Opinion Ten Reasons Why HP’S Itanium-Based Servers Have Reached the Point-Of-No-Return

Opinion Ten Reasons Why HP’s Itanium-based Servers Have Reached the Point-of-No-Return

Executive Summary Hewlett-Packard (HP) refers to its HP Integrity and Integrity NonStop Itanium-based servers as “business critical systems”. In Q4, 2007, HP sold over $1 billion of these business critical systems. But, since then, due to a number of factors, Itanium-based server sales have declined significantly. Over the past year, business critical systems sales have hovered in the $400 million range per quarter, an almost 60% decline as compared with the 2007 high-mark.

From our perspective, HP’s Itanium-based servers have now achieved a form of stasis (a medical term that refers to an inactive state). We expect a rise in Itanium business this quarter (due to pent-up demand for the new Itanium 9500), but we also expect that – within in a few quarters – underlying, dogging problems will again drive Itanium business downward. These problems include HP’s financial woes; increased competition (particularly from Intel x86-based servers); market factors (such as the market move toward Linux and a market preference for x86 architecture); a broken ecosystem (where HP has actually had to take legal action to get a business partner to keep supporting its independent software on Itanium-based platforms); an ill-founded Itanium recovery plan known as “converged infrastructure”; and more (in fact, we list a total of ten reasons why we believe HP’s Itanium-based servers have reached the point-of-no- return on page 2 of this Opinion)…

In this Opinion , Clabby Analytics describes why we believe that HP’s business critical Integrity servers have now reached the point-of-no-return.

The HP Integrity Situation Back in 1989, HP engineers decided that they could design and build a new superscalar microprocessor that could take the computing world beyond 32-bit computing. This new design would be able to process instructions of variable length — 32-bit, 64-bit, or more, or less — enabling information technology (IT) buyers to address huge amounts of memory (32-bit processors were limited to about 4 gigabytes at the time). This new design would ultimately be named “Itanium”.

Unfortunately for HP, it took years to bring this new processor to market (over a decade elapsed between the first design meetings and the first product release). Further, successive releases of Itanium continually dropped planned functionality (see here ) while constantly missing release target dates. Customers waited for years for new versions of Itanium (see here ) ― and when these new designs finally arrived, they sometimes offered only marginal performance/functionality improvements (see here . And note, we have not yet found performance benchmarks for Intel’s new Itanium 9500 series. Will this be another case of performance deficiency?). No wonder the press dubbed the Itanium project “the Itanic” (a play on words about another catastrophe ― the sunken, colossal cruise ship “Titanic”).

To HP’s credit, despite constant delays and dropped functionality, HP managed to build an Itanium ecosystem that included HP infrastructure and management software as well as applications offered by hundreds of ISV partners. HP channels and business partners also promoted Itanium ― driving Ten Reasons Why HP’s Itanium-based Servers Have Reached the Point-of-No-Return HP’s Itanium-based Integrity servers to their zenith in 2007. Since 2007, however, Itanium sales have steadily declined, due in part to the worldwide economic downturn that occurred in the 2007- 2008 timeframe (this downturn constricted IT budgets) ― but other factors such as increased competition and the withdrawal of key vendors from the Itanium ecosystem also played a huge role in the decline of Itanium-based system sales.

Today, HP’s recovery plan for its Itanium-based servers involves converging Itanium with x86 systems using a “converged infrastructure” to glue the two architectures together (this plan assumes that HP customers want Itanium and x86 glued together – a market demand we do not see. For more on this perspective please read this report ). Further, Intel (the co-designer/manufacturer of Itanium processors) is sharing common processor design elements and create a common socket for both the x86 and Itanium lines (we see this as an ultimate phase-out program for Itanium).

Ten Reasons Why Itanium Has Reached the Point-of-No Return In a speech marking the end of his career, a late U.S. general took a line from an old army ballad that exclaimed: “old soldiers never die, they just fade away…”. Such, we believe, will be the case with Intel’s Itanium processor. We expect that HP and Intel will not “kill” Itanium, but rather blend it with x86 architecture over time, thus letting Itanium fade out of existence.

