HIGH TECH CONNECTIONS
JANUARY 13, 2004
SAN JOSE, CALIFORNIA
© Copyright 2004 Hewlett-Packard Development Company, L.P
Thank you. Good morning everyone, welcome. I want you to know that we have brought Dutch weather to you so that you feel completely at home. It's a shame, I understand most of you arrived over the weekend and you are leaving tomorrow, and so it would appear that you will miss our normally wonderful California weather all together. Apologies, but hopefully you feel right at home.
All rights reserved. Do not use without written permission from HP.
It is a great pleasure for me to be here this morning and I come here today first and foremost to say thank you, in addition to talking with you about the important subjects of innovation, and competitiveness, and risk taking. I come here to say thank you first and foremost because at HP, we believe deeply that great organizations are defined not simply by their capabilities, but also by their character, and that great companies are defined as well by the company they keep. And we have been privileged to be partners and friends with so many of you over the years, and that partnership, as was mentioned, has helped make us the largest IT company in the Netherlands.
And it is true that if you are a Dutch citizen, you are by definition an HP user, whether that is using an ATM machine, or making a phone call, or making a stock trade on the Amsterdam Exchange - all of these transactions are processed by HP technology. Eight out of every ten Dutch people work directly with HP and we believe therefore more than ever, that our success is tied very much to your success. And I believe that as a company, and candidly, I believe that for the United States as a nation as well.
And so I want to talk today not just about company competitiveness, but also about national competitiveness, because I think it is important that our companies and our countries continue to work together and to build our future together to prosper in a world economy which is changing very rapidly before our eyes.
I do think that it is a bit ironic that in the Netherlands, you are going through some level of soul searching about the necessity to take risks once again. I think we all are after the last several years, but it is true that in many ways, the Dutch have led the world, and we have learned - that is, the rest of the world - have learned a great deal from the Dutch about taking risks. Think about all the brave Dutch who took huge risks 400 years ago and crossed oceans to explore new lands and new markets.
Beyond that, I think there are few nations that are better poised than the Netherlands to take advantage and lead the next wave of IT as the global economy continues to pick up. The Netherlands, as you all know, is very strong in the foundation of ICT, from semiconductor technology and equipment. But the Netherlands also possesses one of the most Internet-ready environments in all of Europe. It has the highest Internet connectivity rates in Europe. You have one of the top cable penetration rates in the world, and the Netherlands has one of the largest Internet exchanges in Europe. And you also have a very large number of companies - many of whom are represented here today - that provide services for electronic business, as well as a business community that is shifting rapidly now from electronic data interchange systems to Internet based systems. Just as an example of that shift, last year in the Netherlands over 40% of all businesses said they used the Internet for procurement.
And on top of that, the Netherlands is very well positioned to take advantage of future technological advancements. For example, over six million Dutch citizens - that's over 40% of the population - own cellular phones, and obviously, wireless communication is now transforming not just communications, but every aspect of our lives.
At HP, we believe, and our strategy is to lead a huge shift going on where literally every physical analog process - every physical analog process - will become digital, mobile and virtual, and that means that every process from procurement, to photography, to entertainment. We made a huge set of announcements last week around digital entertainment at the Consumer Electronics Show. Every process will become digital, mobile, virtual.
Now, I think what we've come here to talk about today and this week isn't just a question of what we need to do to stay innovative, because I think the companies in this room have all shown a capacity to innovate. I think we're really here to talk about what does it take to stay competitive, and what does it take to stay competitive in a world that is changing very rapidly - where the bar, frankly, goes up for all of us every single day.
Now, some of you may know that I was a history major right down the road here at Stanford University - Medieval History and Philosophy, to be exact. So, I am not a technologist by training, but I am very interested in history because I think we can learn a lot from it. And on that note, about 50 years ago there were two social scientists named John Von Newman and Oscar Morgenstern, who looked back on the history of the human race and came up with a new organizing principle that they called "Game Theory." Now, central to the idea of Game Theory was that there were two kinds of games - two kinds of games that motivate people and companies and countries. There are zero sum games and there are non-zero sum games.
Zero sum games are contests in which for one person, or company, or country to win, another has to lose. Most of our sports are zero sum games. There's a winner, there's a loser, and a draw is singularly unsatisfying for everyone concerned. But there are also non-zero sum games where one person's gain is not necessarily another's loss. Non-zero sum games are based on the belief that you don't have to lose for me to win. For one country to move ahead, another does not have to fall behind. When our interests overlap, we both can win. When we work together to create new opportunity, we all can win.
