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NOVEMBER 14, 2002

© Copyright 2002 Hewlett-Packard Development Company, L.P
All rights reserved. Do not use without written permission from HP.

Good morning. Well, where's Larry (Ellison)? Good question. Actually we all know where Larry is, right? Larry's doing one of the two things he really loves. Of course, Oracle is his first love. But the America's Cup is his second love. I bring it up because, as of yesterday, Larry and his team have now won their last nine races, in a row. They are now becoming one of the most feared America's Cup challenger teams. Now, why do I bring this up? Because in fact it is HP that puts the wind in Larry's sails.

We supply all of the computing systems and technology expertise behind their bid for the 31st America's Cup. Let me give you some of the things that we're doing for them. The boat design was done on our computing solutions, high-performance technical computing supercomputers. By the way, the design team worked on our supercomputer platform, so that they had even more computer power than for their previous designs. We are supplying them with notebooks and desktop PCs, servers, iPAQs and storage. So, let me just say right here that if Larry Ellison's team doesn't win the America's Cup, it's not because of the technology. It's clearly because of the captain. Just kidding, Larry.

I want to talk today about the customer's agenda for IT. I am not going to stand up here and talk about our new $10 billion (US) advertising campaign, or our $10 billion bet, or the next chapter of e-business. I'm here to talk about what I think is the real agenda in IT, and that is, the customer's agenda. Because I think where we are now, and where you as customers want us to be, is recognizing that the value proposition for IT has to change.

Now, first of all, we all know that this is a tough IT market. And in fact, I think a lot of the commentary around this industry has been focused on a cyclical economic environment. We all know that the cyclical economic environment that we're in means that there have been substantial declines in growth rates. That smaller start-up players have been struggling to survive. That, in fact, consolidation in the IT industry is happening.

This all seems pretty obvious today. In September of 2001, when HP first announced our merger with Compaq, it didn't seem all that obvious. We were talking about consolidation then. We were talking about lowering of IT growth rates then. We were talking about the requirements for scope and scales, breadth, depth, longevity and sustainability for IT players.

the customer agenda

Now, I think people understand it. But what I think people also misunderstand still is: This is not driven by cyclical economics, although clearly that's a part of it. I believe what we're seeing in the IT industry today is as much being driven by changes in customer requirements. That is, long-lasting structural changes in the IT industry going forward, not simply cyclical economics. What I mean by that is, customer requirements now are not any longer about the fastest, hottest box. They are no longer simply about the latest killer app. They are no longer about what's the next big thing, the next coolest piece of technology.

Customers now are focused on: How do I get a better return on investment? How do I get real value? How do I make sure that I can live with, not only the initial costs, but the ongoing costs of ownership? This focus on value is more than a cyclical economic issue. This focus on value is long-lasting and permanent because, let's face it, as customers of technology, you have concluded that you can't make progress by throwing everything out that you've already invested in. You can't make progress by creating lots of separate stand-alone islands of technology. You cannot make progress unless there is a way to reduce the amount of complexity you have in your IT systems.

You can only make progress, in other words, if you can truly rationalize and leverage the investments you have already made. You can only make progress if you can evolve your IT, not throw everything out and start over. You can only make progress if the level of complexity is reduced and you can only make progress if your total return on the investments you make in technology improve over time.

The point here is this is a permanent set of changes on your part. These changes will be with us whenever the economy comes back. I think it is also true that despite the slowdown in IT over the last couple of years, technology is becoming even more deeply woven into the fabric of our businesses and our lives. There is a clearer understanding that technology is the business, and that the smart application of technology determines increasingly winners from losers.

What you as customers want to know are these pretty basic things. Not who has the latest, hottest, fastest box. Not what the next killer app is. But how do I lower the cost of acquiring technology? How do I lower the cost of operating my environment? How do I make sure that the investments I make in technology flex with my business requirements? Because, let's face it, the requirements of business agility and adaptability are accelerating.

