September 5, 2008

HP’s ‘End Run’ Around Windows

The carefully crafted ecosystem of tech companies built around Microsoft's Windows operating system is showing signs of strain. Hewlett-Packard (HPQ), a longtime Microsoft ally, has quietly assembled a group of engineers to develop software that would make Windows Vista easier to use, or bypass some of its more onerous features. A Skunk Works of engineers at the company is even angling to replace Windows with an HP-assembled operating system, sources say.

HP's "customer experience group" -- formed nine months ago and headed by vice-president Susie Wee, a former director in the company's research labs -- is developing software that can complement Microsoft's (MSFT) Windows operating system to make it accessible to more users. Wee's team is tackling touchscreen technology and software that lets users circumvent Vista to watch movies or view photos, as well as transferring ideas from HP's Halo videoconferencing system to mass-market products. "Our customers are looking for insanely simple technology where they don't have to fight with the technology to get the task done," says Phil McKinney, chief technology officer in HP's personal systems group. "For us, it's about innovating on top of Vista."

Others in HP's PC division are exploring the possibility of building an HP operating system for mainstream desktop and notebook computers based on the open-source Linux system, which competes with Windows, say people familiar with the company's plans. The goals may be to make HP less dependent on new releases of Windows, and to strengthen HP's hand against Apple (AAPL), which has gained market share with computers that boast innovative features and inspire a loyal following of users.

Apple Is Seizing Share McKinney didn't deny that those conversations had occurred, but said any discussion happened below senior management levels. "Given how many engineers are in my R&D organization, I wouldn't be crazy enough to say, 'No, we haven't made those inquiries,'" he says. But he adds that HP isn't devoting large-scale resources. "Is HP funding a huge R&D team to go off and create an operating system?" That "makes no sense," he says, given the compatibility problems with users' software programs that such an effort could introduce.

HP has long been an advocate of Windows, and there's no indication that the relationship will change any time soon. HP is the world's largest supplier of PCs, with about 19% market share, and analysts estimate overall sales will grow 10.3% this year, to $115 billion. Yet the tepid market reception of Windows Vista [BusinessWeek, 5/15/08], the latest version that made its debut in early 2007 -- combined with a fear that Apple could cut further into Windows' shrinking U.S. share -- have led HP to inject proprietary innovations into its computers as a way to differentiate them, analysts say.

Meanwhile, Apple has been gaining share in the U.S., where it accounted for 7.8% of PCs shipped in the second quarter, according to market researcher Interactive Data (IDC). Mac shipments grew nearly 32% from a year earlier. Apple also enjoys fatter profit margins and more loyal customers than makers of Windows PCs, thanks to its delivery of both hardware and the Macintosh operating system.

Fear of Microsoft's Wrath A concern at HP is that Apple could develop a low-priced, sub-$1,000 notebook that could cut into a core HP market, says one person who has advised HP executives about their PC strategy. The customer experience group would constitute a preemptive strike against such a development. "Apple is a huge motivating factor," this person says. "You don't build loyalty by making a box that's practically identical to your competitors'."

But HP needs to walk a fine line in creating an identity for its products that doesn't directly involve Windows -- while trying not to alienate Microsoft, whose marketing muscle and access to technical details are critical. "Nobody's ever done anything like this before," says the advisor. "It's a big risk, and the return is so far not certain."

According to McKinney, Wee's group has taken charge of HP's TouchSmart PCs, which overlay special software on top of Windows Vista [BusinessWeek, 6/25/08], letting users tap and drag on-screen icons to launch programs.

How Far to Take Linux? The division is also looking for ways to expand application of the company's QuickPlay technology, which lets users quickly boot up their machines with Linux, without waiting for Vista to start. There's also interest in providing methods to watch TV, movies, and other media beyond the Media Center versions of Vista that Microsoft sells. Wee was a designer of some of the software underlying HP's room-sized Halo videoconferencing system, and her team is exploring how concepts from that product could be applied in a broader manner.

A decision by HP to create its own consumer-friendly version of Linux would be a break with current strategy. HP, Dell (DELL), and other PC makers already offer customers an option to buy desktops and notebooks with Linux preinstalled. But those machines account for a small percentage of sales, and PC makers don't heavily promote them.

HP could package Linux with the tools needed to work with HP's printers, digital cameras, and other add-on hardware, backed by the company's marketing and technical support. Yet further embracing Linux could also leave the company's innovations open to copying, due to Linux's open-source licensing terms.

HP's efforts to make Vista more user-friendly come as Microsoft launches a new ad campaign for Windows designed to shore up Vista's reputation, which has been bruised by early technical problems and a withering ad campaign by Apple. The ads, created by hip Miami ad shop Crispin Porter & Bogusky, will star Jerry Seinfeld and Bill Gates. A Microsoft spokesman declined to comment on HP's plans.

Dell and Intel, Too Yet Microsoft's power to control how PC makers alter the experience customers have with Windows has been diminished. Its 2001 antitrust settlement with the federal government placed restrictions on its ability to prevent vendors from installing their own software on top of Windows, or changing the desktop. And the disappointing response to Vista has prompted Microsoft to grant partners more leeway to alter Windows' look and feel, analysts say. Dell's latest Studio notebooks, for example, feature an Apple-like piece of software called the Dell Dock that groups Vista shortcuts into icons for such common tasks as digital photography, e-mail, and Web browsing.

Longtime Microsoft allies are making wider use of Linux in their products as well. Dell's new ultraportable Inspiron Mini 9 notebook, announced Sept. 4, gives customers the option of running Linux, and Dell may use the operating system in future digital music players, according to a person with knowledge of Dell's plans. Later this year, Dell plans to start selling business laptops equipped with a special low-power chip and an embedded version of Linux that let users bypass Vista to quickly read e-mail, view their calendars, and browse the Web when they flip open their screens. "This is what my customers want," says Dell senior vice-president Jeff Clarke.

Even Intel (INTC), the world's largest chip vendor and a staunch Microsoft ally for decades, is promoting Linux for a new class of ultraportable machines such as the Dell Mini, which uses its Atom processor, just when Microsoft is trying to spread Windows' influence to more portable devices. In August, Intel acquired London Linux developer OpenedHand to work on software for Atom devices. Too many defections could hurt Microsoft economically, since the company collects about $70 for each copy of Windows that PC makers preinstall on their machines.

"It's an end run around Windows," says Rob Enderle, president of consultancy Enderle Group, about the efforts. "For both Dell and HP, there was a realization that Windows became an impediment, especially compared to Apple," he says. "The vendors are taking back some of the user experience."

Add that to the growing list of repairs on Microsoft's Windows checklist.