But in a short phone interview with AllThingsD, CEO Meg Whitman and CFO Cathie Lesjak reiterated what they said on a conference call with analysts: Progress has been made, but there’s still a lot of work to be done.

AllThingsD: Meg, let’s talk about the state of the competitive environment. We heard some pretty tough results from Dell last week, and you said on the call that HP was choosing to pass on some deals in order to protect profit margins. Tell me a little more about that.

Whitman: For the long term, profitability remains a focus for us because we can’t afford to let our profitability crater the way Dell did. We have to have the ability to invest in the next generation of PCs and servers and software. It was a tough quarter. We walked away from several deals and lost some share. But it felt like we did the right thing in going after the deals that were the right deals for us. There were also some execution issues. We have to make sure we have the right product for the right customers at the right price point. And particularly at the low end, I think we could do a better job there. But overall I’m reasonably pleased that we made the right decisions in the PC business.

Dell was also making a lot of noise about industry standard servers and how it took some share away from HP. Was it a similar dynamic in servers as it was in PCs?

Whitman: Yeah. We saw what happened to Dell’s earnings. They were down 75 percent. If they were a publicly held company that was trading freely in absence of a buyout number, the stock would be down by 50 percent. It would be ridiculous. We are a publicly held company and we have to invest in the long haul. So we had to choose to walk away from some deals in hyperscale and industry standard servers and PCs that didn’t make sense for the company. I feel like we did the right thing, but there’s always something you can learn from these things.

How do you feel about competing against a privately held Dell versus a publicly held Dell? We saw some indication of how it might behave in the marketplace this quarter. Do you think you’re going to have more of this aggressive pricing behavior and so on?

Whitman: I don’t know exactly how their behavior is going to change. But remember, they’re loading a lot of debt onto the company. And remember how LBOs work. The key is to pay off the debt quickly so you can take the company public again and make a lot of money. We’ll see if they remain as aggressive as they have been. But frankly, this is just a competitive business. We have a lot of competition. We have shown that we can win over time whether it’s against Acer or other manufacturers that we beat out. So if it’s Dell or anyone else, we have to have continuous improvement. We have to invest in the right products. We have to streamline our go-to-market strategy, we have to constantly refine our supply chain and we have to be more agile. And that is just part of being in the business.

Lesjak: And we’ve shown that by being No. 1 in the market for industry standard servers for many, many years now, and we’ve been competing against Dell that entire time.

Cathie, there was a lot of talk on the call about reducing HP’s debt. Give me a look ahead as to what changes when that debt comes down to approaching zero, then what happens?

Lesjak: It frees us up to step back and look at what we want to do with the cash we’re generating, and we want to make sure we’re making the right kind of investments. Those investments may be in buying back shares, or capital expenditures, or research and development to get us on track for the future, or to make small M&A deals. And we want to evaluate these all on a returns basis, both in the near term and in the long term. Because you really need to do both. Some decisions will be based on the near term and with some we’ll be willing to wait a long time for the returns because they’ll be worth it. This is actually one of those moments when we’re going through a lot of product transitions, where the new style of IT products are coming in and the older style products are going away. And what we really want to be able to do, instead of having to manage big transitions, we want to get through them more quickly and that means that you have to invest for the short term and long term.

Whitman: I’ve been saying this a lot lately: You have to plant acorns before you have oak trees. And I think with a lot of the CEO transitions, we didn’t plant enough acorns. And now we’re paying that price.

So part of the impression I got from this quarter and last is that you’re able to beat the Street expectations in part because you’re able to manage your cash flow very tactically. You did well with cash flow for the first half of the year and you said on the call that you don’t expect it to remain as strong in the second half. With the macro environment remaining so weak, I come away thinking that your success is really less about products and lines of business and right now more about managing and taking out costs. Is that fair?

Lesjak: I’d sum it all up to operational excellence. You have to do this all the time. I mean, we’re in a competitive industry. Margins are tight and you have to be maniacally focused on managing your costs every minute, and making sure you’ve got the right product in the right place at the right time. I think this has to be part of the DNA of the company. There’s no moment when you exhale and then you get to spend more. This is about being focused all the time and bringing that discipline to the company. Now in the second half we have some extraordinary cash payments to make around taxes and restructuring payments. As well as some cap-ex that we think will be good investments for the future.

Is there any indication that the macro environment is going to improve? We’re seeing the worst environment for PCs pretty much ever, and IT spending generally isn’t looking so good. Do you sense any improvement in either?

Whitman: From a macroeconomic perspective, which is what drives IT spending across small businesses, medium ones and big enterprises, I think the environment remains about the same. I could be wrong here. We don’t see any improvement coming in Europe and we don’t see an improvement in the U.S. So we’re not counting on those as tailwinds or headwinds, but really more of the same. PCs are a little different. PCs are a subset of personal systems, and as you know that business is growing generally with all the tablets and mobile devices. It’s possible the PC growth rate doesn’t decline as much. It may continue or it may flatten. The objective is that when it starts to flatten out, whose is the company with the best products and the company best-positioned to gain share. We want it to be us.

Lesjak: Taking advantage of the fact that tablets are a growing segment, you really look at HP’s position in tablets, and that will improve significantly in the second half of this year. We’ve got the Slate 7 Android consumer tablet and the Elitepad commercial tablet. Those ramp in the second half, so we’ll have some help on the top line. Not so much in the PC business but personal systems.

Project Moonshot launched during the quarter and there’s a sense that there’s a lot of hope riding on that product. When does it start shipping in earnest for revenue? Is that a 2014 story?

Lesjak: It really ramps in the second half of this year but it’s more of a 2014 story. The real material benefit is 2014 and 2015. IDC has done some projections that the Web and cloud services business will grow about 19 percent in 2016. So that works out to about 8-10 million servers between now and then. So that’s the market that Moonshot is going after.

Whitman: You also have to remember that the ramp is slower with these enterprise products than with the consumer products. Big enterprises need to bring them in and do a proof of concept and see what workloads they want to run on them. And then they have to prove it out. Enterprises move more slowly, but when they move, they move big. But the ramp is slower than the the consumer product.

What’s your biggest priority for the rest of the year now, Meg?

Whitman: We continue with our restructuring program. We said it was going to be a three-year program, and we’re about halfway through that timeline. So there’s more work to do there. And to Cathie’s point, it becomes part of the DNA. This is what we do in the normal course of business. We also have to manage the transition between the new products and the older products. We’d like to accelerate the growth of the new products if we can.

And you said on the call, despite all these market headwinds, you think you can grow next year.

Whitman: We do. We continue to believe that growth is possible next year. You’ve got to remember, we’re doing this amid some of the biggest transitions that have hit the IT industry in a generation. The macro environment is not going to help. The delayed runoff in enterprise services helps this year but hurts next year. But we think we can grow. It depends on a lot of different factors. To be clear, we expect EPS growth in 2014 regardless.

What’s your latest thinking on Autonomy? Is that part of the operation where it should be?

Whitman: I think Robert Youngjohns and his team have done a great job of stabilizing Autonomy. We’ve put in some systems that were lacking and we’ve changed our go-to-market. We’ve invested in R&D jobs there. We had 50 openings for research jobs there recently and I suspect that most of them have been filled by now. So I’m pleased with the progress. That team went through a lot, so I have to give them a shout-out. They had some difficult circumstances. And I’m pleased with what they’re doing. I think you’re going to see Autonomy grow in the next few quarters.

You still having fun, Meg?

It is fun. The senior team feels like they’re making a difference. The turnaround is on schedule. Obviously there are lessons learned every quarter, but we feel good about where we are.

Aneel Bhusri

Few people in Silicon Valley wear as many hats as Aneel Bhusri. Currently known primarily for his role as co-CEO of Workday, the cloud-based human resources software company that floated in an IPO last year, he also maintains an active role as a partner at venture capital firm Greylock Partners. He also finds time to sit on the boards of many interesting startups, including Sumo Logic.

Workday is the company that caused a lot of consternation at the large enterprise software firms. As it raised money and marched toward its IPO, SAP acquired Workday rival SuccessFactors in late 2011, forcing Oracle to make a similar move to acquire Taleo.

AllThingsD caught up with Bhusri at a San Francisco restaurant recently to learn of the latest doings at Workday, and to chat about his view of the fundamental shifts that are rocking the enterprise from so many directions and creating opportunity in the process.

AllThingsD: Aneel, you sit in a position with sort of a unique point of view, being both a CEO of a cloud software company that’s by definition riding one of the fundamental shifts in the enterprise, and also you’re a partner at Greylock, with a history of leading investments in enterprise-focused companies. So, from a high level, how do see the changes happening in the enterprise landscape right now?

Bhusri: When you think about what’s happening in the enterprise, it’s the most disruptive time in 25 years. Apps are moving to the cloud. Arguably, the relational database is going to look like a mainframe in 10 years, as transactions move into in-memory databases and Hadoop and other noSQL databases for Analytics. Storage is going from disk to flash. The legacy enterprise companies aren’t innovating, but they have cash and they have distribution, so they can buy their way into this new generation of innovation. To me, the one big question is whether or not this generation of entrepreneurs sells out to the big guys, or do they go it alone? This is going to be a conundrum for this wave of entrepreneurs. The large companies will put such large valuations in front of you that it’s hard not to sell out. Some will go it alone, and some won’t.

Do the new companies stand a chance? I mean, you’re talking about some pretty formidable companies being attacked.

One big change that has occurred over the last few years, that if you look back to the period from 2000 to 2006, with the exception of Salesforce.com, everyone was trying to compete at the edges with the big guys. No one wanted to take them head-on. No one wanted to take on Oracle or SAP or EMC or any of these guys, because they knew they would lose. Then, with the explosion of new technologies like the cloud, like Hadoop, like flash memory, you’re seeing a new set of companies that are not trying to compete at the edges, but are going right for the jugular. We haven’t seen these in 15 years or so, when new companies are trying to disrupt the established players rather than just coexist. So the big companies have not been threatened for a long time. Salesforce is going right after Siebel, a.k.a. Oracle. Palo Alto Networks is going right after Checkpoint Systems and Cisco. Pure Storage is going right after EMC and Hewlett-Packard. This is why the enterprise space is doing well: Because the companies that are becoming public are going after big markets.

To follow your example, then, is Workday going for the jugular versus SAP and Oracle?

We have the advantage in product, and they have the advantage of distribution. And that race is going on in every key segment: Distribution channels versus innovation. Oracle and SAP have the advantage of distribution. It’s not about money. We have a lot of money in the bank. It’s more about investing it smartly and building out the distribution to bring out our market-leading product faster than they can build a market-leading product using their distribution.

So how is business at Workday generally? You recently landed HP as your biggest customer. Have you landed anyone else like that?

