H-P Will Need to Fight for Its Linux Lead

H-P(HPQ) cranks out more sales from Linux hardware than anybody else -- a prized claim to one of the few hot spots of a sluggish server market.

The big question going forward is whether that lead can hold up amid fierce ankle-biting from Dell (DELL), a powerhouse in commodity servers, and IBM(IBM), with its deep pockets and massive research investment in Linux.

It's a strategic question worth asking given Linux sales jumped 35% in the first quarter, while the overall server market slumped nearly 4%, according to IDC. Faced with tight budgets, more corporate hardware buyers are choosing Linux, the so-called open source operating system that typically runs on Intel (INTC)-based hardware, over the conventional Unix systems running on proprietary hardware from IBM or H-P.

Though the latest results show H-P held the top spot in Linux revenues by a comfortable margin, it's seen its portion of the pie shrink over the last year -- mostly because after its merger with Compaq, it shuttered the H-P line of servers and kept only the Compaq line.

Meanwhile, both Dell and IBM upped their share of the Linux market.

Linux Market Share in Revenues
Company	Q1-2003 % share	Q1-2002 % share	% Change in share
H-P	31.7%	36.2%*	-12.4%
Dell	21.3	19.8	+ 7.6
IBM	15.6	14.8	+ 5.4
Source: IDC, May 2003. * H-P is the combined results of Compaq and Hewlett-Packard in Q1 2002.

To be sure, some analysts caution against reading too much into the latest share numbers. "I think it's too early to say H-P's squeezed by IBM and Dell," says Robert Cihra, an analyst at Fulcrum Global Partners.

Though H-P has been losing share to Dell, that partly reflects the fact that Compaq had a big chunk of the market to lose, having pretty much invented the Intel-based server over a decade ago, he says. "I think H-P has a good shot of really benefiting from Linux because H-P via Compaq is such a big name in Intel servers," Cihra concludes. Fulcrum does no banking.

More than 90% of unit shipments of Linux are based on Intel platforms, according to IDC.