As we look at HP’s Itanium predicament today, we see ten reasons why Itanium servers will not be around for the long haul. They are:

1. The broken ecosystem; 2. Increased competition; 3. The market migration trend from HP/UX to Linux on x86; 4. The cost of continued development; 5. Margin pressures; 6. Lack of volume manufacturing; 7. Unclear workload definition; 8. Customer disinterest (as manifest in the Itanium the sales stasis pattern described earlier); 9. Strategic directions (spending on unneeded programs such as HP’s converged infrastructure environment, HP’s Project DragonHawk, and HP’s Project HydraLynx”); and because 10. There is Itanium end-of-life plan in place (a good indicator that Itanium will phase out).

The following subsections examine each of these points in more depth. Broken Ecosystem Probably the biggest reason that Itanium will cease to exist over time is related to its broken ecosystem. IT buyers buy solutions ― the hardware choice can be considered incidental. And with major vendors pulling support for Itanium, combined with fewer independent software vendors (ISVs) signing-on to host their applications on Itanium-based systems, fewer and fewer key industry solutions are being made available on Itanium-based servers. Fewer solutions = fewer sales…

In previous Clabby Analytics reports we described how numerous important vendors have either pulled support for future software revisions on Itanium, or have refused to offer their software products on Itanium architecture. We have noted that Microsoft pulled future Windows support for Itanium a few years ago, as did Red Hat more recently with future Linux revisions. We also pointed out that EMC’s VMware made a conscious decision never to offer its products on Intel’s Itanium architecture. More recently, we described how Oracle’s decision to pull support for Itanium would drastically and negatively impact Itanium sales.

For the record, we forecast that Oracle would pull future support for its products on Itanium over a year before Oracle did so. However, a California court has forced Oracle to keep supporting its products on Itanium. This situation, however, actually reinforces our point about how badly the Itanium ecosystem is broken. If HP has to sue its business partners in order to keep certain ISV offerings in the Itanium portfolio, then clearly something is wrong with the Itanium ecosystem…

Increased Competition One of the early goals for Itanium architecture was to make Itanium the defacto standard for 64-bit computing. Accordingly, Intel developed its Pentium and Xeon lines as 32-bit only architectures, reserving 64-bit computing for Itanium. But, in 2003, AMD forced Intel to respond to competitive pressure by introducing a 32/64-bit hybrid x86 architecture ― thus providing x86 users with a path to 64-bit computing without having to adopt a completely new architecture in Itanium. This mean that AMD customers had a clear path for existing ISV and custom applications to migrate upwards to 64-bit computing ― while Intel did not. It took Intel a year to respond to this competitive pressure, but ultimately Intel introduced a 32/64-bit hybrid x86 microprocessor, followed by a 64- bit Xeon x86 architecture.

To us, Intel’s introduction of a 64-bit version of its x86 microprocessor was the beginning of the end for Itanium architecture. Since Xeon went 64-bit, there have been fewer and fewer compelling reasons to adopt Itanium as the 64-bit computing defacto standard.

Since 2004, Intel has improved reliability, availability and security on its x86 processors ― and has also introduced multi-core architectures that can challenge Itanium from a performance perspective. Further, other rivals ― especially IBM with its POWER architecture ― have raised the bar in microprocessor and systems designs, increasing competitive pressure on Itanium-based platforms. In fact, we argue that IBM’s POWER architecture has been years ahead of Itanium, especially in the areas of virtualization and security (for more on IBM Power Systems advantages over Itanium, see this report ). With increased x86 and RISC (reduced instruction set ― such as IBM’s POWER design) competition, Itanium-based servers experienced significant pressure in the quest to become the 64-bit defacto standard ― and have essentially lost this battle.

Market Migration from HP/UX to Linux on x86 Over the past decade the Linux operating system has become more robust, more reliable, and more secure. And, as Linux has improved, it has encroached on the Unix operating environment’s stranglehold on mission-critical computing deployments. In today’s market, the Unix operating environment market is static (not significantly growing nor losing revenue), while Linux is experiencing solid growth (examine Linux supplier Red Hat’s financial statements for proof of this growth. Note that in 2012 Red Hat reported that it is now a $1.13billion dollar ISV ― and 2013 results are due out next month and should be equally positive).