There’s nothing slowing down about the shift to the cloud. I don’t see anything on the horizon that is changing that. But, yes, we’ve landed a big customer and, no, I’m not allowed to talk about it yet.

Did having HP name you as a vendor help bring in more business?

Anytime you land a big company like that, it gives people more comfort that the cloud is real. It’s hard to measure. But it helps other large companies to see that another one of their peers is shifting an application to the cloud.

So, what are your priorities at Workday this year?

I would consider this to be a really key transitional year for Workday. If we’re really successful, three or four years down the road we’ll look and see this was the year where we put the foundation in place. If you look back historically, we were a one-product company and in only one geography, and that was the human resources product in the U.S. In the next 18 months, we’re going multi-product and multi-geography. We’re expanding into Europe, and the financial products are doing really well. We will continue work on the financial product, but this is the beauty of the cloud: With every update, we add more functionality, and we land more customers. And in 18 months, we become a company that is both global and has multiple products, then I think we’ll have Oracle and SAP back on their heels for the next five to seven years. As for HR in the U.S., the other guys have a really long way to go to catch up to us. We have to build out a global distribution channel over the next 24 months. And as we build that channel, we’ll also be building financials, which is a market that’s two to three times the size of the HR market. What comes out the other end is the next large enterprise ERP company.

Is there a third leg to the stool after financials?

Analytics. We announced a big data product, and it doesn’t go into general availability until the second half of the year. What I did not realize as much as I do now is that there are companies that have a variety of different data that they want to co-mingle from a lot of different sources. Also, they’re looking for a home for third-party data. Most production systems don’t want you to bring third-party data into them. They want a way to import all of the third-party data they had from either HR or financial. And our big-data product is a way to help them do that, and I expect a pretty strong attach rate with that. So I think that is the third leg, right there. Take those together, and you’re looking at a pretty big market.

But while the gaming hardware was notably absent, consumers did get a glimpse of some key upcoming game titles, as well as Sony’s plans to offer cloud gaming, more integration with PS Vita, and even some concept games that use Sony’s motion-sensor device, the Move.

AllThingsD sat down with Jack Tretton, the president and CEO of Sony Computer Entertainment of America, to discuss the future of the gaming console — as well as why Sony didn’t show theirs last night — and Sony’s strategy of “doubling down” on its hardcore gaming audience.

I think it was Sony’s Andrew House who said right off the bat that the living room is no longer the focal point of gaming. Can you further explain this idea and how it relates to the future of the console?

My interpretation is that the living room used to be the only place that gaming lived. Now it’s the primary place, but it’s not the exclusive place. So I still think that sitting on the couch in front of the TV with a powerful console like PlayStation is the nerve center of the experience, but it doesn’t end there — it extends out into the world, 24 hours a day, seven days a week, on smartphones and tablets and dedicated devices like Vita. It’s a little bit scary if you’re a core gamer, because you feel like if you go to sleep, you might miss something.

A good portion of tonight’s event was on game titles, not as much on cloud streaming, mobile or entertainment. Is Sony PlayStation doubling down on its position with hard-core gamers?

Well, I think the console has evolved beyond strictly gaming devices. People expect multimedia capabilities, and that’s certainly a given. But what we’re all about, in our DNA, is the gaming and the gamers. You buy [PlayStation] because you’re a gamer and you enjoy playing games, and you use it for other purposes, but we’re first and foremost about that core gamer that eats, sleeps and drinks the gaming.

I think there are more gamers today than there have been ever before, and the core is really strong, and loyal.

But at the same time, at least in the U.S. market, Microsoft has had the best-selling console for many months in a row now, and they’ve taken a media-heavy approach. What’s your thought on their strategy?

We look at the market in worldwide terms, and every market is extremely important to us. The facts are, we debuted the PlayStation 3 at $599, which was an extremely steep price barrier for a lot of consumers. And we debuted a year after Microsoft, but on a worldwide basis, we’ve sold the same, if not more, devices. I think we’re at 77 million sold right now — it’s basically splitting hairs. Despite all that, our message has been extremely well-received around the world.

Plus, if you look at multimedia services, we’re the No. 1 streaming device when it comes to Netflix, not Xbox. They’re trying to — I don’t really know what they’re trying to do. I’d rather not comment on their strategy. But we’re trying to say we’re all about the gamers and, by the way, there’s multimedia out there. I think the people who tuned in to see this live streaming event, from all around the world, were watching to see the gaming.

Will the new console cost $599 to start?

I certainly hope not. I think we’re very proud of what we delivered with the PlayStation 3 in terms of technology, and that we were able to enhance the features while still reducing the price to $249. But I think our goal with this is to debut at a more consumer-friendly price. But we haven’t made any final decisions about what the price will be at launch.

Why didn’t we see the new console today?

I guess when I think about the console, you open it up, you look at it, you certainly look at it when you insert a disc, but for most people, it’s behind a cabinet or on a shelf somewhere and you spend all your time looking at the screen. And we wanted to show people the screen. There will be multiple opportunities to share the look of the console between now and the launch. We just didn’t choose this first event as the time to show it.

But is it ready?

I mean, we’re certainly capable of showing playable game content, but we don’t have a mass-production box that we can bring out and pull out. That’s still in development in terms of final specs and design.

It wasn’t a big surprise today that there were some cloud-gaming announcements, given Sony’s acquisition of Gaikai. But cloud gaming, especially when it comes to graphics-heavy stuff, can suffer some technical difficulties. How does Sony plan to manage that?

I think that all credit goes to Gaikai, and all credit goes to Sony for recognizing the strength of Gaikai and acquiring them. We’ve cerainly had cloud storage, but Gaikai seemed to be well ahead of anybody else that we saw, and were doing things we didn’t think were possible. So I think the acquisition allows us to do things that are more in line with consumer expectations; allow them to play the games they expect.

And PS4 can play those games. I’ve certainly seen it done that every game we’ve ever published, up through PS3, is playable with no latency. I don’t know if we’re saying we’re at that stage yet, but we think we can get there in the near term.

Now that the tech investment buzz cycle has pivoted in an enterprise-friendly direction, I thought it was time to check in with Levine, a partner at venture capital firm Andreessen Horowitz.

I talked to him late last year on the heels of a busy summer. In July, he led AH’s stunning $100 million investment in GitHub, then followed it up with an $11.2 million investment in Meteor, and in October, an investment in Udacity, an education startup.

Perhaps hinting that 2013 will be as busy as 2012, last week he led a $30 million investment in Data Gravity and joined its board of directors.

We had a pretty long conversation. His fundamental argument about why smart enterprise-focused startups make for good investment opportunities comes down to one simple notion: Pretty much everything that’s been running in the corporate IT environment — things on which companies will spend more than $3 trillion this year according to some educated estimates — is ripe for a significant disruption that will make it less costly to own and operatee, more efficient, less prone to failure and simpler to use. That means a lot of large companies who have a lot of skin in the game maintaining the status quo are likely to have their worlds seriously rocked in the coming years.

Sound like fun? It’s exactly what AH hired him for two years ago.

Here are some highlights from the first half of our conversation. I’ll post the second half soon.

AllThingsD: Peter, the thing I keep hearing people say these days is there’s this feeling that the venture community is sort of “waking up” to the enterprise, or that it’s suddenly cool. You, on the other hand, have been all about the enterprise from the start. What do you think about that?

Levine: Yeah, it’s a really good time to be investing in the enterprise. We see so many interesting companies in the space right now. Just for context, it’s interesting that you comment on the idea that people are just waking up to the enterprise, and that’s exactly how I have felt for awhile, that there’s this renaissance in enterprise computing. There’s an awakening up and down the stack for new products that are going to service the enterprise.

Like what?

In my mind there are three categories that are all being disrupted at once. Cloud infrastructure: All the underpinnings of it all — storage, security networking and virtualization — would all fit there. At the next layer there’s software-as-a-service, though now there’s almost anything as a service. That’s transforming all the on-premise applications. At the highest level, mobile is transforming how people are consuming information and data and applications they are using. … In the cloud infrastructure you can see someone like a Cisco as the old guard, or even server vendors to some extent, and the new folks being VMWare, which totally upended the server world. For networking, you might see Nicira and other companies in the software-defined networking space as examples. It’s early days in that. There’s a big shift in software driving new network infrastructure rather than hardware and components driving the network infrastructure. In the same way, a VMWare can turn a server into an infinite number of servers. With SDN, the hardware component, it may even be a server in this case, with software basically creating a virtual network.

I get the point on Software-Defined Networking, though lately Cisco would argue, and not entirely without merit, that it has some of its own SDN chops. But I think your point is bigger about incumbent companies in the enterprise.

Exactly. The point isn’t whether Cisco has the technical chops to go do SDN, and it’s not whether they see this trend or don’t see it. They see it as well as everyone else. The problem is that from a business model standpoint, it’s really hard to go from one side of the pillar to the other. We’re talking about the commoditzation of components that very strongly eat into revenue streams and how revenue is recognized. That may sound like a minor accounting rule. But it is huge. With software, if I have to prorate my revenue for three years over the course of a sales engagement, rather than book it all up front as you do with a hardware sale, it dramatically shifts the sales model, the revenue model, the go-to-market model. It’s not only about the technology. For someone like a Cisco, they may very well have the technology chops, but there it’s about commoditizing the very revenue stream you rely on for your existence.

So I presume there are more examples like this in other parts of the stack?

Of course. There’s software-as-a-service on one side. There’s SAP, which has a long history of running big on-premise apps. And then you go to the other side. The whole transformation began with Salesforce.com. Ten years ago, Salesforce.com was an outlier. It was heresy to even think about putting precious customer data outside your firewall. I think that Salesforce really paved the way for the entire software-as-a-service category. And now every part of that stack — from business intelligence to analytics, to performance management to CIO tools — are all moving from the on-premise equivalent to off-premise, SaaS-based equivalents. Every major on-premise vendor has an equivalent off-premise counterpart.

And yet here you have the same thing as in your first example: SAP and Oracle are buying SaaS companies and talking about how they, too, are running in the cloud.

It’s true. They can acquire their way in. They have a lot of money. However, I’ve worked at large companies, and when you’re in there, you have this revenue base, and have a history defining how you’ve done things for the past 20 years, from sales to engineering to architecture. So even at the executive level, you can have every intention to transform the business and move into the new cloud architectures and so on, as the strategy trickles down through the organization it becomes difficult to implement because of the way people are managed and it becomes very hard to swallow some of these acquisitions and have them flourish. Basically the old guard suffocates the new innovation by not letting it flourish.

So we talked about software-defined networks, and there was last year a lot of attention on new companies there. Where’s the next area of attention?