And, by the way, do I as a customer have freedom? Can I choose the pieces I want? Can I make sure that I stay in control of my environment and my investment? In other words, the business needs to stay in control of what is core to its business, not hand the keys of the kingdom over to someone else. How do I make sure I have freedom of choice and freedom of movement?

four fundamental principles

So, what is it that HP is focused on? Fundamentally, our strategy, our investments, our commitment, is focused around four fundamental principles. First, that we will be the company that provides the best return on information technology (RoIT). And by the best return on information technology, we deliver on that commitment through our products, our services, our people and, importantly, our partners. And by return on information technology what we mean is: Lowest total cost of ownership We mean improved productivity. We mean better manageability, better interoperability. We mean reduced complexity. And yes, we mean quality, reliability and security.

We are the largest consumer IT company in the world. We are also, by the way, the largest IT supplier to the small- and medium-business market. If you think about the portfolio that we have: imaging and printing technologies, which are critical now as businesses digitize processes, personal systems—from a handheld all the way up to the latest tablet PC—enterprise systems. No. 1 in storage. No. 1 in servers. No. 1 in network management capability through our OpenView platform and professional services.

If you think about that portfolio, and then you think about the market segments we serve: No. 1 consumer IT company in the world, No. 1 small- and medium-business technology company in the world, No. 1 or 2, depending on how you count the portfolio, enterprise IT company in the world. We believe it is factually accurate to say that we are the No. 1 technology company in the world.

And so we have to think both about our largest, most sophisticated enterprise customers and also about our consumer customers. As a company, we serve about a billion customers in 160 countries around the world. For consumers, we're focused on providing what we would call simple, rewarding experiences. Technology and solutions that are simple to own, simple to buy, simple to operate. That provides rewarding experiences. Experiences that make consumers' lives more productive, more communicative, more fun, more valuable.

We build, we deliver, we invest in, the best return on information technology and simple and rewarding consumer experiences. We build that on the base of world-class cost structure. We believe our cost structures in every aspect of our business must absolutely be world-class because customers will continue to be very price-sensitive. We also know, in some categories, good enough is what you're going to buy.

Finally, we have a discipline that focuses our innovations, our people, our assets, our R&D, on the places where we believe we can make a unique contribution and lead—partnering for the rest. Put another way, our partnerships, such as the very important 20-year relationship we have with Oracle, are central to our strategy. They are not things we do off to the side. They are central to our strategy because we believe they make the best use of our assets. We believe as well they give customers the flexibility, freedom and choice they require.

best return on information technology

Fundamentally, this is what HP is focused on going forward in our markets. I want to really spend more time on how we deliver the best return on information technology. Let me start by really talking about this 20-year relationship that we have had with Oracle.

A 20-year relationship with Oracle, 80,000 joint customers, we have 40 percent platform share of Oracle. In fact, we are Oracle's largest platform partner, bar none. Just as an example, today more than 70 percent of our Superdome—that's our high-end UNIX server—include Oracle software. More than 70 percent of our HP-UX customers as a whole run Oracle applications. And no, I don't believe UNIX is dead. I believe UNIX, NT and Linux are all important. But I certainly do believe that UNIX is not growing as fast as Linux or NT.

When we look at our customers' requirements, it's clear that there is a real requirement for high-end systems. If we look at our services outsourcing business, we find that 95 percent of the customers that do outsourcing business with us also use Oracle solutions. We have been doing joint R&D and the co-development of technologies and services with Oracle over this 20-year period. Some of the performance benchmarks that we just talked about in the introduction, are an example of the productivity of these joint relationships. We worked together for five years to create the Oracle 9i database, with real application clusters.

This week we jointly announced four new initiatives that improve customers' return on information technology. We expanded our Itanium 2 initiative, we launched HP Verified, which is a qualification and information program that we use to assure customers the highest availability on Oracle 9i RAC solutions. We announced a joint remote-support technology initiative. You're going to see a number of other joint remote-support initiatives come out from HP and Oracle over the next several weeks and months.

We're probably most excited about the worldwide 9i application server middleware agreement that we signed this weeky to deliver leading market middleware solutions to our joint customers.