Although Unix market revenues have remained static for a few years, this does not mean HP-UX revenues have also remained static. IBM has been gaining Unix market share at the expense of both HP and Oracle by aggressively providing migration tools and assistance for moving from HP/UX and Oracle Solaris to IBM’s AIX Unix environment. Over the past few years IBM has migrated thousands of HP and Oracle Unix users to AIX under the auspices of IBM’s Migration Factory. For more details on IBM’s Migration Factory, see this report .

February, 2013 © 2013 Clabby Analytics and IT Market Strategy Page 3 Ten Reasons Why HP’s Itanium-based Servers Have Reached the Point-of-No-Return Although IBM has experienced great success in migrating HP and Oracle Unix customers to its version of Unix (AIX), Unix users are also migrating to the Linux environment on x86 architecture. Linux has a similar look-and-feel to the Unix operating environment ― and the fact that Linux cost less (no license fee, just service and support), and that Linux has become much more robust over the past few years from a reliability, availability and security perspective has attracted Unix users to the Linux platform. And because somewhere around 90% of all Linux in the enterprise deployments are on x86 architecture, Linux on x86 has become the logical Unix migration choice.

From our perspective, the Unix-to-Linux/x86 migration trend presents a bit of a quandary for HP in that HP would clearly like to protect its HP/UX on Itanium revenue stream rather than have its customers migrate to its own lower revenue/margin x86 servers – or worse, to other vendors x86 platforms.

One HP document that we came across describes how HP’s DL980 G7 Intel Xeon multi-core-based servers make “an excellent platform for scale-up consolidation and for virtualization of legacy UNIX® and Linux workloads”. It goes on to point out how its DL980 G7 is a good alternative to IBM's AIX (Unix) Power Systems environment and Oracle’s Solaris (Unix/SPARC environment) — but makes no mention, ironically, of migration from HP/UX to Linux on the DL980. Reports such as this show us that HP is still interested in protecting its Itanium base.

For more information on the market’s Unix to Linux on x86 migration trend, please see our more in depth report on this subject found here .

It should be noted that IBM has turned up the pressure on HP’s high-end Intel servers by introducing new System x models and PureSystems (expert pre-integrated systems) – as well as cost reduced Power Systems. Readers should know that IBM has reduced the cost of its Power Systems models 710 and 730 as of February, 2013. A 2U, 16 core, 64GB of memory Power System drops from approximately $26,000 list price today to approximately $11,000. This is a huge price drop for a 2U, 16 core, 64GB of memory Power System – and places what we consider to be a vastly superior system at a price point that directly challenges HP’s Proliant DL380 (an equivalently configured system). We see this as a move by IBM to turn the tide away from migrating from Itanium-based servers to x86, and turn it toward staying on Unix. It will be interesting to see if IBM’s pricing move draws even more HP Integrity customers toward IBM’s Power Systems…

The Cost of Continued Itanium Development In the belief that it would be no longer cost effective to build its own microprocessors, HP decided in 1994 to partner with Intel (HP and Intel would design Itanium, then Intel would manufacture the processor). Recent court documents (that came to light during an HP/Oracle lawsuit) now show that HP has been paying Intel hundreds of millions of dollars to keep manufacturing Itanium (close to $700 million since 2008). Our issue with these payments is that if a microprocessor is successful, it should not need to be underwritten by its vendor base…

So, if it is costing Hewlett-Packard hundreds of millions of dollars to keep Itanium alive, how does the company justify this cost in the face of declining/now static sales? Back in 2010, HP produced this backgrounder on the company’s Enterprise Business that we think gives a clue as to how the company justifies continued Itanium development. In this report, HP describes how HP’s Enterprise Business organization delivered almost half the company’s revenue, and more than half the company’s profit in a given quarter. The company’s Enterprise Storage, Servers and Networking organization (ESSN) was a major contributor at this time in revenue and profit ― and the business critical systems division is part of ESSN.