Three years ago we invested in Nicira under the assumption that this was coming. There are still opportunities there, but the nature of this business is such that when a successful outcome like that happens, there’s a flurry of activity, where the venture community tends to pile on the next 40 companies doing similar things. But there’s other areas. Storage is a really interesting area right now. If you look at computing being commoditized by VMware, and now networking being commoditized by SDN, storage is the most expensive component at that layer. And it has been dominated by the same architecture and the same companies — EMC, NetApp, Hitachi, IBM — for at least 20 years. Same architecture, same companies. So I do believe there is an opportunity for companies in that layer to be disaggregated. Now, people have been talking about that for a long time. I was one of the very early employees at a compay called Veritas in the 1990s. So it’s a space that I have an affinity for. The interesting part of that market is that people have talked about the commoditization of storage since then. That said, it’s actually pretty interesting.

So what is startup vs. incumbent dynamic in storage?

In the past there was only the enterprise data center. And a startup would have to go head to head against an established startup in the data center. Whatever you’re selling, storage or networking or security, you’re going head to head with the incumbent players. And for a startup it is incredibly different. There’s questions about service and support and features, and there’s a CIO who says, well you never get fired for buying X or Y. So what’s happened now — and it just became clear when I talked with a friend about this recently — is that whole cloud architectures that are being set up in parallel to enterprise data centers, maybe inside or outside a company, or whether it’s Salesforce or Facebook, or Zynga or Amazon, those are the companies that are very sensitive to price, anti-incumbent, they’re adaptable to letting startups come in. So where a lot of new startups are starting to get traction is with these new cloud architectures, and it might be within a corporate infrastructure, and where there’s green field opportunity. What you find in these environments is a lot of commoditization at every part of the cloud infrastructure layer — whether it’s compute, networking, security or storage — they’ve all been greatly commoditized as compared to the traditional data center. That parallel universe has given startups the ability to make an inroad by gaining traction and relevance. And those companies are the lead users. The cloud infrastructure has dragged the crusty old data center to innovate in a new way.

So who are the companies you’re starting to see and invest in doing that disruptive work in storage?

We recently did an investment in a company called Convergent-io, which is building a storage networking switch that will leverage commodity disks at performance and reliability rates that are equal to if not better than current storage arrays. So that is the whole magic. You have to get equal or better performance and reliability. The whole idea of using flash is really interesting, but that’s essentially using the same architecture. What I’m sort of trying to leapfrog in the storage space, is to ask how storage can become commoditized on the back of commodity components.

You’re not a believer in the idea that flash can save the world, at least inside the data center?

Flash is expensive, but it’s still a storage array that sits there with a lot of expensive stuff around it. The flash stuff is linear and sequential versus the way storage array has tended to work in the past. My belief is that fundamentally there won’t be a storage array anymore. Now, that’s a big leap. But in the same way, things will change up where software will just define the storage layer. I’m talking commodity flash and disk as being the basis for the infrastructure.

In the 15 months since that conversation, SAP has been on the move. HANA is not only done, but all of SAP’s primary applications are running on it. SAP has pivoted from running all of its applications in an old-school on-premise fashion to offering them both in the cloud and on premises, or on a mixed hybrid-cloud basis.

It also made a significant acquisition of SuccessFactors, the cloud-based human capital management (HCM) company. SuccessFactors is now a significant business unit within SAP, and includes all of its previous HCM software assets, and it competes with that market’s fast-moving cloud player, Workday.

Last week, SAP hosted a global launch event to announce that the three-year effort to convert its entire suite of business applications to the cloud — and to the HANA architecture — was complete. It also provided me an opportunity to catch up with McDermott in New York. Here’s a sample of our conversation:

AllThingsD: Bill, the last time we talked about HANA, you hadn’t quite moved all your primary applications over to it. It’s not exactly a huge piece of your business yet, but let’s start there. How is HANA coming along?

McDermott: We have 1,000 customers on it now, so it’s growing really fast. The last update we gave, we indicated that we think it could be a half-billion U.S.-dollar business, which would make it the fastest-growing software product in the history of the world. So it’s big.

The last time we talked, you hadn’t quite moved all your applications over to HANA. The big one that was missing was the Enterprise Resource Planning piece. Can I assume that part of the news today is about that process being completed?

That’s exactly it. The big news today is about the whole SAP suite being moved over to HANA. All the things that the business suite does — how you manage your supply chain and manfacture your products and get them to market, how you manage your people, how you manage your customer relationships, everything around you in that whole end-to-end value chain — runs in what we call the business suite. And we go to market with that suite in 24 industries, small, medium and large, all over the world. Now that whole suite runs on HANA.

For the benefit of people who struggle with the idea of what the software actually does, can you give me a good example of who uses it, and how?

We work with this company HSE24, it’s like a QVC in Europe. They are selling product on television, there’s a meter at the lower right-hand corner of the screen telling you how many of that item are left. That’s run on SAP software. When you call in to the call center, they already know from the sensors on the social networks, via HANA, what you’re likely to want. And then they can also do the upsell and the cross-sell. One of the customers that is going to be featured today is John Deere. We’ll talk about how they can, based on usage history and patterns, provide preventative maintenance on the things that will need it the most.

There’s obviously more to it than simply running existing processes faster and cheaper and more efficiently, right?

The wild part about all this is sort of like this: No one could have predicted that Disney would become the Disney we know today when Walt drew a picture of a mouse. What you have is the limitless potential. CEOs have the ability to rethink business models, based on having the speed and the insight and the simplicity to truly change how they run their companies and transform industries. You and I fly too much, and sometimes flights get canceled. It happens. If I have to get out of Moscow and get back to New York, the airline can charge me more. If my original flight is canceled, and I’m on the line with three other people, you can get more money out of me. Dynamic real-time pricing can transform the airline industry.

Is this all the result of intelligence you’ve brought from the applications themselves, that are getting a new benefit from being run in-memory on HANA?

There are two ways to look at it. The in-memory architecture makes it fast, and simplifies it. The application makes it so smart. You’re combining transactions and analytics. And you’re also doing things we like to call “extreme applications.” You may be a big consumer products company, and you have trade promotions that go to different stores in different geographies. If you ask them how it’s going at a particular store in Brazil, they will have a hard time answering unless they’re using HANA, because it captures all the transaction data. They know exactly who’s buying what, and using which promotion or deal.

Talk to me about the competitive landscape. Oracle CEO Larry Ellison loves to lob verbal grenades at you from time to time. Care to lob one back?

In the old days, the answer would have been yes. What’s happened is that we take it a compliment when people try to spread fear, uncertainty and doubt. It’s a sign they’re worried. But they don’t have to be, because we’re open, and our most important mission is to make customers happy and fulfill their ambitions. We’re fully cooperative with Oracle, with IBM and with Microsoft. So, anything that a customer chooses to do with one of them, they can continue to do it, and we are highly supportive of that.

Obviously, SAP’s applications can now run optionally in the cloud or in a mixed environment. But the pure-play cloud companies like Salesforce.com and Workday are certainly showing some strength. What sort of competitive threat are you seeing from them?

I think SAP has responded in the cloud. SAP Cloud will take care of your customers on-premise or on-demand. We announced SAP Customer 360, and it runs on HANA. So it’s real-time, it’s predictive, and it’s in memory. If you want to buy it on a public cloud on a subscription basis like Salesforce, we now have it. Once people realize it’s running on HANA, we’re going to have an advantage. Salesforce has done a good job of building a large cloud company, but they have done it on an old architecture. You can’t do real-time analytics on the Saleforce.com platform. That’s a big Achilles’ heel. On talent, Workday is a good company, they built a good HCM solution. We bought SuccessFactors, and then we took all the assets of SAP’s existing HCM application and put them under SuccessFactors. So now, as it relates to people, wait until you see, in June, the list of companies who are running SuccessFactors. Workday had a great opportunity to go in where there was no competition, and we didn’t have a response. We had HCM, but it was all on-premise. The market wanted talent in the cloud. Now they are going against us, and there’s a lot of competition.

Then there’s Google Apps, the suite of Web-based office applications that compete directly with Microsoft’s Office. More companies have embraced Google’s approach, and Microsoft earlier this year launched a competitive response called SkyDrive. All this made the end of the year seem a good time to check in with Amit Singh, a Google VP and head of its Enterprise unit. My first question was one I’ve asked repeatedly about Google Apps in one way or another for the last few years.

AllThingsD: So, was 2012 the year that Google Apps went mainstream in the Enterprise?

Singh: I’ll give you an update on customers and the product. This was the year where we broke the barrier and got large-scale customer adoption. There are others we haven’t announced, and you’ll be surprised by some of them. But Roche and BBVA — you wouldn’t consider pharma or banking customers to be early adopters. We also announced some large retailer customers, like Dillards, Kohl’s and Office Depot, and in the quarter before we announced them, we announced Costco. So these are big customers.

What’s making them cross the Rubicon and switch?

Its a combination of things. In this industry, once you see others going for it, you do it. However, there have been some confidence-building measures. People ask if you can deliver cloud applications at scale better than they can internally. The answer is yes. Is your security comparable to theirs? Yes. Can you comply with the regulatory environment they face? Last year, the answer was no. Now we’re able to do that at scale. It’s a combination of things. People are seeing others switch. We’re adding features. We’re building confidence. The more our customers get out there, the better people feel about it. People don’t listen to us. They listen to our customers. … Then we started Drive. Then we launched Google’s Cloud Platform, which was a big inititiative to open up our infrastructure for developers everywhere. The largest companies in the world are seeing what they can build using Google’s scale. And we launched the next generation of Chromebooks. Each of the things we’ve done, the investments we’ve made have given people reasons to take a serious look at us in a ways they might not have done before.

How do you view the competitive landscape now? Microsoft certainly responded with SkyDrive and a new version of Office. What threat do these represent to your plans?

Whether we like it or not, there’s massive change going on in the Enterprise. We started doing Gmail and Chat for your domain in 2005, when it really wasn’t very sexy. We extended and wrapped it with enterprise controls. We’ve since built up a lot of enterprise processes and support. Microsoft bought Yammer, and it’s a total consumerization type of play. Users adopt technology and then they bring it to the Enterprise, whether it’s welcome or not. A lot more things wil be built on things like Amazon Web Services, or hopefully more on Google, because it’s a lot faster and cheaper and better than what they can get internally from their own data centers. And that’s only going to accelerate. Regarding competitors, Microsoft has seen its market share decline somewhat. Enterprise is the place where they are holding on. People are showing up at the office and bringing their own devices and expecting their employers to support them. And with Windows RT, there is no backward compatibility with all the apps. That’s the first time that has happened in Windows. The Windows 8 move, they have done what they need to do, but it’s fairly disruptive. SkyDrive is coming. SharePoint needs to integrate with Yammer. So, change is coming whether you like it or not. We think we offer an alternative that is pure and proven.

What do you have that they don’t?