Now, I think non-zero sum game theory and thinking is at work in this meeting, in this delegation. If there is one idea motivating the HTC members on this delegation, it is that we all have a stake in each other's success. The Netherlands has a rich history of innovation and research. The Netherlands is the eighth largest market for US investors, and the third largest direct foreign investor in the US. The US is the largest direct foreign investor in the Netherlands with more than 1,600 US companies with subsidiaries or offices in the Netherlands. In other words, whether we like it or not, we are dependent upon each other's success and progress.
But going back to these social scientists, what they argued looking back on the history of the world was that there are moments in our world when we, collectively as global citizens, make the most social and economic progress. And those moments are when new technologies come along that permit or encourage new, richer forms of non-zero sum interaction.
In other words, looking back on all the great advancements of the ages, there are moments in history - from the invention of the wheel, to the Silk Road, to the invention of the automobile, the airplane, and the Internet - where technology makes it possible for everyone to advance together, if everyone is willing to do their part.
And I think we are at one of those moments in history right now, a moment where every process - every process - will become digital, mobile, and virtual; where the vast potential of technology can indeed change the world, not just change how a business operates, but change how our society operates, improve and change lives for the better, whether it is someone in Amsterdam or Silicon Valley or someone in a rural village deep in India or South Africa.
And I think a decade from now, we are either going to look back and tell a glorious story of advancement and empowerment because we all did our part, or we are going to look back and think about what might have been. And I think what determines which story we tell ten years from now really comes down to some fundamental things. I think it comes down to partnership and collaboration, and I mean partnership and collaboration between the public sector and the private sector, between nations, between companies. And I also think it comes down to targeted investments by government and focused innovation by industry.
And of course, it takes the ability to make an investment and take a risk. Every nation faces a question of competitiveness; every nation has to decide how it is going to compete and thrive in the global economy. And competitiveness is not inevitable. Rising standards of living are not inevitable, progress as a company is not inevitable. Competitiveness for a company or a nation is always a matter of choice, decision and investment.
Now, a number of CEOs here in the US have started this dialog with our own US government. Craig Barrett and I started this dialog with policy makers in Washington last week. We started this dialog because we are concerned that much of our energy now is going towards investing in protectionism, instead of investing in competitiveness. And much of our energy as well, is not going towards investments in things like education and innovation. As companies, we know we have to invest in the development and training of our workers. We have to invest in R&D. Nations must do the same thing.
So, what does it take for a country or a company to be competitive in this new age? I don't think this is rocket science, but I do think it is a matter of choice. We know for a nation that the economy of information and communications does best in a highly entrepreneurial society, where people with new ideas have access to capital; where barriers are low to establishing a new business; where the rule of law and governance and transparency are strong, and where citizens are empowered to make the most of their lives.
By the way, that's not a bad formula for how a company thrives as well - a company to be open and transparent where people can make the most of their ideas in an environment that encourages risk taking, entrepreneurialism and invention.
And we also know that the information and telecommunication revolution is fueled by open markets and global trade. So, what does it mean in terms of investments? I think it means some pretty basic things. I think competitive nations, just like competitive companies, invest in three things: first, they invest in the education and training of their people, because the information economy is first and foremost a knowledge economy. Second, they invest in research and development to drive the next generation of growth by nurturing new ideas and new technology to bring the fruits of those ideas to market. Education and training, innovation, R&D, and third, they work to create societies or companies that are grounded in predictability, openness, transparency, accountability, trust, rule of law; countries or companies that recognize and reward merit and achievement, because those are the qualities that are needed to sustain innovation and investment. To me, frankly, the most disturbing thing about the last three years we have gone through in a global economic slowdown - and this is disturbing both here in the US and around the world - is that these three kinds of investments are in some cases the very first things that are cut.
In the United States alone, nearly all 50 states are facing deficits and are targeting education for cuts. Here in the United States, for example, we have the "No Child Left Behind Act" that is not fully funded. By cutting investments in education, we are cutting the very things that will allow us to continue to grow and compete. Last year alone, just as an example, HP spent about $280 million on worker education and training, and this year we will spend almost $325 million on worker education and training.