February, 2013 © 2013 Clabby Analytics and IT Market Strategy Page 4 Ten Reasons Why HP’s Itanium-based Servers Have Reached the Point-of-No-Return In November, 2012 (just a few short months ago), HP reported its fourth quarter fiscal 2012 and full year financial results. And a closer look at ESSN revenue and profit shows that the decline in demand for business critical systems (Integrity servers) when combined with declining demand for HP storage solutions has driven HP’s enterprise server, storage, and networking (ESSN) division revenues downward to $5.1 billion – a drop of 9% in revenue as compared with the same quarter a year earlier. To make matters worse, in a conference call following Hewlett-Packard’s Q4, 2012 earnings announcement, Cathie Lesjak (HP’s chief financial officer) stated that “overall business critical systems revenue declined 25% year over year … BCS performance was again impacted by the persistent Itanium revenue decline ”.

As we look at last year’s ESSN and business critical system results ― and as we consider how much HP is spending to keep Itanium alive ― we are forced to conclude that HP should curtail further investment in this platform and instead hasten its customer’s migration to x86 architecture.

Margin Pressures HP’s November earnings call also cited that the operating profit for ESSN in Q4 was only $423 million (8.3% of revenue) – indicating to us that HP’s profit margins are falling. This is a far cry from the large profit contribution that was being made only a few short years before ― and to us, this confirms that Itanium-based systems and storage solutions are being sold at lower margins.

Often times vendors are forced to discount their products heavily to drive sales. HP’s most recent earnings report seems to indicate that HP is being forced to reduce profit in order to keep moving Itaniums.

Note: HP’s new Itanium 9500 was announced in November, 2012 ―and, accordingly, HP’s sales and profit margins for Itanium should experience an upward bump in business for one or two quarters. But after HP customers upgrade or refresh their systems, we expect Integrity server sales to again continue their decline. This will again force margin pressures on Itanium processors, again driving down profitability.

Volume Manufacturing One way to fix HP’s Itanium woes would be to find a way to increase the volume of Itanium-class servers being sold. IBM customers buy tens-of-thousands of POWER processors every year and deploy them in devices ranging from automobiles to high-end computing systems (this is in addition to the hundreds of thousands of POWER processors sold into Power Systems, PureSystems, and PowerLinux environments). At the height of Itanium sales it has been estimated that Intel was producing 200,000 processors per year in 2007 ― mostly for use in HP Integrity servers. With the 50-60% drop in the Itanium business since 2007, we suspect this number is now fewer than 100,000 chips per year.

One way to have overcome Hewlett-Packard’s Itanium cost problems would have been to make up the development/manufacturing costs described in the previous subsection by selling more processors for use in various products in various industries. With limited volumes being sold primarily in high-end computer systems, HP and Intel do not have this luxury nor associated revenue stream to underwrite Itanium development.

February, 2013 © 2013 Clabby Analytics and IT Market Strategy Page 5 Ten Reasons Why HP’s Itanium-based Servers Have Reached the Point-of-No-Return Unclear Workload Definition Intel’s latest Itanium product brief shows that Itanium 9500 is positioned as a “mission critical computing” solution designed to provide highly-scalable performance and world-class availability for mission critical application environments. This product brief emphasizes Itanium processor resiliency features ― and claims that Itanium processors offer “optimized performance for your most data-intensive applications”.

Itanium is based on a processor design known as “explicitly parallel instruction computing” or EPIC for short. And, as the name EPIC implies, this processor is very good at processing parallel workloads as found in the scientific and financial industries. But we note that there are now zero Itanium-based processors on the industry’s TOP500 Supercomputer list ― and hundreds of Xeon-based servers ― which implies that Xeon-based servers may be a better alternative for complex parallel computing tasks. As for Intel’s claim that the new Itanium is well suited to process data-intensive applications, we are hard pressed to find many examples of data intensive ISV applications in the Itanium application portfolio. Hence, Itanium may be able to run data-intensive applications well ― but without leading edge business analytics, Big Data, and other compute-intensive applications in the Itanium portfolio ― so what?

