Shortly after completing its acquisition of Compaq Computer, systems giant Hewlett-Packard (HP) made a perplexing decision. To the consternation of many observers, the company announced it was pulling out of two of the hottest markets in software – application servers and web services development.

That seemed to fly in the face of remarks made by HP CEO Carly Fiorina, who had trumpeted the expansion of the company’s software interests as a key driver behind the acquisition. But there is no contradiction, HP executives argue. Rather, the decision merely reflects the company’s desire to focus on areas of the software sector where it can make the greatest impact. And it is only in the closing months of 2002 that the scope of the company’s ambitions in software has become clear.

HP sets the context for those ambitions with a headline number. Post-merger, the company claims that it ranks as the world’s fifth largest software company, behind Microsoft, IBM, Oracle and SAP, with revenues of $5 billion – a bold claim it can only make by rolling in sales of operating systems (it currently supports five of its own and wants to ditch all but two), as well as third-party software that it distributes.

In fact, when HP talks of its software business, it is actually referring to the $2 billion revenue stream that has now been regrouped around three core products: OpenView, its widely installed network and systems management suite; Utility Data Centre (UDC), the embryonic software suite (underpinned by OpenView) that enables data centre staff to manage their server and storage systems as a single virtual pool of resources; and OpenCall, its telecommunications middleware.

In terms of enterprise computing, OpenView is now the main building block for HP’s software strategy. According to Peter Blackmore, head of HP’s enterprise systems group, customers currently spend around $1 billion a year on OpenView software.

Capitalising on its strong pedigree in systems and network management, HP sees major potential in OpenView’s role at the higher level of service management, which enables administrators and, indeed, managers to collate performance data from various devices, platforms, applications and storage systems and related that to how well they are meeting agreed services levels.

At the company’s annual software conference in Lisbon in November, HP unveiled 30 new products, upgrades and enhancements – all related to OpenView and service management. These include new OpenView storage resource management software, which HP, is billing (not uniquely, however) as the industry’s first product to automate the process of ‘provisioning’ storage resources depending on an application’s varying requirements. It also brought more automation to the network monitoring software agents contained within OpenView that help administrators to diagnose and predict potential problems on a network and automate their solution.

However, OpenView is also the focal point for HP’s return to web services, the new applications approach for ‘discovering’, assembling and delivering software modules as a service over the Internet. As web services are deployed, enterprises will need comprehensive management tools to ensure optimal performance and the availability of such services, argues HP.

In Lisbon, it unveiled HP OpenView Web Services Management Engine (WSME) for enabling an enterprise or service provider to provision .NET and J2EE services on a subscription basis, to enforce access control, authorization and authentication, to define and enforce service level agreements, and to offer support for web services security, routing and referral. WSME is not a stand-alone product, but rather a collection of software components, some of which will reside on a partner’s web services platform, others will integrate with HP OpenView products. HP also launched OpenView Smart Plug-ins, new software for managing the performance, availability and response times of web services software platforms, including BEA’s WebLogic Server, IBM’s WebSphere, Microsoft’s .Net and Sun ONE application servers.

“We want to make OpenView the de facto standard for web services management,” says Cesare Capobianco, head of HP Software in Europe. That is no mean undertaking, he says, given the dynamic nature of web services.

The move comes only five months after HP’s decision to halt sales of its Netaction application server and the Web Services Platform (formerly e-Speak). Few analysts were surprised by this decision, despite widespread recognition that HP was the original ‘thought-leader’ in web services after the release of its first e-Speak web services product in 1998.

In the place of those, the company now resells application server and web services development and deployment tools from Microsoft and BEA Systems.

Some analysts think that HP’s web services management strategy is a clever way of hedging its bets on the vying standards of J2EE and .Net. Will Cappelli, an analyst at market researcher Giga Information Group believes, the company’s web services strategy could actually enhance its standing in the market as a result of its agnostic approach.

But in the emerging utility computing market, analysts are more sceptical about HP’s claims that it will receive a significant software review boost from UDC. “It will be very difficult for HP to generate any kind of cross-selling or up-selling between UDC and OpenView,” says analyst Charles Homs at Forrester Research.

One reason for this view is that UDC is essentially a server consolidation package, sold to data centres with 200 servers or more, that pools processing and storage power in a rack controlled by OpenView. Since launching the product in March 2002, HP has established a customer base of 12. That compares with the install base for OpenView of 135,000.

However, OpenView represents only half of the HP software picture. OpenCall accounts for the other $1 billion in annual revenues. The product suite is used by telecoms companies to build and manage their networks, and has had its user base swollen by the addition of Compaq’s telecoms software.

As a result, Capobianco predicts that OpenCall will actually creep ahead of OpenView in revenue terms in 2003, despite that fact that OpenView revenue growth is running at double figures in Europe.

For the present, though, that is not reflected in the company’s overall software sales performance. In the closing quarter of its fiscal year to 31 October, software revenues nose-dived 15% compared to the year-earlier period.

Even taking into consideration the software units it has closed as part of its consolidation, this picture will have to be reversed if HP is truly going to take a place on the software winners’ rostrum.