Now, we all know such companies, but it's probably worth reminding ourselves that the time to make the investments in competitiveness, as difficult as they are - frankly sometimes, as controversial as they are - the time to do it is before it's too late. And the time to make the investments and the tough choices to ensure competitiveness is before it is obvious to everyone that it needs to be done.
We all know that when it is obvious to everyone that a company has to change dramatically, a lot of time has been lost, and I think the same is true of nations. And that is why I believe it's important to have a discussion about competitiveness requiring choice, investment, and risk taking is an important discussion for a company as well as a nation.
Making the investments in competitiveness is frequently, as you know, controversial. Certainly, HP has had its share of controversy around the choices we've made to ensure our competitiveness and our leadership. But our goal is to be the leading technology company in the world because we are well on our way to that goal. But it has taken investment, and choice, and risk-taking, and in many cases, the willingness to stand up to criticism.
Now, when we think about innovation - you know, there is innovation and there is focused innovation, and at HP, we have "invent" in our logo because for us innovation is our life's blood. We are a technology company. We think innovation is everything. But our innovation strategy is specifically described as focused innovation, and what we mean by focused innovation is we will focus our resources, our talent, the energies of our people, our money, where we can take a unique contribution and lead - which is a high bar - and we will partner for the rest. So partnering, and respecting, and admiring the innovation of others is as much a part of our innovation strategy as the $4 billion a year we spend on R&D, or the fact that today we are generating 11 patents a day - that's up from five patents a day a year ago, up from three patents a day two and a-half years ago. We now generate 11 patents a day, and have moved from the number nine innovator in the world, to the number six innovator in the world in about 12 months.
But that's focused innovation, and we partner for the rest. And those partnerships are critical, but what are we investing in? What do we invest that $4 billion in, and where do we think - together with our partners - where do we think more investment is required? Let me start with simplicity. The technology that all of us sell is still way too complicated. It is crystal clear that in order for technology to really achieve its potential in businesses, in society, in homes, and in lives, technology has to become radically simpler.
We talk about it in terms of radically simple, better together, and what we mean by that is technology has to be almost intuitive, and stuff just has to work better together. And that requires investment, and I believe there is no more difficult engineering feat than making something very complex - very simple.
Just as an example of this, we have a $49 photo printer on the market. It's a great seller. It took us 100 patents to produce it. And the reason we are among the leading technology companies in the world is because we invest in stuff that just works. So, radical simplicity we think is key.
Security is another area where we are focusing a lot of our innovation, and we all know, I need not say very much about the importance of security. Third area: rich digital content. When every process becomes digital, mobile and virtual, we are talking about truly rich digital content, whether it's digital music and the result of our partnership strategy that you saw last week, a partnership with Apple, for example, around music. Whether it's digital photography, whether it's digital entertainment, whether it is the digitization of the healthcare process in terms of prescribing or detecting disease, rich digital content is the next big wave.
Mobility, of course, and we also think this is about driving standards, because for all of this technology to work together better, standards become critically important. Standards are about common language and interconnection. Now for HP, we tend to bring all of that together when we talk about our value proposition.
Our strategy, in shorthand, is high tech, low cost, best total customer experience. High tech, we think customers demand and need reliable innovation - innovation that's focused on not just great functionality, but true simplicity, interoperability, security. Low cost, because let's face it, everyone wants an improving return on their technology investment, whether it's a CEO of a company or a mom and dad at home, and we believe that this is an era where technology and its benefits can be made accessible to all, but only if reliable innovation is provided at a price customers can afford.
And finally, best total customer experience because despite the fact that we all love technology, most customers actually don't care that much about the technology. What they care about is the experience or the functionality that it provides them, and we as technology companies can't fall in love with the technology that we provide, but fall in love with the experience that our customers demand.
I'm going to close up here and open it up for your questions, but as I've said in many different ways, competitiveness is not inevitable. Competitiveness for a nation, for a company is a matter of choice, and investment, and risk taking. And I don't in any way mean to suggest that by the dialog we are having here in the United States, that I am not optimistic about a company's ability to make these investments, or country's ability to make these investments.