Now, as you'd probably expect, we are not only very good partners to one another, but we are also very good customers. Just to give you some examples of this—of the extent to which HP and Oracle really work together—Oracle runs many of their corporate applications on HP technology including order entry, sales online and e-mail. Relatively recently, Oracle reaped a lot of savings and productivity increases when they consolidated 90 separate e-mail systems and 120 databases all around the world to three HP 9000 servers running four databases.

Oracle real application clusters are developed, optimized and tested on HP platforms. HP has been a development platform for Oracle ever since the 64-bit database first came out. HP was a year ahead of anyone else in that endeavor. We think what all this means for customers is that when you have early bits of a product that are actually put into production on an HP platform at Oracle headquarters, those things are stress-tested together for six months before they go into the market. That means a lot of quality assurance for you.

We also have a number of other examples. We've delivered the best range of Linux development and deployment for Oracle. Just a few facts: HP ProLiant systems running Linux have approximately 60 percent of the Oracle 9i RAC installations worldwide. HP is partnered with Oracle to certify every version of the Oracle parallel database on Linux since 1997 and that includes Oracle 9i RAC and Oracle Parallel Server. HP is the only company to publish TPCC Oracle 9i RAC benchmarks on Linux, and is also publishing Itanium on Linux Oracle 9i RAC TPCC numbers.

So, we think there is no other platform partner that has the technical breadth and depth in terms of our work together.

lower acquisition costs

Now, let me start by talking about how we lower acquisition costs. Because a big piece of the best return on information technology starts with: What does it take to acquire technology? We believe first that open, standards-based modular building blocks are the surest way to lower acquisition costs. And that is why you have seen us and you will continue to see us invest heavily to ensure that our product line is the most modular and the most standards-based in the industry. Because we think modularity and openness gives you flexibility and choice.

You'll see us as well stick to an engineering paradigm that banks on heterogeneity and a diverse technology environment. This is a long-standing commitment of HP, this isn't something that we've just come up with recently to try and talk you into buying proprietary technology. It is why you're going to see us continue to invest in being the leading platform provider for Linux, NT and for UNIX platforms. We think all three of those are critical in building out an IT infrastructure.

It's why you'll see us continue to extend our leadership in modular architectures like blades and extend our offering in storage, with Enterprise Virtual Array. It's why you will see us lead in both .Net and J2EE. Because we have heard from customers over and over again that both are important for the environment, and that they need and want to create an infrastructure that deals with both.

It's also why you're going to see us continue to invest very heavily in virtualization. Virtualization in storage. Virtualization in servers. Virtualization across the data center. Because virtualization is what ensures that you get maximum utility as well as flexibility and adaptability out of the resources, the investments and the systems that you have already made.

Now, when we talk about return on information technology, we're not simply talking about the infrastructure, although we are clearly talking about that. But we are also extending this thinking to PCs, to handhelds, to wireless devices, to printing infrastructures as well. Because we believe your entire information technology infrastructure has to be adaptive. We believe that you are focused increasingly on everything from the desktop to the print shop, from the data center to the copy center. When you think about information, you are thinking about information across your enterprise in all of its forms, whether that is paper or digital, and how to mesh those systems together into one seamless digital adaptive infrastructure.

We also have a standards-based building block approach to systems design in engineering. Again, everything from computing to storage. We're focused on providing the best price/performance curve. We think that standards-based modular approaches win every time in efficiency and flexibility. That is why, for example, at the high end of our server line, you see us moving from Himalaya and HP-UX to Itanium. We think our commitment to Itanium is smart and both HP and Intel remain committed to developing the ecosystem to help accelerate the adoption of Itanium. At the low end, we are already the leader in IA32-based servers, our blade servers at the low end are great examples of leadership in modular architectures.

I'm just going to talk about blades for a moment because I think it's an interesting example of modularity. The real advantage to blades for customers is low acquisition cost. We are the first vendor to ship 1,800 blades per month. The No. 1 position with 55 percent market share in the high end of storage. As an example, I talked about our Enterprise Virtual Array product line. And analysts, just to give you a sense, are estimating that modular storage solutions offer a 20 to 30 percent price/performance improvement, over comparable monolithic systems. That 20 to 30 percent price/performance improvement is in the 2003 timeframe.