We used to compete on just cost. But that’s changed. On the cloud, over time you shouldn’t have to charge more money to get cloud services. Overall, your costs should go down. We’ve been at the $50 price point for apps for some time, while increasing the depth and breadth of our solution. On the other hand, the way they are incenting their customers to move is by charging them more. That is their strategy, and they are entitled to do what they want. Devices are going to proliferate, and Web services are now being delivered at scale. Then the question becomes whether you want to build around the desktop, or whether you want to build around Web services and devices being connected together. And, frankly, they don’t have the credibility to deliver Web services at scale. That’s just not what they do. They learn, hopefully, over time.

And yet you have to coexist with the desktop Office Client when the time comes, right? How is that now?

In the last year, if you look at the depth of where we’ve gone with Docs, both in the core features and in the desktop fidelity, we’ve made tremendous progress. Our goal is to get to the 90 percent of users who don’t need to have the most advanced features of Office. Sheets does tables graphing, etc., out of the box. In Q3, if you import from Excel into Sheets, you won’t be able to tell the difference in Sheets. We know the gaps between our features and theirs. We’re improving them week by week. We’re going to get to the the 90 percent. If you need the last 10 percent, you’ll want to use the desktop. The next thing is the import from PowerPoint to Slides. That’s where QuickOffice is going to help us a lot.

Talk a bit about the state of the ecosystem. We saw, for example, Backupify embracing a role as the backup for Google Apps users recently. I imagine there must be many secondary and ancillary services that operate within and around Google Apps. How is that evolving?

The way you look at a successful business is its ecosystem. For us at Google, it’s all about the ecosystem and developers. We have Android developers working on Enterprise applications now. The Android ecosystem for Enterprise is getting better, now that we’ve added things like encryption, and the same is happening on Chrome. On Apps, the top enterprise marketplace apps have all been acquired by larger companies. The top apps are getting a lof of distribution through Google. As Google Apps gets wider and stronger, the ecosystem is getting strong, as people want to extend its capabilitles. There’s Backupify; there’s Cloud Log for audits. There’s Smartsheet. We’re seeing the natural evolution, but you can expect us to spend more time cultivating that in the coming year. There’s also a strong ecosystem around implementation and support of Google Apps. We’ve gone from 3,000 partners to 6,000 in one year. So now there’s this massive distribution.

So what’s the big theme for 2013?

“Work the way you live.” Consumerization is here. It’s time to really embrace it. We’re doubling down on the Enterprise. It’s an increasingly important part of Google, and a place where we plan to invest and to support our customers.

Weighing in at 7.5 pounds, it is an ambitious, jaw-dropping effort helmed by former Time, Life and National Geographic photographer Rick Smolan — he of the “Day in the Life” series of photography books, as well as “America at Home,” “America 24/7” and “24 Hours in Cyberspace.” Smolan’s new book attempts to demystify — largely successfully — the nebulous concept: What is big data?

It was exactly the question that Smolan was asking when he first hit upon the idea for the book while attending the D9 conference in 2011. Hearing the phrase “big data” uttered in so many conversations, he had no idea what it meant. Asking at first yielded unclear answers, yet he persisted, eventually landing on the idea.

Today, the book is landing on the desks of world leaders, dignitaries and other notable people around the world: Among those on the list: President Obama, the Dalai Lama, Pope Benedict XVI and Chinese Premier Wen Jiabao, and also Twitter CEO Jack Dorsey; Daniel Tunkelang, chief data scientist at LinkedIn; and actor Robin Williams. Among the images they’ll see upon opening it is the blended image of 1,400 different shots of New York’s Times Square taken across 15 hours. Big data is about people: What they do, where they go, who they know and so on. The stories about how data, once harnessed, solves problems and in some ways creates new ones, is its overarching theme.

There’s also a smartphone app for iPhone and Android that is launching today. It’s an interactive viewer app from Aurasma that aims to bring the book’s content to life, accessing videos and animations by pointing the camera at images on certain pages flagged within the book. On top of that, there’s a $2.99 iPad app that enables readers to take a deeper dive with some of the stories, using videos, charts and animated infographics.

I talked with Smolan about the book yesterday by phone, after spending more than a few hours perusing an advance copy over the weekend. Here’s a little of what we talked about:

AllThingsD: So where did you get the idea for a book on big data? It’s a phrase that doesn’t necessarily jump out at me as part of the title of a bestseller.

Smolan: I was at D: All Things Digital in 2011, and I kept hearing the phrase big data, and I kept asking people what it meant, because I felt stupid and because it sounded like one of those marketing phrases. The first person I talked to said, “It’s so much information it won’t sit on your personal computer.” Well, that wasn’t very interesting. The next one said, “It’s taking information from one place and overlapping it with information from another, and finding these patterns.” And that wasn’t interesting, either. The third person said, “It’s like watching the planet grow a nervous system.” And that sounded interesting. Basically, we’re seeding the world with low-cost sensors, and we’ve all become sensors with our cellphones. And instead of doing random samplings, we can almost survey every single person on the planet in real time — where they are, what they’re doing, how fast they’re going, what they’re spending money on. The ability to gather that information, process it, visualize it and then respond to it while it’s still happening is something we’ve never had the ability to do before.

Some of the material in the book I’m familiar with. The first image I saw when I opened it was one I recognized from MIT’s Sensable City Lab, and I also recognize big data anecdotes from IBM, like the one where they harnessed medical data to detect infections in premature infants. In this way, it seems it’s a little different from your previous books.

It’s sort of a combination of original photography and curation. I think that putting all the information in one place and weaving it together, with these wonderful essays that I think are just as strong as the pictures. I’ve been getting notes from people like Marissa Mayer and Jack Dorsey saying that this is the first time they’ve had something that helps them explain how important this is. Amazon called last week to say they sold out of copies of the book on the first day and people were ordering 50 or 60 copies at a time, which has never happened ever to any book I’ve done in 25 years. They were dumbfounded. The hard thing about the book world is that you never know whether 10 people or a million people will find it interesting. A lot of people have never heard about big data and the ones who have, have a lot of trouble explaining it to other people. So I’m hoping that this will become the thing the people who know give to their parents or their family as a way of saying “this is why what I do is important.”

Obviously you’ve spent a lot of time thinking about all this during the last year, and you’ve probably been asked a million times if you think this is all creepy or intrusive in some way. Is it?

I’m an optimist. Every new tool can be used for good or evil. The whole point of doing this project is to start a conversation about it all. The people who are thinking most about big data right now are corporations and governments. I’d like to broaden the conversation and I hope the book makes some kind of contribution. I’m worried that the only ones profiting from it right now are corporations. As individuals we have very little say about how our data is being used. I’m not worried about the privacy implications of it so much. But it seems to me that as an individual, if I’m the one generating the data, I should have some kind of say in how it’s going to be used.

Did you have a particular favorite anecdote or photograph?

I just came back from Australia, and they have this expression down there: Gobsmacked. I think a lot of the pictures in the book convey that feeling. There are some that are funny, some that are just thought-provoking. There’s the case of the Environmental Systems Research Institute (ESRI) that creates these incredibly detailed satellite maps for governments. They found there were villages in Nigeria, which has the highest rate of polio resurgence in the world. There are villages there that have never shown up on any map, no one in the government knew they were there. ESRI can recognize the shape of huts and pathways. The Gates Foundation has been trying to eradicate polio in places like Nigeria, and they have a very big effort there. They took the satellite maps and handed out 10,000 GPS-enabled cellphones to polio workers. They could see where they were in real time, and make sure they got to each of the houses. We spent a week travelling with the polio workers watching them do their work. I think the idea of using satellites to help cure polio is a pretty interesting concept.

You have a lot of examples where understanding of big data is saving lives, which I think will surprise some people who don’t initially see it as having direct benefits for real people. What are some others?

There’s the case of the recent earthquake in Japan. I heard a fascinating story by Kai Ryssdal on Marketplace Radio about how 43 seconds before the shaking actually began, all the bullet trains and factories in Japan stopped running. It was all automated. That country spent 15 years and half a billion dollars to build the system that automated all of this. Obviously the devastation was horrible, but the system worked. Then I read about a group of engineers in Palo Alto that had created a program called Quake Catcher that uses the accelerometer in your laptop. Its the part in your laptop that detects when it’s been dropped and quickly moves the head on the drive drive before it smashes to the ground. It uses the same acceleromter to detect earthquakes. If it senses vibration and sees the same pattern over a 30-mile area, that’s an earthquake. On one side of the page, you have this huge half-billion dollar project, hardwired, dedicated parts that have to be replaced, lots of engineering time. And on the other you have this free ubiquitous crowdsourced mobile sensor system that has no profit motivation, and no cost. I love it. It’s a delightful story of people doing this to help each other. And the data just underpins it all.

Is there anything in the book that has some practical, everyday value?

Yes. There’s the example of Shwetak Patel, he’s a MacArthur Fellow and teaches at the University of Washington. He found a way to detect every device in the home and measure how much power it’s using. Every month we get a bill from the power company and we just pay it, we don’t even ask what it’s about. He’s created a sensor that can be plugged in anywhere in the house that detects the unique digital signature of everything that’s drawing power in the house — your computer, your toaster oven, whatever. I asked him if there was anything he had learned that would surprise the average American. He said it’s the DVR. The average American spends 11 percent of their monthly electrical bill on their DVR. It was designed in such a way that the hard drive never spins down, so even if you record only one show a week, it’s running the entire time and consuming power. So instead of drilling another oil well or burning more coal you could reduce America’s power bill by 5 percent just be redesigning the DVR. So many stories have this sense of delight: The data has been there all along, it’s just that no one was paying attention to it.

You’ve also done iPad and smartphone apps to enhance the book. What can you tell me about that?

I don’t know that anyone has ever done this with a book like this before, but there’s a free app you can download to your smartphone. Some of the pictures in the book have this little yellow key symbol in the corner. When you have the app, and you point the app at the page, it launches the page in the app. There are videos, there are Ted Talks. I think there are 22 or 23 videos. There’s an animated version of a story about pizza delivery guys in Midtown Manhattan. There’s also an iPad app, the profits from which go to charity: water, which is a nonprofit that’s working on bringing safe drinking water to people in developing nations. My goal here is to keep people turning the pages.

What do you want people to be left with in the end?

There’s an essay toward the back of the book called “Data Driven” by Jonathan Harris that has a really interesting thought. It’s that there is a relatively small group of people who are living in cities like San Francisco and New York, are mainly between the ages of 22 and 35, who are having an outsized effect on the rest of the human species. The kinds of societal changes that used to be the result of wars and famines are being brought about through software. …What I like about the essay is that EMC, which funded the book, had no right of review. I told them that this book wasn’t going to be all about cheerleading big data as the solution to all our problems. I said it was also going to sound a cautionary note because I think that right now governments and corporations are the ones having conversations about big data and that the average person isn’t. But it can have an effect on so many things in our lives, from our credit rating to our ability to get hired and our ability to do lots of things. I think it’s really important that we have this conversation now.