As for running mission critical applications such as the enterprise resource planning, customer relationship management, and supply chain management software environments (products provided by Oracle), it would be wise to remember that Oracle is under court order to support for these applications…

Curiously, the afore mentioned product brief also stresses that Intel’s new Itanium 9500 series servers “share many common platform ingredients with Intel Xeon processor E7 family such as the chipset, memory buffer, interconnects, and industry standard memory to bring volume economics of the Intel Xeon server industry to the Intel Itanium platform”. The reason why HP feels that it is necessary to emphasize the overlap between Itanium and Xeon befuddles us...

Customer Disinterest As we examined the continual decline of Itanium sales since the 2007 zenith, we have concluded that HP has been unable to relight the fire and enthusiasm for its Itanium-based servers. We found some exceptions in that HP appears to be experiencing some success in the Far East with new value-added resellers (VARs) who build their own stack and application solutions on Itanium hardware. Further, we are aware that many leading financial institutions and almost all of the Fortune 100 still have Itanium solutions (including several NonStop solutions in banks and stock environments). But the real question is: “are customers growing the level of their commitment to Itanium servers ― or are they just buying more capacity to run existing custom applications that are tied to the platform?” Given the lack of press activity combined with few new case study examples of successful Integrity installations on HP Websites, we have found little evidence that customers are growing their commitment. Further, we believe that HP’s business critical systems stasis sales patterns reinforce this conclusion.

Strategic Directions Over the years we’ve had big problems with HP’s strategic decisions such as the company’s exit from the crucial middleware business in the early 2000s (which increased the company’s reliance on Oracle for middleware); the company’s dumping of its successful PA-RISC base in favor of Itanium; the company’s acquisition of EDS ― and most recently the company’s Autonomy fiasco (an $8 BILLION write off). We also note that the company’s Systinet and Mercury acquisitions do not appear to be adding a lot of revenue to the company’s bottom line. To all of these issues we must add HP’s strategic direction with its Integrity servers to this list.

February, 2013 © 2013 Clabby Analytics and IT Market Strategy Page 6 Ten Reasons Why HP’s Itanium-based Servers Have Reached the Point-of-No-Return Last year we published this report that describes HP’s “Project Odyssey”, a plan that calls for a “converged infrastructure” (an infrastructure based on HP mission critical software) that will unite HP’s many operating environments (HP-UX, NonStop, and OpenVMS) on Itanium with Windows and Linux on x86 architecture. From a hardware perspective, Project Odyssey calls for x86-based server boards to be placed in a Superdome 2 chassis alongside Itanium server boards (this project is codenamed “DragonHawk”). HP also intends to increase the reliability and availability of 2, 4, and 8 socket x86 blade servers — by cascading its HP nPartitions capabilities and various other features from its business critical systems (Itanium-based systems) to its c-Class blade enclosures. This project is codenamed “HydraLynx”. Our problems with these HP programs are that:

1. We don’t see the customer demand for an HP-based converged, combined Itanium/x86 infrastructure (where is the lengthy list of HP customers demanding this?); 2. We see HP’s “converged infrastructure” a way to keep various HP software programs alive. If Integrity servers are eventually withdrawn from the market, then much of HP’s intellectual capital – and associated revenue stream – in operating systems such as HP-UX and NonStop, much of HP’s availability/resiliency software, and all of HP’s virtualization software investments that are tied to Integrity infrastructure/systems software go down with the ship… 3. These programs assume that HP can field competitive infrastructure and systems software (for instance, competitive virtualization software). We find several HP offerings (particularly its vPARS, IVM and containers) as lacking when compared to various competitors.

Remember: in Homer’s “Odyssey” Odysseus’ ships were blown off course – and it took him ten years to return home. We see an eerie parallel between the original Odyssey and HP’s current course… We would like to see HP revisit its strategy and rethink Project Odyssey. Is it a good use of its precious development resources? Given HP’s financial woes, we think the company could find better ways to spend its money.

