money on each sale and make it up on volume. The tactic never works and often creates financially troubled relationships.
HP also runs the risk of starting a price war between itself and Cisco. Cisco, as the larger firm in the field, probably has substantial resources to retain its own customers. HP will need to deep discounts. It is the suppliant.
The economy, still in the early stages of recovery, may be strong enough so that the large tech companies in Silicon Valley believe that they have the earnings and balance sheets to take risks to gain market share. HP is likely to find that the network gear business is already one with thin margins. The network companies, the telecom and cable firms, have learned that nearly unlimited capacity is very expensive and not profitable. Consumers have limits to what they are willing to pay for access to pipes. HP has begun a process that may get it some new customers without any profit.
Douglas A. McIntyre