The transformation is still getting under way, and last month Dell hired Marius Haas, the former head of Hewlett-Packard’s networking business to run its Enterprise division.

Yesterday, at an event in San Francisco, Dell announced the latest step in its battle to win more of this business. Its Active Systems family of products is Dell’s answer to the converged infrastructure trend that’s hitting the IT industry. In recent weeks we’ve seen IBM talk about its Pure Systems line of products, while Oracle has talked about its Exa- line of Engineered Systems hardware. And Cisco Systems has its Unified Computing and Servers.

The aim of all of them is pretty straightforward: Get all the needed parts of IT infrastructure together in one piece that’s easy to deploy and operate, and also easy to sell in one go.

A few days ago, I caught up with Haas and also with John Swainson, the new-ish head of Dell’s Software division, to talk about their respective parts in the ongoing process of transforming Dell.

AllThingsD: So, with Active Systems it sounds like you’re combining a lot of diverse pieces together into a single product.

Swainson: Customers want all the pieces of hardware. This is a clear trend we’re seeing in the industry. They want not just the compute and networking parts. They want the storage in there, too. They want the ability to manage these things, and they want the ability to scale it up and down. Scalability is often a euphemism for ‘you can make it really big.’ But some of the benefits are being able to make them reasonably small, so that smaller users, who want smaller computing environments, get the same benefits.

That seems to fit with a broader theme that I’m hearing from other companies. Customers want their IT simplified so they don’t have to deal with so many vendors and parts that don’t always work together well.

Swainson: Simplicity is not having to do systems integration. But it’s also having a system that’s automated, that’s intuitive, and human beings can sit down and figure out how to set these things up, and how to provision your workloads. I think you’re going to continue to see us focus on the usability aspects of systems management. My thesis is that customers don’t want to buy hardware or software or servies. What they want to buy is a computing solution to a business problem. To the extent that you can make it easier to use, the better off you’ll be. The second thesis I have is that stuff that’s easier to use gets used more. So you’re targeting a wider range of users, you get to sell into a broader base of customers. A lot of our competitors have retrofitted their bespoke solutions into these packages, and if you scratch, say, one level down, you’re going to find the complexity is still there.

Haas: Some of the key things in our strategy is the modular approach; what John was talking about is key. This whole notion of intelligent orchestration. It delivers unparalleled ease of use, and we’ve got it across the entire product family. We’ve taken an end-to-end soluttions approach which brings together the performance and the agility, so we can optimize both on price and performance, but also on operational efficiency. And we think we’re the only ones who can do it. And it’s all built on the open-innovation philosophy, so there’s no lock-in for customers. It’s easy to scale up, scale out and scale down.

So, Marius, tell me how the enterprise business looks right now. I talked with your boss, Michael Dell, in July, about the plan to reengineer Dell as an enterprise-focused company, and your hiring last month seemed to be a big step in that direction. Understanding that you’re still pretty new on the job, what are you seeing as you look ahead?

Haas: This is purely a look back, but the momentum we’re seeing is great. Last quarter, we outpaced the competitors we’re seeing in every area we compete in. Servers, storage, networking and services, and John now has a much bigger portfolio with the closing of the deal for Quest. Organic growth was 39 percent in networking, and 90 percent if you include the Force 10 acquisition, where others were in single digits. We had server growth of 8 percent. We were the only one that had both positive unit share and revenue growth in servers and share gain. Everyone else was negative. And in storage, if you look at the Dell-owned IP storage, we were up 6 percent and the others were up less — EMC about 3 percent, and minus-7 percent at NetApp. If you look at the core modular peices of the architecture, we’re doing extremely well. Add in support and the options business, it grew 12 percent year over year. When you think the market is growing roughly flat to 1 or 2 percent. Now what we’re doing is saying to the marketplace that we know the trend is toward convergence. We know that the simplicity and ease of use in being able to deploy workloads without having to worry about how the infrastructure works together is very key. We estimate about 20 to 30 percent of all the IT spend will be on converged systems by 2015, so that’s just around the corner. So we’re making sure that we’re marching in that direction, and building off a core set of capabilities that are winning in the market.

How big is the enterprise business by revenue?

Haas: The part we break out is Enterprise Serviecs and Solutions, and it grew 6 percent, to $4.9 billion, last quarter, so it’s about a $20 billion business annually, or about 30 percent of annual revenue. But it represents about 50 percent of gross margin. The part that I’ve got — the Enterprise part, the servers, storage networking and converged infrastructure — Steve Schuckenbrock has services, and John has software. We are embarking on what looks like the new Dell enterprise, and are charged with transforming the company.

Marius, I recently noticed John setting some aggressive goals for himself in the software business. I’m curious if you’ve got goals of your own that you’d like to share?

Swainson: I said two things: My short term goal is $2 billion in revenue by 2016. Today, we’re at about a billion and a half. That will be our run rate at year end. That’s not highly unrealistic. The longer-term goal, and I don’t have a time frame on it, is to reach the $5 billion range. If you calibrate the business versus the other pieces of Dell, to balance things out, it should be about a $4 billion or $5 billion business, something like that.

Marius, let’s put you on the spot. Any goals like John’s?

Haas: I think what I’ll tell you is that we’re extremely bullish on our position in the market. We certainly have goals to grow faster than the market, anywhere from two to five times as fast as the market, depending on the segment. And what we’re doing is positioning ourselves to take advantage of the some of the transitions that are happening, and we have a great value proposition to do so.

You’re feeling bullish, when others — and of course I’m referring to Hewlett-Packard — are having difficulties right now. Is right now the time to maybe try to go and take some share from HP?

Haas: Let me just tell you two data points. You can see it in our results. We are taking share from almost all our competitors that we compete with on the entperprise side. The other is — and this is a survey that just came from Morgan Stanley, it’s a forward-looking spend analysis, asking CIOs if they expect to spend more, the same or less with different IT vendors. And in servers and storage, they said they were willing to spend two to four times as much as they were with our competitors. So that’s a nice leading indicator of the mentality of the CIO about the value proposition that Dell as a whole is providing. We have an enormous loyalty base in our midmarket customer set. In many cases, we are their IT organization. They trust us to bring them the right solutions to help them grow their business and scale their business at the right performance and price points. That is a great platform for us to deliver solutions that scale up but come in at entry points they can absorb quickly.

One expression of that strategy — and a controversial one at that — was the nearly $12 billion acquisition of the British software firm Autonomy, announced 13 months ago. HP ultimately didn’t spin off its PC business, but its acquisition of Autonomy stuck. Now it is firmly part of HP’s software business.

As CEO Meg Whitman struggles to turn HP around, software is still a key part of her plans. While Whitman has made no secret of her opinion that Autonomy needs attention, there are some solid bits of HP’s software business — like Vertica and ArcSight — that are showing significant promise, if only they could grow.

Finding a way to get them growing is the job of George Kadifa. In June, HP named him as executive vice president, head of the company’s software business and a member of its executive council. Kadifa knows a bit about the software business. He spent seven years as a senior vice president at Oracle, and then ran his own company, Corio, for six years, until it was acquired by IBM for $182 million in 2005. From there, he went to investment firm Silver Lake, where, as partner, he pushed portfolio companies to improve their operations.

Kadifa sat down with AllThingsD last week at the software unit’s new headquarters in Sunnyvale, Calif., for his first interview since joining HP. We talked about how he plans to fix its weaknesses, improve its strengths and make software a more sizable piece of HP’s overall business.

AllThingsD: George, you joined HP to head up its software business unit in June. You’ve reached the 100-day mark, so give us your assessment of where you see things now and where they’re going.

Kadifa: A lot of good things are happening. We’re at about $4 billion in revenue, so if you look at HP Software as its own business, we’re about the fifth- or sixth-largest software business in the world. We have a great customer base; having worked at IBM and Oracle and now HP, customers really like us, versus previous experience. And we have a lot of products. A lot of them we acquired rather than built in-house.

Among the recent acquisitions, Vertica is one where the consensus seems to be that it was a pretty good deal. Where do you see Vertica going in particular, and what sets it apart?

One is the technology, which we think is second to none. When you think about it, the idea of taking data in columns and then arranging it in a row fashion, it seems like sort of a trivial difference. But it’s really unbelievable what it gives you in terms of capabilities. Say you’re storing a thousand names, you’ve got first names and last names. Let’s say five of those guys are named Arik. Normally you’d store five Ariks in a column. But here, instead of listing the name five times, you make a note above it with a five, so you know the name occurs five times. Now when you search through that list it’s so much more efficient, it’s two or three orders of magnitude faster, which means it’s 100 to 1,000 times faster than classic relationional technology. It has turned out to be a real diamond for us.

Yet it’s a small diamond. Yes, it’s growing, but how do you get it to grow fast enough that it becomes a more meaningful part of HP?

It’s a fair question. What we started with was a business with revenue in the low millions. It wasn’t in the $100 million range in revenue. It was really a project with some customers. We took it, and now it’s in the middle-double-digit millions. I can see us getting to $100 million with Vertica in a very short period of time. And there’s no reason it can’t be a billion-dollar business.

Let’s wrestle with the situation at Autonomy a little. You just named Robert Youngjohns to run it. Unlike Vertica, the consensus here is that Autonomy was an expensive deal that hasn’t come close to meeting expectations yet. What do you see happening there?

We just had a two-day planning meeting with everyone from Autonomy, where we went through the current status and looked at where we’re heading. The key for us right now is to get fiscal year 2013 on track, and that starts Nov. 1, so we’re working on that right now. Basically, when you look at Autonomy, the core unit is the IDOL Engine, which is the unique capability of meaning-based computing. We’re going to double down on that. In our labs in Cambridge, England, we have 40 or 50 mathematicians writing algorithms. And we’re going to build a team here in the U.S. to productize it and create a platform around it, because it has that potential. Frankly, the way Autonomy was managed previously, they put a lot more emphasis into enabling applications, which was fine, but our belief is that there’s a broad agenda, which is creating a platform around meaning-based computing. So we will maintain those apps, but at the same time we’ll open up the capabilities to a broader set of players outside HP.

It sounds like what Autonomy was doing was growing by acquisitions and then creating a more vertical stack of applications prior to HP’s ownership, rather than taking a broader, more horizontal approach. It sounds to me like HP wants to make Autonomy more horizontal. Is the potential there?

You’re correct. And, yes, the potential is there. I asked Autonomy that very question about why they went vertical instead of horizontal, and the answer that I got was that it came down to a difference of culture between the U.S. and Europe. In Europe, they tend to make things complex in order to create more value. For example, they saw the IDOL engine as too complex to just give it to people. Instead they thought they should acquire vendors and then create value by enabling applications. Here we take something that’s complex and we ask how we might simplify it in order to give it more scale for a bigger market. So, some of that difference was cultural, and some of it was that I think they fell in love with these acquisitions. … We think Autonomy’s technology has broader implications. And to reach that potential, we have to open it up as much as possible. And we’re also working with other organizations inside HP — PCs, printers, servers — to basically produce additional synergies.

