ProCurve hits the second spot

But it's almost a separate company in many ways, so why doesn't HP break off its ProCurve business?


For the no.2 vendor in the LAN switch market behind Cisco, making network gear isn't close to being a full-time gig. Yet HP's ProCurve business over the last several quarters has crept up to the second spot -- albeit, a fairly distant second -- behind Cisco in world-wide LAN switch market share, according to Synergy Research Group. HP has surpassed 3Com, Nortel, Extreme and Foundry.

In enterprise-specific, high-end LAN market segments such as modular Layer 3 and Gigabit switches, ProCurve by HP (as the company now calls the business) is also the no.2 vendor in shipments; the HP networking arm sold 1.07 million advanced-feature switch ports in the first half of 2006 -- three times the shipments of 3Com, Enterasys, Extreme, Foundry, Force10 and Nortel. (Market leader Cisco shipped 8.2 million ports.) HP's overall revenue for the first half of the year was 4.3 percent of the US$7.5 billion market, compared with Cisco's 71 percent share.

If you changed the name of the company, you'd hardly know ProCurve was an HP brand; HP has few marketing ties between ProCurve and its IT infrastructure and services businesses; it even partners with Cisco on major installations and deals. Given that, and the fact that a subsidiary of HP outperforms a bunch of companies that make nothing but network gear, would the ProCurve group do better spinning off as its own entity?

"It would be naive of me to say that hasn't been something that hasn't been thought about," says John McHugh, vice president and general manager of ProCurve Networking by HP.

A cash cow

One reason it hasn't happened, he says, is that ProCurve makes a lot of money for the company.

"Networking has always had significantly higher profitability and gross margins than the company on average," McHugh says. "In fairness, this business has been used as a cash cow."

The fact that ProCurve by HP operates at a perceptible distance from the parent company helps the group stay competitive in a commoditising market, McHugh says.

"We really want the relationship with HP to be a non-issue," he says. "The business is based on an investment by HP but it runs and survives and looks like a stand-alone entity. That's been a large part of our success."

McHugh, a 25-year HP veteran, took over the company's network business in 1997. He oversees a staff that includes around 350 engineers. Approximately 12 percent of ProCurve's revenue goes toward research and development -- around $65 million in 2005, if you calculate from analysts' guesses of the group's revenue for that year. (HP does not break out revenue of its ProCurve group.)

Less pressure?

Some industry watchers say HP can sell its network products at a lower margin and support a broader product line, because there is less pressure as with publicly traded switch vendors to meet revenue goals. McHugh says this is not so.

"HP and my current CEO have no tolerance of charity cases," McHugh says. "Rest assured that [CEO] Mr. Hurd is at least as critical as Wall Street is of the business units in his organisation."

Another reason ProCurve is fine where it is, McHugh says, is because of the technological resources it gains. McHugh reports to HP CTO Shane Robinson, and the group does benefit from work done by HP Labs, the company's development arm.

"We sow seeds in HP Labs, then go into the field and harvest when we can," he says. One example, he says, is virus throttling. The technology, which is wrapped around the network interface port layer of a server, has been put into switch ports by the ProCurve team.

Analysts and users agree with McHugh's notion that ProCurve is fine as is with the "by HP" tag.

"Having the HP name behind them helps fuel their growth," says Katie Trippet, an analyst with Synergy Research.

"ProCurve is HP's best-kept secret," says Joe Thielen, IT manager at the Hain Celestial Group in Colorado. He uses the ProCurve by HP gear in the company's LAN and WLAN. Reliable standards-based products, with a lifetime warranty on hardware and software upgrades, are part of the draw.

"I'm not sure if it would be a huge benefit for ProCurve to break away from HP, other than there would be more focus on networking," he says. "It would be nice if HP would push their own equipment with their servers. But with Cisco's marketing being so compelling, what are you going to do?"

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