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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Elwood P. Dowd who wrote (94348)	12/19/2001 9:56:05 PM
From: hlpinout	Read Replies (1) \| Respond to of 97611

A nice read. -- INSIDE TRACK: Just the two of them: The computer industry's main sub-sectors are settling down to become duopolies Financial Times; Dec 20, 2001 By PETER MARTIN The jury is still out on whether Carly Fiorina will pull off her proposed merger of Hewlett-Packard and Compaq, as you can read above. But if the merger goes through, it will symbolise a little-noticed change in the computer industry over the past decade. Most of the industry's sub-sectors - huge industries in their own right - are settling down in effect as duopolies, with two leading operators clearly ahead of their rivals. There are still third and fourth contenders in most of these sectors; in some there are a host of smaller ones. But the serious battle, for the dollars of big corporate customers, is between the top two. In databases, the battle is between Oracle and International Business Machines. In enterprise management software, it is between SAP and Oracle. If the HP/Compaq deal goes through, the leaders in big corporate systems will be IBM and the new HP, selling technology derived in part from Compaq's acquisitions of Tandem and DEC. For corporate sales of desktop personal computers, the rivals will be Dell and the new HP. In internet systems, they will be Sun and IBM. In PC microprocessors, they will be Intel and AMD. There are a couple of sub-sectors where the battle is three-way: mid-sized corporate systems, where IBM competes with Sun and the new HP; and network storage devices, where the new HP will take on IBM and EMC. And there are a couple of areas - desktop operating systems and office productivity applications - where there is really only one big operator: Microsoft. Such a sweeping generalisation sparks a host of immediate objections. Wounded marketing managers at companies from Acer to Unisys will be eager to point out the gaps and errors. There are a few sub-sectors that are genuine free-for-alls: systems integration, retail PCs and laptops. There are any number of niche areas where the leaders do not feature. In them, substantial companies make a good living from supplying specialised bundles of hardware and software. There are national markets, such as Japan, to which this model has only sketchy relevance. And there are rapidly emerging new business sectors, including handheld devices and wireless networking, where the technology is changing so rapidly that today's leader could be replaced overnight by one of 20 innovative competitors no one has ever heard of. Still, I stand by the overall claim. An industry once noted for its breadth of competition is settling down into a pattern familiar in other mature businesses: two or three leaders in each sector and a number of also-rans. This process is accelerating in the industry downturn as companies merge, pull out of unprofitable sectors or drop behind the pace of innovation. There is a range of important consequences. Let us focus on three. First, the growing concentration means that antitrust scrutiny of the sector - already a source of controversy - will continue to intensify. Since all the leaders are American, the potential for friction between the US and Europe is great. Second, whatever the competition authorities do, the two or three leading companies will be able to establish dominant positions. Companies with one or more top-two positions in important sub-sectors will stay profitable through the downturn and generate strong earnings once the industry rebounds. Companies stuck with a string of third or fourth places will find themselves permanently vulnerable to pricing pressure, struggling to support the cost of global sales networks and essential research and development. So third, more and more companies will find themselves faced with the HP choice: either seek to attain top-two status in several important fields or settle for a much less ambitious future. The modest alternative - call it Plan B - is one in which a company cuts back its operations to those areas, perhaps niche ones, where some degree of market leadership is possible. Strategically, Plan B is the safer option. After all, the risk of trying to be a top-two operator in a range of sectors is that you end up as a profitless number three in each. And the mergers associated with such a strategy are hard to execute effectively in high-technology businesses where employee morale is vital. But Plan B is not devoid of risk either. As many companies have found, shrinking a company to its core risks surrendering revenues faster than you are able to cut costs. Carly Fiorina has chosen a more ambitious approach. Whether or not she gets the chance to put it into practice, it is an understandable response to the industry's new shape. Even those who do not agree with her choice should recognise the seriousness of her dilemma. * In an article on the Comment & Analysis pages in Tuesday's FT, I inadvertently quadrupled the debt of Europe's eight biggest telecommunications companies. The true figure is just over Dollars 200bn (Pounds 140bn): heavy enough, in all conscience, but not as crippling as my typing error suggested. Apologies. peter.martinft.com