I think progress in the next decade - continued success in the partnerships between our companies and our nations - requires the right combination of realism and optimism. And in some ways, I think that is what the Netherlands and Silicon Valley have always been about: realism and optimism. We have to be realistic that this stuff is hard. We have to be realistic that not everything happens right away. We have to be realistic about the fact that not everything happens the way we plan and predict it. We have to be realistic about the fact that none of us can do it all alone. And we have to, as well, be realistic about the fact that sometimes it is two steps forward and three steps back before it can be two steps forward and one step back.
But I think we also have great reason to be optimistic - great reason to be optimistic. So those of you who have seen our ads, you know that our ads end with the phrase, "Everything is possible." For me, that is far more than a marketing slogan - I actually believe that. I don't think everything happens right away, I don't think everything is easy, I don't think everything happens as we predict it. But I do think everything is possible. And I think the history of the relationships between the companies that are represented here today give us great cause for that kind of optimism.
Thank you very much, and I'd be happy to take your questions now.
HP is one of several companies recently to mention nanotechnology in advertising. Could you talk a little bit about where nanotechnology fits into your business plan today and in the near future?
Yes, thanks for asking the question. HP Labs is a crown jewel for HP. It is a great source of innovation as well as pride, and while we spent a great deal on near-term development - little r, big D - we also spend hundreds of millions of dollars on more long-term research. Big R, little d and nanotechnology falls into that category. We are very privileged to have one of the leading scientists in the field of nanotechnology, Stan Williams, who leads our efforts in nanotechnology. Stan Williams, for those of you who may not know that name, several of his patents recently - one in particular, was singled out by MIT as one of the five patents most likely to change the world.
Nanotechnology, as you all know, we think is going to be a real game-changer in terms of the ubiquitous nature of computing and storage capability. I do not think that nanotechnology is a game-changer in the next two years. I do think nanotechnology is a game-changer in the next four to six years. And if you think about my comment that every process will become digital, mobile, virtual, think about having the power in something the size of literally an atom, think about having all the computing and storage power that is needed in something the size of several atoms. Think about the possibilities for disease detection. Think about the possibilities I was talking about in the medical field. Think about the possibilities of having a device so small that it is completely noninvasive - that literally measures, for an individual, everything going on in their body all the time. Think about the advances that would bring in terms of disease detection and prevention, and allowing the medical field to prescribe accurately.
Why is that interesting? Well, beyond being kind of gee whiz rocket science, it's interesting because - I won't get the statistics exactly right - but an alarmingly high number of fatalities in the health care industry are caused by mistakes in detection, diagnosis, and prescription. So we think nanotechnology is a big huge deal. The reason I'm kind of stretching the time frame is I don't think we're going to be delivering to the marketplace in the next two years a nanotechnology product. But I do think it's an underlying technology that will vastly expand the fields of life where computing can make a real difference. And I think that will happen in the next - call it five year time frame.
How do you hope to innovate and be competitive in the very crowded TV business where you're going to be one of the latest entrants?
Well, for those of you who saw the announcement we made last week, in fact we're not selling TVs, although we are putting technology in the market that can be used as a television. What we announced last week was a digital entertainment system that allows you - by the way, a component of that digital entertainment system is a digital display. That digital display could be used, can be used, will be used by some people as a TV, but in fact, we are talking about something far broader than that. The digital entertainment system fundamentally allows a consumer in the home to access, manage, edit, store, and create with any kind of digital content from any source - any kind of digital content from any source. And that is much more than a television can do today, and it is much more than simply moving the PC into the living room.
In fact, by the way, this is not a strategy that we are going to accomplish alone. We have partnered very successfully, for example, with Phillips, one of our great customers, one of our great partners - a great supplier to HP. We partner very successfully with Phillips in the entertainment field, and I believe we will continue to do so. But we think what's going on in the home is not simply where you put intelligence, or how sexy your displays are. The digital revolution in the home is not just about gizmos and gadgets. It's not about whose TV screen is the sexiest and the most beautiful. It is about literally digitizing every process in the home, starting with entertainment, and that means, in a sense - the analogy I used that last week was we're not talking about moving the PC into the living room. In a sense, what we're talking about is creating at a price point that consumers can afford, with a level of simplicity and reliability that consumers can manage - a data center for the home; literally a capability to manage any kind of digital content from anywhere and do anything with it you want.