Are the teams ready and primed? Meg Whitman, your CEO, and CFO Cathie Lesjak have made no secret that, so far, they have seen Autonomy’s ability to respond to deals that had been teed up by HP as lacking. Is the structure in place to address that problem?

It’s not in place yet, but the situation has settled down somewhat. The processes are working. The reason is that initially we kind of left Autonomy alone, and then we tossed a bunch of deals at Autonomy. The initial plan was to keep it intact, have the HP salesforce bring in deals, and everyone would be happy. One problem is that there were too many deals, and second is that the deals weren’t well-qualified. So what we did next was put in place a management process around sales cycles at Autonomy.

There’s been a lot of turnover there. Obviously, the former CEO, Mike Lynch, left, but so did a lot of the people who worked with him. Does that hurt the institutional memory at all?

No. Basically we lost the top half-dozen people. And you always expect that with an acquisition, especially with people who have grown up as entrepreneurs and will always be entrepreneurs. The remaining people running the products lines are still around, and so is the salesforce. The development guys in Cambridge and Chicago are still there.

Michael Dell has basically said he intends to keep growing his company by acquisition. Your boss, Meg, has said that we can expect no major acquisitions for the forseeable future — at least until the balance sheet is in better shape. If there were going to be acquisitions, even small ones, I would imagine they’d more likely be in software. Is that a fair statement?

I don’t want to say anything on Meg’s behalf. From a software point of view, if there are tuck-in acquisitions that can help us develop our technology, I’ll go and request to do it. The cash we generate from software would cover us. So that’s the thinking right now. We need to learn as a business how to grow organically because that’s where all the value is. At Silver Lake we did analysis on companies that grew by acquisition: Oracle, SAP, Microsoft, IBM, EMC and others. You find that their revenues grow and their profits grow. But what doesn’t grow, and what actually shrank from 2006 to 2011, is their multiples. Their valuations multiples shrank. What the market is saying is that just making acquisitions doesn’t add any value unless they create organic growth. That is how we look at it here. We’ve done a ton of acquisitions, so the task now is to create more organic growth because that is what the market will value.

Steve Schuckenbrock’s job is to change that. Last year, Dell named him president of the company’s Global Services Solutions Group, and his assignment is nothing less than to build Dell into the kind of IT services company that can compete with the likes of Hewlett-Packard, IBM and Accenture. Dell’s biggest move on that score came in 2009, when it spent $3.9 billion on Perot Systems.

And services is part of the big transformation that CEO Michael Dell is leading at the company that bears his name, and about which he talked with AllThingsD earlier this summer. Dell’s future is less about the PC around which the company was founded, and more about being a well-rounded player in the Enterprise IT business, and that includes services.

Before coming to Dell, Schuckenbrock was co-COO at EDS, the IT services company that HP acquired for $13.9 billion in 2008. That unit has taken a lot of lumps in recent months from current HP CEO Meg Whitman, who has said she wants the group to focus on more profitable deals. When I sat down with Schuckenbrock earlier this month, naturally, I couldn’t help myself from asking about that first. But his reflection on the troubles there are closely tied to his view that the IT services industry is changing fundamentally in ways that Dell is uniquely qualified to meet.

AllThingsD: Steve, given your history at EDS and the things that HP’s current management has been saying about it, I have to ask what you think about the challenges there?

Schuckenbrock: I was co-COO at EDS six years ago, and I left before the sale to HP. So I have a lot of history with it. I left to basically start up the services business at Dell. It has a lot of wonderful people, and a really good culture of walking through walls for customers. And these kinds of businesses, you can kind of push that culture to the edge once, which Dick Brown (CEO of EDS 1999-2003) did, and then you can pull it back, and then you can push it again, and at some point it becomes hard to fluff that pillow back up. It began even before HP bought it, where there was this emphasis on cost, cost, cost, and you just can’t sustain that for six or seven years in a row. At the end of the day, through that cultural issue, you have an industry that’s changing dramatically, where the kind of big, custom, traditional outsourcing deals are kind of dinosaurs, and those have been the bread and butter of the business. And so when I spearheaded Dell’s acquisition of Perot Systems, we wanted to buy a company that was big enough to give us credibility, but small enough that we could change it. Yesterday’s model is quickly dying.

So are you essentially running the old Perot Systems?

It’s part of what I do. When I first came to Dell, I put everything in services together as one team, and then we globalized everything, so when you a buy a notebook in the U.S. and you happen to be in India, we know where you are, and we can fix the machine. We couldn’t do that in the past. We ran things in India one way, and in the U.S. another, and in Europe a third way. So we fixed that in the first year or two. Then we acquired Perot, and that built other legs of the stool within the services business. I left services for awhile, and ran sales for large enterprises. And then I went back to services.

And how big is services as a percentage of Dell’s business?

It’s about an $8.5 billion business, out of about $60 billion and change for all of Dell.

Let’s talk about this shift in model you brought up. What do services companies need now?

One of the things that attracted me to Dell a few years ago is that it’s a machine. Behind the 30-million-odd devices that we support is a really great standards-based machine. And our support services for our commercial customers has been ranked number one by TBR for something like 30 of the last 36 quarters. It has a really long track record of support. When you look at the big outsourcing contracts, they tend to be very customized, and so you do different things for each customer. And it’s generally driven by the large company’s view of the so-called “best way of doing things.” Well that customization worked in the old way, when margins were at 30 to 35 percent. When you start pushing margins into the teens and add in the capital intensity and then the risk profile of those contracts, it only takes a few bad deals to fundamentally break a good company. As x86 (systems based on chips from Intel and AMD) has become the dominant compute platform, services can start looking more like the machine that we have in the support business. Not identical, but more like.

How are they similar and how are they different?

Our field services are exactly the same, whether it’s for an outsource customer or our support services. Our service desks are run almost exactly the same as our support desk, with the exact same set of tools. I can get a lot of leverage from a call center with 30,000 people working with a customer that may only need 100. That’s a lot of leverage from a profit standpoint and a quality-of-service standpoint, because I don’t have to reinvent the wheel every time. So I think what Meg is saying about HP and EDS, and what I’m saying about Dell, is that we both want to go after customers that embracing a new compute model, and help them on the journey to get there. Customers who just want me to do it their way, but cheaper, I’m not so interested in. So you’ll see words like “cloud,” and “remote infrastructure” showing up in the services business, and “customization” will be a word from the past.

Are the customers getting it, or are they still fighting battles from the last decade?

Not only are the customers getting it, but they’re starting to push us, which is a good thing. About three years ago, I would talk to customers about all this standardization, and they would say it was more theoretical than practical. Today, it’s not. The cloud is standardized. When you access the cloud from a device, you don’t care whether the services are running on a Dell server or someone else’s server. What you care about is that you get the service that you want. It used to be that when you went to a customer, you had to do everything to their standards and specifications. Customers now say they want a service, and they’re less concerned with how it gets delivered. And that fundamentally shifts the model.

So why would a big company then choose Dell over HP-EDS or IBM?

I recently visited DuPont, which is a new customer, and they basically boiled it down to innovation, a conviction about the new computing models I talked about, rather than clinging to remnants of the past. And that’s sort of built into our DNA at Dell, because we’ve never been anything other than x86 and so we’re kind of wired to walk into the conversation and disrupt the old way of doing things. We also recently won a deal with CoreLogic, which provides all the real estate information for multi-listing services. And you can imagine how data- and storage-intensive that business is. And I won’t name the companies we were up against, but you can probably figure them out. And what the other guys proposed to do was to keep them running on the systems they already had. We proposed migrating to an x86-based big-data platform, and moving all their applications off mainframes and onto x86. We’re using our IP to help them move, and our storage technology that we’ve gotten from the various acquisitions over the past few years. So it’s another example of leaning into the future, as opposed to leaning into the past. Those are the kinds of deals I’ll do all day long.

Today, the company announced two new phones, the Lumia 920 and Lumia 820, the latest in its line of smartphones running Microsoft’s Windows Phone operating system. Their key features: New cameras designed to eliminate blurriness and improve image quality in low light conditions; big, bright displays; and wireless charging. It is, in many ways, a reintroduction of the Nokia brand to North America, territory that has become more or less dominated by Apple’s iPhone and phones using Google’s Android operating system.

Nokia CEO Stephen Elop sat down with AllThingsD for a few minutes today to talk about the new phones, and the company’s strategy going forward.

AllThingsD: So, Stephen, Nokia is releasing two new smartphones today. Let’s start there. What’s special about these phones?

Elop: Let me give you a little context. You may recall that back in February of 2011 we announced a pretty significant shift in Nokia’s strategy. And that included the partnership with Microsoft, it included a new focus on what we call mobile phones, which are the lower-priced devices and sold primarily in emerging markets, and also on what we call future disruptions, like what comes next, research and innovation. Then, in October of last year, we introduced the first Lumia phones, the first Windows Phone-based Nokia products. Today is the next big step in that journey with Microsoft. We’ve introduced the Lumia 920 and the Lumia 820.

The first thing I notice here are the displays. They’re pretty big and pretty bright.

Just to give you a sense of these devices, they have big, bright displays, but they also react uniquely under direct sunlight. So, through polarization and special brightening capabilities, you can stand out in direct sunlight and continue to use your device. Or if it’s winter, and you happen to be someplace cold, and you have gloves on, the screen responds to gloves, it responds to fingernails. It’s a very sensitive touch display. But the other feature that makes us confident about this phone is that we think it will enable people to take the best photos. I suspect from the device you have on your lap (an iPhone), you’ve probably taken a few thousand pictures in low light conditions, at night, where it’s a bit blurry, or the flash blasts out the face. Our PureView technology, which is a unique Nokia capability, in the Lumia 920, we’ve built a unique sensor and lens capability that is floating.

What do you mean by “floating”?

Mechanically, it moves. So to counterbalance the movement of your hand, or you’re walking down the street or in a car taking a picture, the lens is moving to counterbalance your movements. And we have unique software on the device that interprets it all to give you amazing images. In low light conditions, the hand-shaking is a big problem because it leads to blurry images.

So I take it that the camera’s capabilities are going to be a key feature you use in marketing?

Absolutely. Because when you talk to consumers, they say they’re taking blurry images with their phones all the time. Now you can hold the phone up in that concert and get a beautiful image, or of the kids at a soccer game. Now it goes further than that. This type of camera technology and the screen, they both take a lot of power, so we have a very large battery. But the other thing we have is wireless charging. You can set the phone down on a wireless charging platform, and it charges.

Is this Nokia-built charging technology, or did you license this from someone else?