Now, I want to make a couple of comments about Linux. I know you've heard a lot about Linux from some others this week. Let me just put some facts on the table. HP ships more Linux servers than anyone else in the world. Our Linux business is now a $2 billion business annually, inside HP. We partner with Oracle as well as SAP on Linux. We think we have the lead in Linux for sure in the high-performance technical computing realm.

Importantly, we have the most comprehensive set of service offerings in Linux. Frankly, it is the service offerings that set us apart and when we are competing on Linux opportunities. Frankly, we don't see a company like Dell in the competition at all because of the importance of the service and support offerings.

A commitment to standards means you have to participate in standards bodies. We have been a leader in standards for many, many years. We have about 700 people who work in about 300 different standards organizations around the world. We think we clearly have one of the largest and most effective standards programs in the industry. We are really focusing those standards efforts and the participation in standards around areas like improved compatibility and interoperability because that is what's so critical to giving you the flexibility, adaptability and economic benefit you're looking for.

hp and Oracle

So, what are HP and Oracle doing together to lower acquisition costs? First, our joint development on Itanium is obviously very important. Oracle has designated HP as its platform development partner for Itanium 2 applications. That means that Oracle's first commercial database on the Itanium 2 platforms is going to be available on HP's UNIX and Linux platforms.

We're working together as well with key Oracle 9i database partners and customers to migrate to the next generation Itanium processor family. That's true across Windows .Net, Linux, and HP-UX operating environments. We are already seeing significant performance, CPU, memory, i/o bandwidth, and graphics capability improvements on the Itanium benchmarks that we're running. Saber is one of our joint customers in this area.

We are doing a lot jointly around Linux. Again, we think Linux is important as a way of lowering acquisition costs. As well, on our UNIX platforms we have really pushed the envelope in terms of delivering the industry's best performance benchmarks on Oracle databases, applications and middleware. Most recently on the Oracle 9i RAC. We are now taking all of that experience and expertise and extending it to the Linux platform—where we are first to market with Oracle on Linux.

Today, importantly, Oracle 9i is delivered across our Windows, our UNIX and our Linux platforms. It is an important example of our bet on heterogeneity and our bet that being the best platform provider across a heterogeneous environment is what our customers are looking for. This week we also announced a strategic middleware partnership for J2EE.

We're also committed to [HP] OpenView. OpenView is a critically important software platform for our utility-based computing offerings going forward. We are doing joint development with Oracle around our OpenView systems management platforms. We are very focused on Web services management and integrating Oracle 9i platform technology components into our OpenView platform going forward. The bottom line of this is that we intend to be the best platform for running 9i applications and services, period.

Again, what does all this mean to you? What all this means to you is building around standards-based modular building blocks means we can deliver better price/performance and lower acquisition costs. All this innovation, is not innovation for innovation's sake—not innovation simply for the faster, hotter, better. But innovation to include the return on information technology.

lower operating costs

Now, lowering acquisition costs is really important, but it is not enough. In addition, if we are going to deliver the best return on information technology, we also have to lower your operating costs. In fact, we know that a great deal of the cost envelope in today's IT shop—whether it is a large business or a medium business—is in the management and operations of the entire infrastructure. Our surveys show that up to 70 percent of the total IT budget is spent on the management and operations of IT infrastructure.

We also know that within this envelope a lot of the IT investments that have already been made are underutilized. We've heard from many of our customers that they are really focused on things like storage-utilization improvement projects. What they're trying to do, as an example, is take the aggregate utilization of all of their storage assets from 20 percent today up to 80 percent. By the way, that may explain, in part, why we have much lower growth rates across IT. It's more than cyclical economics. It is customers really focusing on upping the utility, the utilization of investments they have already made—before they're willing to make new ones.

On the other hand, these same customers tell us that when they get their utilization rates up to 80 percent, they believe their storage requirements will grow at 20 to 30 percent going forward. That is true because as you know, there will be more data created in the next three years that has to be stored, managed, used and mined for insight. There will be more data created in the next three years than has been created—by data I mean digital content—in the entire history of mankind up to this point.