As part of that, we announced a digital display, as part of that we announced a digital media hub, a digital photography strategy as part of that, our digital music strategy - where Apple is playing a huge role, as part of that. And we made a number of announcements around digital rights management, because we believe part of what has to happen for digital entertainment in the home to be valuable to consumers is artists have to want to continue to create it. And therefore, we took a very strong stand that intellectual property, digital content, the same rules of law and ownership need to apply. It's wrong to shoplift and steal a physical good off the shelf of a store, we all know that. It's equally wrong to steal somebody else's intellectual property that they've invested in creating."
… You have put together two companies in a period when not everybody was agreeing with you. You are now one and a-half - two years into it. I saw 3,500 people in Paris when you flew back and forth for a one hour presentation, and they were at your feet. Why did you take such a risk, because that's not an easy thing, and what did you do to make that merger a success, if it's a success?
Well, you might say that I'm biased, but one of the things that I like about business, the reason I left history and went into business is, I think business is a field where results count. And I think the results are frankly indisputable. The results in terms of cost savings - three and a half billion instead of two and a half billion; twelve months ahead of schedule; the results in term of profit improvement - 67% in 2002, 47% profit improvement in 2003, over 20% EPS improvement in 2004. I think the results are indisputable in terms of market share growth. We have gained or held market share in literally every category in which we compete, when most of our detractors said we would lose it in gobs. I think it's clear in our track record of innovations, from three patents, to five patents, to 11 patents a day - all in the time period of putting a merger together. I think it's unmistakable in terms of the customers we are gaining.
Why did I take the risk? I took the risk - first, the Board, I must say, examined every alternative strategically that the company had. You have to remember that when I came to HP, people sometimes forget this, but when I came to HP four and a-half years ago, it was great company; it was a proud company, but it was a company also that in the middle of the largest technology boom in history had missed its numbers 11 quarters in a row. It was a company in the middle of the largest technology boom in history that was growing in the low single digits. It was a company that in the middle of the largest technology boom in history had missed the Internet, and it was a company in the middle of the largest technology boom in history that was known as the 'Gray Lady of Silicon Valley.' This was not a company leading any more. This was a company resting on its laurels, not building on its history. And I think our legacy required us to build on that foundation of success, not to rest.
And so, we spent a lot of time having determined that we needed to lead once again, we spent a lot of time thinking about what does it take to lead. And there were a couple of things that became crystal clear. First, in our industry, scope and scale matter. Scope and scale matter even more when every process becomes digital, mobile and virtual. Scope and scale matter in the consumer business. You, as users of IT, I will bet that every user of IT out there has made the decision that they will partner with fewer firms going forward, not more. Scope and scale matter. You want reliable innovation at a price you can afford.
It was also true that where HP led, Compaq trailed, where Compaq led, HP trailed. We all know that industry standard servers are growing by leaps and bounds. We gained in this process leadership in Linux - by the way, we are the leading Linux player in the world today. Most people think it's IBM, it's not. We are more than twice as large as IBM in the Linux server market. We lead in Linux, we lead in NT, we lead in UNIX. There is one religion that HP has, and that is the religion of heterogeneity and interoperability. We believe customers want choice. We will always offer heterogeneity - whether that's Linux, and NT, and UNIX, whether that's a Microsoft solution, or an Apple solution. And we're always focused on making all of that work better together, because it's what we think customers require, whether it's dot.net-based Web services and J2EE.
And so, the merger gave us improving profitability, better market share position, a larger asset base that we could use to invest in R&D, great talent, and I think it's clearly been a success. So why did we take the risk? Because it was clearly the right thing to do for our customers and for our shareowners, and throughout the whole process, I was confident that if as long as people would really take the time to understand the facts - not the 30 second sound bits, not the soap opera, not the drama - the facts. As long as people took the time to understand the facts and as long as we then executed, which took incredible discipline on the part of every person in HP, we could get it done and we could deliver.
The last thing I'll say and on this subject is when the controversy that you politely mentioned was going on, I took all the heat, and by the way, that's appropriate. It's the leader's job to take the heat, it's the leader's job to stand up and represent the decision, the choice, the risk that they're taking. But frankly, since we have been successful, I've gotten way too much of the credit. You don't put together what we've put together and have it be one person alone - even a leader alone. Our success today is a story of the incredible dedication and contribution of those 142,000 employees in 176 countries who believed as well that we could change the world, who believed in the vision of leadership, and who believed that we were going to put our customers first and execute on their behalf. So they deserve the credit.
Thanks very much, and enjoy the rest of your conference.