We’re using a wireless charging technology standard called Qi (pronounced “chee”) in a lot of these technologies. We want to drive the standard. There’s also a very fashionable brand in Europe known as Fatboy; they make beanbag chairs, so now there’s a beanbag chair that charges your phone.

These phones are Windows Phone 8. Will we be seeing any Windows 7.8 devices?

We’re not announcing any today, but the statement we have made is that we will continue to sell devices with that software, and we’ll continue to upgrade them. For example, the start screen with the newly sized icons, those will start to show up on the existing Lumia devices as well. So some of those devices will continue to be sold. We may introduce some new ones, but we haven’t announced any yet.

It seems like the Windows phone market is growing for Nokia, but not fast enough to offset the declines in the Symbian and other lines. How do you plan to address that?

We don’t think about it as one offsets the other. We have to grow, and it is our intention with these devices to grow the number of Windows Phone devices that are out there, and to grow our market share as it relates to the smartphone segment. But at the same time, the other parts of our business, the mobile phone business in volume, it grew quarter on quarter. So there’s an opportunity to continue to grow a market that’s been very good to us.

Microsoft has Surface coming, which puts them in the hardware business. It has yet to say it is going to build its own phone, and Nokia hasn’t spoken of a tablet. But there’s a lot of potential for both of you there to make some moves. In that eventuality, what do you think of the prospect of competing with your most important partner?

It is the case that these relationships are complicated. Now, we haven’t announced a tablet, but if we were to do so, it would be competitive with whatever Microsoft does. That’s okay. I’ll use another example: Samsung. We compete directly with them on smartphones. They are, at the same time, one of our largest suppliers. And so you have different meetings with them at different times of the day. And that’s okay. These relationships are so complicated, you can be competing in one segment of the market and doing business with them in another. And that’s okay.

Combined as it was with the Web travel concern Kayak, which debuted the same day and whose shares rose similarly, it was a good day for tech IPOs. Add to the pile last month’s debut of ServiceNow, and this fall’s pending bow by Workday, and it’s hard not to conclude that the tech IPO market is getting its mojo back after the botched Facebook offering in May.

Unless you follow the business of firewalls — the computer gear that is designed to keep good data flowing on corporate networks and keep bad data out — you may have missed the rise of Palo Alto Networks. I was certainly curious, and so on Friday, AllThingsD arranged to have a conversation with founder and CTO Nir Zuk at the New York Stock Exchange. Zuk started Palo Alto Networks during a stint as Entrepreneur in Residence at Greylock Partners. Before that, he was CTO at NetScreen Technologies, which was acquired by Juniper Networks; before that, he was a principal engineer at Check Point Software.

My first question was a basic one:

AllThingsD: Nir, Palo Alto isn’t the first company to make firewalls, obviously. What makes yours so special that you think you can disrupt the entrenched players?

Zuk: There are a lot of firewall and security companies out there, many new ones, that are changing the way security is done. I think the industry has been sleeping a bit, despite the efforts of hackers, who never do. Traditional firewalls have two issues. First, they haven’t changed much over time, so a whole industry was created to build products that sit behind the firewall, and to help firewalls do their job better: Things like intrusion-detection devices and proxies and so on. So I think the first thing we did was change that. We have one device that handles all of security. I think the bigger issue that we are addressing is that most of the network security devices were created at a time when the Internet was just Web-browsing and email. And now there are hundreds of new things. There was no SharePoint, and no Dropbox and no Twitter. So the old architectures can’t provide any protection for the new things, other than to just block them. If you’re an enterprise that believes the Internet is just Web and email, then the old devices may be right for you, but if you’re an enterprise that believes you can get additional value from these new applications, they need tools to secure these applications. And that is what we’re about.

Let’s use the example of Dropbox, since I use that from time to time. What do you do to make that secure for a company to use?

IT departments know how to secure email. They scan incoming email for malware and botnets and viruses and so on. And they make sure you don’t get executables via email, and they make sure that you don’t send out things that shouldn’t be sent out. We allow enterprises to secure Dropbox in the same way. They can scan the incoming Dropbox files for viruses and for spyware and whatnot, and also scan on the way out, making sure you don’t put on Dropbox anything that you’re not supposed to. Our firewalls know inherently how Dropbox works, and where the files are and how to scan them. And we also set permissions by user. Some people are allowed to share things on Dropbox that others aren’t. The marketing department can share Photoshop files, but there’s no reason for salespeople to do it, so why let them do it?

So how wide is the umbrella? There’s always a new batch of applications to catch up to. How do you stay ahead of that curve?

We have a team in California that is looking at all these new applications. They add support for them, and then push that support to all our customers.

It sounds to me like you constantly have to evolve it, so it necessarily has to be an on-premise device mixed with a software-as-a-service approach. Is that right?

The updates are provided as part of the basic service for the box. Of course, we have to build the device with a special architecture in order to allow us to send the updates without the need for a major upgrade every time we add support for another application. Enterprises don’t like to update their boxes every week. And then there are other services we provide, like threat prevention. We send updates to the device, teaching it to be on the lookout for new malware and exploits. We have a service to filter new kinds of content. We have a service to figure out the security posture of devices as part of the global remote access solution.

Tell me about customers, and what you’re hearing from them? Are there new threats they’re dealing with?

Every week we see new kinds of threats. Sometimes we see a whole new family of threats. Recently, we’re seeing more targeted attacks. We’ve seen two changes. The first is that targeted attacks aren’t as widespread anymore. And a lot of the traditional security companies build their business and collection infrastructure, which gathers bad things in order to analyze them, based on the assumption that all the bad things they see are widespread. The second thing we’re seeing is that attackers don’t go directly after data centers. What they do is try to take over end-user machines, and from there jump to the data center. To fight these two things, we came out with a service called WildFire, which allows enterprises to send up to the cloud all kinds of files that are coming into the organization. You can send it to our cloud for analysis, and then within a few minutes you get an answer. If it is bad, we generate a signature and send it to all our customers.

So if someone sends me a bad PDF, which I get sometimes, I can send it up to you, you can analyze it, and if it’s bad, you’ll share that intelligence with your other customers?

We don’t analyze all file types. We’re adding more all the time. We don’t block it until you receive it. But if it is bad, we notify your IT department, telling them that this user just received a bad file, and you should go clean up their machine before it makes it to the data center.

How did you start Palo Alto?

We started in 2005. I realized what we talked about earlier. There hadn’t been much innovation in security. I saw a bunch of incumbent vendors who weren’t updating their products, and then a bunch of smaller vendors trying to plug all the holes the larger vendors were ignoring. I thought there was room for a new large vendor to come in and shake things up. It wasn’t clear what form that disruption was going to be. So Asheem Chandna of Greylock and Jim Goetz of Sequoia sent me on the road to start talking to companies. I started hearing weird things. Security people complained about how all they did all day long was chase after people using new applications. And when I talked to CIOs, what I heard were complaints about security people running around blocking all these new useful applications. And then I saw where we were going to disrupt. When you start a company, you want to be disruptive by inventing something completely new, or you go disrupt a large, established market. Large companies tend to resist innovation, because they have to protect their established lines of business using the old technologies that are already making money. This is true of any space, not just security. If you can go into a large market and disrupt it, you will be successful. So today we’re sitting here at the New York Stock Exchange.

(Image courtesy of Greylock Partners)

First, he announced that Dell Ventures had launched a $60 million venture capital fund intended to invest in start-up companies working in the data storage space.

Second, asked on stage whether Dell is experiencing a slowdown in China, its largest geographical market outside the U.S., he confirmed, without elaborating, that it is. “That would be an accurate statement, yes,” he told interviewer Andy Serwer. Dell shares closed down 7 cents at $12.12.

The rest of his hour-long appearance on the stage at Fortune Magazine’s Brainstorm Tech conference, here in Aspen, Colo., (now much sunnier than yesterday, thanks) revolved around the standard fare of other interviews Dell has given in recent months: Dell is transforming itself. Its goal is nothing less than to make the personal computer business — for which it has been best known for more than two decades — the minority of its business, and to make its enterprise-oriented IT solutions operations — servers, services, software, security — the unmistakable majority of its business.

The trouble is that transformation takes time, and investors are an impatient bunch. A well-worn stat that Dell and other executives like to share is that about half 80 percent of Dell’s business comes from business and public sector customers. That’s good though it does include a lot of commercial PCs, or as Dell called them onstage — briefly confusing Serwer at one point — clients.

[Update: I revised the paragraph above after receiving an email from Dell correcting me: About 80 percent -- not half -- of its business comes from business and public sector customers.]

The other big story about Dell in recent years has been its acquisitions. Its most recent deal is a $2.4 billion purchase of Quest Software, which it won after a weird on-again, off-again bidding scrum with a private equity group.

Before that was a string of three deals in three days, the most significant of which was Wyse Technology.

Oh, so there was a third bit of news, but only for those with the right kind of ears: Dell disclosed that the company had spent a grand total of $5 billion on acquisitions this year, including the $2.4 billion for Quest. Since many of the recent acquisitions have been of smaller private companies, the exact amounts have been undisclosed.

The acquisitions are part of the transformation: Dell is in the classic build vs. buy conundrum, but lately finding that it’s easier to buy companies that have established products and customers.

Investors have been hard to convince, largely because Dell’s business is still tied so fundamentally to the personal computer business, which is experiencing something of a nasty storm right now.

After sitting on the stage for an hour, Dell agreed to an interview with AllThingsD. My first question was about the new fund:

AllThingsD: So you announced today the creation of this $60 million investment fund aimed at storage companies. You’ve been acquiring storage companies in the last few years and were also an early investor in Fusion-io, which is a storage company of sorts. What opportunities do you see in storage?

Dell: As you’ve probably seen, Dell has been acquisitive. We think there are opportunities to catalyze certain spaces, and storage is one of them. And so we have a specific fund just for that. It’s part of our whole corporate development effort and under Dave Johnson’s team. He’s been leading our acquisition efforts along with the business unit leaders. So this is specifically organized around making early stage investments in storage companies. We think there’s still a lot of innovation to come. We think there’s still potential for a lot of change and excitement.

Let’s talk a bit about the acquisitions you’ve been doing lately. You bought Wyse, you bought Quest, you bought SonicWall. Is there something specific you’re looking for in the deals you pursue?

We tend to look at this from the perspective of how the tech landscape is changing and what new requirements customers have, and how we build the capacity to respond to those needs while expanding the range of things that Dell can do. Sometimes that results in organic investments, sometimes it results in acquisitions. So we identify a space, let’s say client virtualization, which is what Wyse does. Wyse actually has some really great software for managing virtual clients, and we had partnered with Wyse quite a bit. The best acquisitions for us are firms that we’ve worked with and so we know a lot about them.

Is your hunt for acquisitions complete? Any hints on who might be next?