Now, in the area of improving manageability, we are betting that next-generation infrastructure management will become one of the most important criteria that you will use when you select IT systems and partners. We are the leader in manageability with OpenView and we intend to expand that lead. I talked a little bit about OpenView as a key platform in our utility data centers going forward, but let me give you a bit more specifics.

Using OpenView's services management capability, our customers have been able to: increase their IT staff productivity by 53 percent; increase their IT staff efficiency by more than 26 percent; reduce their downtime by 31 percent; and realize an average savings for every 100 users of almost $250,000. Manageability, we think, is not limited to servers and storage. We are also making significant investments in the manageability of everything from our PCs to our printing products. We think you're focused on desktop to copy center infrastructure to print shop.

In the area of better utilization, we are investing in a range of virtualization products at the server, storage and data center level. Virtualization—what we mean by that is both flexibility as well as capacity utilization. And our own CIO, Bob Napier, talks about the fact that capacity utilization and planning is now going from art form to science. In the server environment, we have the leading virtualization capability from the low end to the high end, from industry standard servers, to our OpenView software, to HP-UX's award-winning partitioning continuum.

In a storage environment, we have everything from the appliance-based approach to storage virtualization that customers can use to get started very quickly to very ultra-scalable feature-rich environments and implementations. We've achieved network and data center-level virtualization through our utility data center (UDC) offering. UDC is the leading data center-level virtualization set of capabilities. This isn't us talking, this is others talking. Gartner, for example, has estimated that we are 18 months ahead, at least, of both IBM's autonomic computing and Sun's N1.

We are using UDC to run our development environment in our own HP Labs as an example. Just to give you some real numbers of what we and our customers have been able to do: Deployment costs using UDC have been reduced by 30 to 80 percent. Capacity planning costs from 5 to 40 percent, operational cost associated with system repair and security configuration, reduced by 80 to 100 percent and 20 to 30 percent respectively, usage metering costs 5 to 30 percent, costs associated with upgrading and migrating systems from 20 to 40 percent. I threw a lot of numbers at you to indicate that these are real, substantial savings that come from the application of this kind of technology.

Now, let me talk a little bit as well about the costs associated with managing data center environments. Today's server designs enable three times the server density in a typical data center, which means you need one third of the floor space requirements. You get real and valuable real estate savings and real and valuable electricity savings. By the way, our research into UDC also is focused now on dynamic and thermal energy management, so that we can dynamically adjust the cooling levels in a UDC to associate dynamically with the allocation of workload.

Let me talk about services because it's not simply the products, it's also the services that we deliver. I'll start by saying that we do not assume that customers can rip out one type of infrastructure in order to get to a uniform architecture environment. We think there is no return on investment for ripping out technology before it needs to be replaced. All of our services offerings and our software capabilities really are focused on managing heterogeneous environments and taking the complexity out of those heterogeneous environments.

partnering to get it done

Let me talk a little bit about what Oracle and HP are doing together to lower operating costs. Just this week, we announced the formation of a joint financial services competency center in New York City. What we're doing is bringing together the porting, the testing, the migration, capabilities on site to the financial community and the software vendors that support and supply them. And we're going to be with them as they move. In many cases, financial services is moving to Linux fast because they see the price performance and flexibility advantages.

We're going to be there, for example, to help with the migration of other third-party databases over to an Oracle 9i database on an industry-standard HP ProLiant server. So, this center makes it easy and efficient for a business to migrate to HP and Oracle solutions and achieve superior database performance at much lower operating costs.

Now, all of this that I've talked about—return on information technology, lower acquisition costs, lower operating costs, whether that comes from the way we design our products, to the way we manage environments, to our professional services capabilities—fundamentally, all of this is focused on making sure that your investments in IT flex with the requirements of your business. Because fundamentally this next era of technology is not about the hottest box or the killer app. It is about creating a technology foundation that is adaptive, productive and evolves with the business.