The Itanium End of Life Plan The whole point of this entire section has been to provide reasons why we believe that HP’s Integrity servers and Intel’s Itanium chipset will not be around for the long haul. Publicly announced plans from Intel and HP both seem to confirm that Itanium will exist in a new form sometime after the next generation Kittson revision of Itanium. Intel has announced that it intends to use an innovative model for joint Itanium/Xeon development ― and calls this model the “Modular Development Model”. Intel developers intend to use this model to build a common platform environment that allows silicon to be shared, and that will take advantage of a common socket design. Using this approach, Intel will be able to take advantage of design features from both architectures while using standard components ― thus driving down its design/development and manufacturing costs.

The way we see this new approach, however, is that Itanium essentially fades into a joint Itanium/Xeon design sometime after the Kittson chip set arrives. And as we said earlier in this report, at this juncture Itanium can be expected to just “fade away”.

Summary Observations In this Opinion we have provided ten reasons why we believe that the days for Intel’s Itanium chipset are numbered. The most prevalent reason is that the Itanium ecosystem is broken ― and we do not see this ecosystem being repaired. In fact, we see quite the opposite:

1. HP has had to sue a business partner in order to keep that partner’s offering on its Itanium- based platform; 2. There are few new ISVs signing up to deploy and support their software on Itanium platforms; and, 3. We do not see the next generation business analytics and big data applications being hosted on Intel’s Itanium architecture (but we do see these applications being hosted on Intel’s x86-based Xeon multi-core architectures, Power Systems, and mainframes).

Accordingly, to us the biggest issue that needs to be addressed when it comes to HP’s Itanium-based systems is the state of the Itanium application portfolio. We expect that the stasis in HP’s Itanium-based server application portfolio will further drag this architecture downward.

We also pointed out that increased competition from x86 servers and from IBM’s Power Systems is undermining Itanium-based server growth in the server market. Plus, we wonder how much longer Intel can continue to invest in Itanium given pressures in mobile computing, in embedded system, and low cost, low power server competition that may come from ARM servers over time…

Market migration trends also show that Itanium is in serious ― and probably irrecoverable ― trouble. Many HP-UX customers have abandoned HP/UX and Itanium in favor of other Unix platforms ― or have moved to Linux on x86.

The costs of continued development; decreasing margins; lack of volume manufacturing to underwrite development costs; and clarity around the types of workloads Integrity servers with the new Itanium 9500 chipset are meant to serve also causes us consternation. HP should clearly state which workloads its Itanium-based servers are meant to process ― and provide numerous customer examples across many industries that show how well Itanium-based servers process those workloads. We see HP’s failure to provide such proof, combined with the stasis in sales orders, as in indicator that customers are somewhat disinterested in the future of Itanium-based servers.

We have long been troubled by HP’s strategic directions ― and have stated such in this report: “HP: A Decade of Mismanagement? ”. We are encouraged by the actions being taken by HP’s new CEO Meg Whitman in terms of getting costs under control and increasing R&D investments ― but would like to see her investments in Itanium-based servers reevaluated.

Finally, the Itanium end-of-life program appears to be in place as Itanium and Xeon will share numerous architectural components and a common socket after the Itanium Kittson (codename) processor makes it to market. HP customers can wait years for that day ― or they can start making the move to other architectures such as IBM’s Power Systems, PureSystems, PowerLinux, System z, System x or other vendors’ x86 architectures today. Given the many business maladies being faced by the Hewlett-Packard company, and given a roadmap that we think shows Itanium fading- away in the near future, moving to another systems architecture today rather than upgrading to the next version of Itanium might be the most prudent course of action for existing Itanium customers.

Clabby Analytics Clabby Analytics is an inde pendent technology research and http://www.clabbyanalytics.com analysis organization. Unlike many other research firms, we Telephone: 001 (207) 846-6662 advocate certain positions — and encourage our readers to find counter opinions —then balance both points-of-view in order to © 2013 Clabby Analytics decide on a course of action. Other research and analysis All rights reserved Febr uary, 2013 conducted by Clabby Analytics can be found at: www.ClabbyAnalytics.com.