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HP vs. Apple quarters: innovation as engine

The financial reports coming from Apple yesterday made me take a sharp breath, and for all the most impressive reasons. The company derided as dead during the late '90s announced sales of $26 billion over the holiday quarter. Apple's on a run rate to post a $100 million fiscal year in 2011. All that, plus $6 billion in profits on a lineup with few products priced over $4,000, and most less than half that.

TopazTablet HP had a fine quarter in its last report, announced in late November. But the company needed more than 300,000 employees to sell $33 billion and post $8.7 billion in profits. The new CEO Leo Apotheker warned that profits would take a hit on increased R&D at HP. Apple's R&D has been built-in to its profits, at levels HP hasn't seen in a decade. At its flashiest, HP can point to a fall tablet from its Palm labs that could deliver hardware innovation to draw people to the brand. (The Topaz renderings, at left, show a 7-inch device sporting WebOS, innovation HP bought last year, rather than built.)

Why should an HP 3000 customer care about the glowing Q1 from Apple? Perhaps because the innovation at the latter could be a lesson to the former, a vendor most eager to retain the 3000 business that migrates. Apple's new numbers put the company within 25 percent of HP's sales and a $3 higher profit per share. There's something special in any computer vendor's sauce that lets it change the rules, as with the iPad, while it cranks out 71 percent higher sales than one year ago.

But it's the combination of innovation and integration that Apple's COO Tim Cook talked up the most in the company's quarterly analyst call yesterday. It recalled that integration was always an HP 3000 advantage over what the market liked to call open systems. Apple's invented a way to make it pay.

Apple climbed to this peak of its business without any strategy, fabricated or real, to pursue enterprise software or networking or storage products. HP has a much broader strategy than what the press is guessing at this week, speculation on a new push toward those three sectors at Hewlett-Packard. Software especially is high-profit, but HP has a long way to go to earn a significant share in that sector. Apple's software innovation lies in its operating systems, the Unix-based Mac OS and the mobile iOS too. Apple reported profits of $6.43 per share; analysts expected $5.38.

The numbers paint a stark contrast between a company that offers an integrated experience -- think your HP 3000 -- and one that demands the customer do integration, whether on a smartphone, a tablet, or in the desktop and even the datacenter.

Apple has no equivalent of the 3000 or Integrity, but it has built its business from the ground up with its own flavor of Unix on the Macs and laptops. Even though it no longer sells server-sized hardware, it still sells OS X Server software. And by the looks of these numbers, it's outselling HP's Unix, plus OpenVMS, combined, even when you subtract the $10.5 billion in iPhones.

One area where enterprise-grade solutions have soared is in tablets. iPads sold more than 7 million units in those 90 days, up from 4 million in the quarter before the holidays started. Apple acknowledges that it's had "no significant competition" in that space. But its COO Cook said the company believes that its top-of-the industry satisfaction ratings, across desktops, laptops and iOS devices, comes from "an integrated approach that delivers better than the fragmented approach." He referred to single payment system, single app store, and the highest number of mobile devices and computers on the latest version of the OS.

iPhones sold 15.2 million units against a wave of Android phones, including those from Verizon, of course. It might be a number to poke fun at, but since 2007, the company says it's put 160 million iOS devices into the market. This, with just one carrier to support its efforts.

Cook had a cogent comment near the end that will resonate with the readers here. He was comparing the integrate-yourself vs. integrated-by-vendor experience. "I don't know about you, but I don't know very many people who want to be system integrators, like in a corporate enterprise." Among the 3000's skilled integrators, this message will remind them of the days when the complete enterprise package was what you unboxed from Hewlett-Packard.

But Apple's a consumer company, you might retort. Not as exclusively, and less all the time. Apple boasted of the iPad and iPhone's 80 percent testing or adopting rate in the Fortune 100 IT. The enterprise message Apple wants to stress is that it's passing the IT proving points, listing several companies like JP Morgan as wins for its iPad and iPhone.

Finally there's the balance of trade to consider. $2.6 billion, or about 10 percent, of Apple's Q1 sales came from China alone. I know that HP's posting quarters overall of about 20 percent higher revenues, but Apple reported profit numbers to blow away HP's per dollar sold. That's tough to do in the short-margin consumer market; ask HP, which has clawed its way to the top slot in sales for PCs, printers and the like. While every electronics and office store sells ink cartridges and printers, even laptops from HP, Apple has places to introduce its product to everyday businesses as well as consumers; 338 retail stores that generated nearly $4 billion in sales, almost double over last year's holiday quarter. That included 850,000 new Macs, and Apple claims more than half of its retail customers never owned a Mac before buying one.

Perhaps it turns out that it doesn't matter who sells the most -- cobbling together a raft of vendors that coalesced on Android, or Windows -- when you look at innovation and integration as your engines of commerce and profit. HP's customers can only hope that that WebOS tablet coming from HP -- in September, by some internal reports -- shows the company the way back to integrated solutions.

An estimate of HP's yearly budget on R&D runs in the 3 percent range of revenues. That would give HP about $ 2 billion in spending per half to innovate. Apple, with a cash hoard of $59 billion now, is so flush that it has placed a pre-paid order for components greater than HP's 2010 R&D spending: $3.0 billion. By pre-paying, the company not only locks in a profitable pricing, but denies some parts to competitors.

This may be the highest point in Apple's history, but the company sounded confident that it felt no worries about how its products might eliminate each other (think ProLiants vs. Integrity servers, or the HP 9000s against 3000s). The future of the Mac operating system vs. iOS, or the company's laptop business vs. iPad tablets, don't concern a supplier that seeks only a top customer satisfaction rating to succeed. "There's not high walls between these product groups," Cook said. "If this is cannibalization [of our products with the new], it feels pretty good."

One example rang out in the soaring pep talk. If the Macintosh company and the iPad unit were separate companies, Cook said, what would the Mac company build to compete with iPad? The MacBook Air, he said, with instant-on and a light form factor. "We're introducting a lot of people to Apple who didn't know the company," he said. Innovation has a lure that simply being No. 1 in sales looks back at over its shoulder, wondering how long before investments in the whole package -- hardware plus operating environments, all integrated -- catch up to it.