So, we are investing in the core capabilities of adaptability into every one of our infrastructure products—whether that's servers, or storage, or software, or networking, or management, or security.

They include, among others, dynamic resource optimization, so that you can flexibly share and assign and deploy existing or new technology resources, based on your operational requirements. It includes automated and intelligent management, so that you can control and sense and initiate responses to changing demands. And those can be based upon established service level agreements or rules. It includes management capabilities and features that are built into all levels of the infrastructure—whether that's at the element level, the system level, application services, or business practice monitoring.

Continuous and secure operations, so that you can maintain and monitor the required availability and security of all levels of the infrastructure. That means, self-healing technologies, it means fault-tolerance and it means high availability architectures.

Now, this isn't just some future thing that we're investing in, these are things we are delivering today. What you see here is the set of capabilities in example of the products and services that have already been engineered with these principles that I'm talking about. Standards-based, modular, focus on manageability, focus on virtualization.

moving forward

Let me close here with where we are going to be focusing on investments going forward.

First, we are really going to focus on consumer connectivity. I talked about simple and rewarding experiences, making products and capabilities work better together. You will see us focus even more heavily, going forward, in consumer connectivity. You'll see us focus even more, going forward, on utility and grid technology. You'll see us continue to focus on new imaging technologies because, again, we believe that customers are focused now on creating content one time—managing it, manipulating it, networking it, distributing it, storing it, and ultimately transforming it into whatever kind of content you want, where and when you want it We think that means, you need to be focused on everything from the desktop to the print shop. Our capabilities and portfolio certainly allow us to participate in the digitization of processes going forward.

You will see us really continue to focus on these important areas. We think they are the place where we can deliver the best return on information technology and simple rewarding customer experiences.

Now, of course, I'm up here to talk about HP, so you would expect me perhaps to be a bit biased. On the other hand, I also want to give you our view of how we stack up against some of our competition. Importantly, we're focused here on how we stack up against this important requirement to provide the best return on information technology. We think we stack up pretty well.

Certainly, I respect Dell, as an example, for what they have been able to achieve as it relates to the very efficient distribution of a product line. But in terms of real technology, real innovation, real services capabilities and real systems, we think we have a real advantage.

I think Sun certainly can be innovative. But when it comes to standards-based approaches, or the services to implement them, or responsiveness to customers, we have an advantage as well.

And in terms of IBM, obviously, much has been written about our attempt to be like IBM. We are not trying to emulate IBM. But we do believe we can and do compete successfully against IBM. I say we don't try and emulate them because we in fact have made very different choices than IBM. Certainly our product portfolio is different in many important respects.

But they are doubling down in businesses where we are not. They are doubling down on high-end business process consulting with their purchase of PWC—we have chosen to partner over and over again. They're doubling down on microprocessor architecture—we are doubling down on a transition to Intel-based standards architectures. They've doubled down on J2EE—we've chosen to be agnostic. They are not a consumer technology player—we are. Fundamentally, we have a very different set of investments and approaches to the marketplace and we believe that freedom of choice, adaptability and the best return on information technology is what you want—where we have an advantage.

We are putting these things in utility and utility computing not with a $10 billion bet but every single day, in everything we do. We have been preparing for this future for a great deal of time. I think among many things that have changed in the last several years, the most important thing that has changed is: Customers now realize that it is not the grits of technology that is most important. What is most important is the return on technology.

As well, what is most important is: Straight talk, practical solutions, the ability to keep making progress without starting over. I don't think the path to the future requires magical binoculars or time machines or any of the other things you may have seen on television lately. I think it requires taking one step at a time. It is a continuum. We are not at a crossroads—we are continuing on a path that we had been on for some time.

Again, for us, we believe it is all around helping lower your acquisition costs, helping lower your operating costs, helping improve your business agility and your business productivity and making sure that you have the freedom and the opportunity to incorporate the best technologies, the best partners, the best solutions, into your infrastructure over time.

That is the strategy that HP is focused on. That is the value we are delivering today in the marketplace—with Oracle, as an example. We hope to be, aim to be, are investing to be, the company that delivers the best return on information technology.

Thanks very much.

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