Giants merge amid IT shockwave

The aftershock of the burst dotcom bubble has hit the IT industry with a vengeance. The 20th anniversary of the IBM PC was marked by a string of layoffs and earnings drops, culminating in the proposed marriage of two of the biggest companies in the business.

On paper the merger of Hewlett Packard (HP) and Compaq, if it gets the regulatory go-ahead, creates IT's biggest company with an annual revenue of $87bn (£58bn). But their combined income is likely to fall after consolidation and IBM will remain top dog, according to analyst IDC.

The new company will be called HP, and will drop the Compaq name. But well known Compaq brands such as iPaq and Proliant are likely to survive.

At the high end, the combined company will focus on the IA-64 processor co-developed by HP and Intel; but both Compaq and HP have a huge installed base using legacy software and processors that will need years of support.

The merger is a symptom of an industry-wide shift in focus from products to services. This is at its clearest in the new Windows XP operating system which, with Microsoft's .Net programme, is part of a strategy to generate continuing income from services sold on the back of the software rather than the software itself.

With XP expected to become the dominant operating system, this has led regulatory authorities in both Europe and the US to ask whether Microsoft is creating an unfair marketplace.

Compaq and HP represent a formidable combination, but few fear they will dominate the services market. IDC says the combined company could not match the know how that IBM can deploy in its Global Services division.

The merger, which is expected to cost 15,000 jobs, came against a backdrop of falling PC sales (6.1 per cent down in the three months up to July) and rising panic.

There were unheard of layoffs by Japanese firms: Toshiba is shedding 17,000 jobs, mostly in Japan; and Hitachi is shedding 14,700. Gateway announced that it is pulling out of Europe. Only Dell, with its famously slick build-to-order system, bucked the trend with sales up 15.2 per cent.

In the UK, the Marconi meltdown highlighted the problems in the telecoms sector, where mobile phone sales have reached near saturation and huge investments in infrastructure have yet to pay off.

Some of this money has gone into swathes of fibre-optic backbone that remains tantalisingly unused, partly because of a slow take-up of broadband connections.

There is also a lack of cheap switches fast enough to cope with optical networks, a position that may be helped by a Motorola breakthrough. But it seems, too, that the industry got carried away with the dotcom hype and underestimated how long end-to-end infrastructure would take to develop.

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