You will see us continue to do acquisitions. [Hahaha.] I find that if we tell you what we’re going acquire, the target gets a lot more expensive. So we’ll tell you after.

What did you see that you like at Quest and made you willing to pay $2.5 billion for it?

It’s right in one of the sweet spots for us. It connects with a lot of things we already do: Systems management, security, identity management, the application performance monitoring, data protection. They have some assets around client virtualization. They have some interesting things they do around dealing with data. We have a service called Boomi that does data integration. If you have, say, two cloud services — like Salesforce and Netsuite and Workday or some other combination of stuff, Oracle — we’re the best in the world at getting all that to work together and we do something like a million integration events a day.

Do you think the market unfairly values Dell on the assumption that it’s still primarily a PC company? Is the market getting the story or is the transformation just not complete?

Some shareholders get it and some of them don’t. That’s how markets work. Most who have looked at it carefully say this is the right thing to be doing. They quibble about some of the smaller points, but they see the larger logic of what we’re doing and our job is to keep doing it.

I hesitate to approach a comparison to Hewlett-Packard and the events at that company over the last year, but in light of how the PC market has been performing lately and given what the Gartners and IDCs of the world have been reporting, have you ever considered spinning the PC operations out?

We’ve never considered anything like that. I think, broadly speaking, the numbers those organizations have reported are directionally correct. And certainly there are all sorts of factors and reasons for that. But there are still a lot of PCs being sold and it’s still an integral part of how companies and organizations use information. Now it’s shifting. You have value shifting into servers and services and all the stuff we’re doing. When you look at the profit margins, that has shifted a lot. We’ve roughly doubled the size of the new part of Dell from $10 billion to $20 billion.

You mentioned China slowing down, but how does the PC market overall look to you? At least part of the slowdown can be arguably blamed on the market waiting for Microsoft to get Windows 8 out the door. How do you see it?

I don’t want to say anything further on China other than what I said onstage. There are multiple factors. There are economic factors, there’s the Windows transition and all this other stuff going on. How do you proportion all of those? No one has any scientific way of doing that. Windows 8 is pretty good. I’m using it. Our business is still indexed pretty heavily toward the commercial market, and there are still businesses that haven’t upgraded to Windows 7 yet. So they’re not going to immediately go to Windows 8. What happens is, someone gets Windows 8 in the office and shows it off, and people start asking for it. Consumers tend to upgrade a lot faster than businesses. They’re a lot more conservative.

Dell has taken some knocks over the years for not spending all that much on research and development. Historically, your R&D expense has always been relatively small as a percentage of sales versus your peers. Now there’s a critical narrative that says Dell is buying companies to make up for the R&D you didn’t do last decade. Is that fair?

As a counterpoint, I’d say all you have to do is go to the U.S. Patent and Trademark Office and look up the 5,000 patents we have been granted and applied for over the years. We’ve been filing patents since 1988. We didn’t get them all in the last few years. They read on pretty fundamental stuff in our industry. Could we have done more? Absolutely. Another way to think about it, though, is that when you’re 19 years old and the company is growing really fast, someone could have said that you could grow it to $60 billion in size and you have to do the same thing and only one thing until you get to that size because if you don’t you’re going to get distracted and confused. That’s kind of what we did. We did the same thing until we got to $60 billion, and when we reached that point we decided we needed to do some new things. Could we have done it at $20 billion or $30 billion? Yeah, maybe. But I spend my time thinking about the future. I have to say it could have turned out a lot worse.

Of course, it didn’t play out that way. HP’s board of directors hired former SAP CEO Léo Apotheker in late 2010, beginning an ignominious 11-month reign that couldn’t seem to end soon enough, after an ill-fated attempt to spin off HP’s PC business was combined with the expensive acquisition of Autonomy.

The Enterprise Group, formerly the Enterprise, Servers, Storage and Networking unit that booked more than $22 billion in sales in 2011, is a recent creation of CEO Meg Whitman, who announced its creation in March and combined HP’s Global Sales organization under Donatelli.

I caught up with Donatelli in Las Vegas, where HP is holding its HP Discover event, at which it announced some product news on the storage front Monday. I asked him first to discuss the storage news in broad brushstrokes:

AllThingsD: The big announcement today was about storage. What’s the important message on that subject from HP that you want people to take away today?

Donatelli: Well, I think the top-level message is that with converged infrastructure, which is a strategy that HP has outlined, we’re out to reinvent the entire infrastructure industry. We’ve made major changes in the network industry, and we’ve done that over time. We’ve made major changes in servers, as with our recent announcement that we’re going to build servers with Intel Atom and ARM-based chips. It’s a total reinvention of what servers do. And then with storage, we think we’re doing the same thing. Most people look at storage as a pyramid with different tiers and different ways they address those tiers. Our competitors address those tiers with product after product, and the result is that to customers it becomes really complex and frustrating. What we’re doing with both backup and primary storage is taking what used to require multiple products and instead delivering one single product. With primary storage it’s 3PAR, and for backup, it’s a product called StoreOnce.

What makes these different from what has come before?

Both have some things in common. Both have new software architectures. They can learn a lot from the past, but they’re designed for the future. Our competitors are using old architectures. Our competitors are taking something that might have been designed for the old client-server or mainframe world and making them work in today’s world. That applies to just about everyone in the market. It’s the same thing in the backup world.

During your remarks you kept coming back to a phrase that made my ears perk up: “De-duplication.” I talked about this once with Prith Banerjee when he was running HP Labs. So how does it apply here?

Broadly speaking, people have backed up to tape since the beginning of time. And while tape always gets better, it is slow relative to disk, more error-prone than disk, and it could not keep up with the explosion in online data. When you’re creating more data all the time — and for compliance reasons, having to back it all up — you end up chasing something you can never change. The faster tape got, data would grow faster. Ideally, everyone always wanted to back up to disk, but as disk would come down in cost, tape would always come down in cost faster, so it was hard to justify. So then de-duplication came. And the best way to describe de-duplication is like this: Let’s say Mary creates a PowerPoint deck, and I really like it, so she sends me a copy, and then I forward it to you. Suddenly we have three copies. If you look across a company as big as HP, you’re looking at thousands of copies. Prior to de-duplication, the primary backup treated all those copies as if they were unique things. And then you’re doing a backup every night, and then another big backup every weekend, forever. So now, between the three of us, we have nine copies of that same PowerPoint deck by the end of the week, and it just goes and goes. So de-duplication uses algorithms to prevent all those extra copies from being made, and it is backed up once, and then every instance of it being used references back to that single copy. So where I had thousands of copies of that deck, I now have one. And these numbers will vary, but you can reduce the amount of data you have to store by 10 times, and there are cases where we’ve seen it reduced 70 times. And once you de-dupe, you can now afford to backup to disk and get rid of the tape.

So how do you see this fitting with the larger corporate mandate to simplify how HP engages with its customers?

I think it fits well within it. Our competitors sell products that sell a different product for each of the different ways to do backup and storage, and for each one there’s a lot to understand — like how they all work, how to service and support them and train people in how to use them. We’re saying that it’s only necessary to learn one product.

HP is broadly seen as trying to fix its IT services business, which is seen as being more profitable. So then the fundamental question becomes one of importance. HP has traditionally sold things — computer, servers, printers and so on. So, then, what’s more important now? Selling services or selling things?

I would start with the premise of your question. Because I think first and foremost … Meg has said that HP is an infrastructure company. This is not about transforming the company. That was the last regime. We’re making what we have work well. So, yes, we have services, and yes, it’s a way that some want to consume products, and our go-to-market has been very streamlined, but it doesn’t negate what we’re doing here at all. These are businesses, some of which, like storage, are growing faster than their markets.

Meg has talked about changing how things are done at HP, including moving senior executives like yourself out of their offices and out into cubicles. How is that different for you? Is it effective, and who do you see when you poke your head out of your cube?

I think Meg is trying to bring a team-based approach to HP. As a management team, I think we’ve spent more time together in the first few months than we have in a year, and I think that’s a positive thing. Todd [Bradley] sits right next to me, Cathie [Lesjak] sits next to Todd. Meg sits right next to Cathie. They’re about eight-foot cubes. It’s the first time I’ve been in a cubicle in about 20 years. I think the communication part of it is a good thing. Anything that promotes more communication is a good thing.

The business-critical service business, which sells the Itanium-based servers, has seen its sales drop in recent years. One could assume that this is the result of uncertainty brought on by the lawsuit with Oracle. Is that a business you think you can repair once the litigation gets resolved?

I think the litigation is very important to that business. We have U.S. litigation starting now, and then there is other litigation in other countries that is starting to play out. We believe we are very strong in our position. We believe not only that Oracle has a commitment to HP, but to our joint customers. We don’t want to see HP — or more importantly, our customers — left in the lurch. I think the results you’re talking about are not the result of litigation, but of Oracle’s unilateral decision not to support Itanium. Our belief is that a favorable outcome will help us there.

But even a task that never ends has to have a beginning, and more often than not it goes something like this: What do I have that needs to be protected, and how well or not is it protected now? Sometimes the best thing to do is call in someone from the outside to look at it all with fresh eyes. And sometimes the answers can be shocking.

It’s the sort of thing that Rapid7, a fast-growing security firm based in Boston, specializes in. While some security firms are more the cops on the beat, hired to keep things in check based on established rules and policies, Rapid7 is one you call when you want to know how the bad guys will try — and try they will — to get through whatever security measures are already in place.

The firm also owns Metasploit, an open source service that’s essentially an early-warning system about new vulnerabilities. Twice in the last year, new research by Rapid7 — released to the wider world through Metasploit — has caught my attention: Once it was about Java, and the other item was about how the methods employed in Stuxnet could be used to create new ways to attack public infrastructure.

I recently had a chance to ask Rapid7 CEO Mike Tuchen some questions about his company and the interesting role it’s playing in trying to clear up a lot of ambiguity about IT security that so many CIOs find frustrating. My first question was to ask Tuchen to explain from a high level what Rapid7 does.

AllThingsD: Mike, the thing I always think of when I talk to security companies is that the scope of the problem is constantly moving. If I were to use a football metaphor, it would be that the goalposts are always changing. And yet there’s another metaphor that fits as well: That of a medical triage, because once you know you have problems, there’s the matter of determining which one to fix first. What does Rapid7 do to help companies sort all this out?

Tuchen: We think of the security market as breaking out into “front-end” and “back-end” activities. Front-end activities are the assessments we do to proactively answer questions like: What’s my security posture? Where am I strong, and where am I vulnerable? What should I do to become more secure? That’s where we fit. 

Back-end activities are the enforcement and remediation efforts to protect data or networks that typically act in real time in response to threats detected including firewalls, anti-virus applications and so on.

We’re finding that as the threats are constantly growing and changing, there’s a lot of interest in assessment. The reality is that we’re seeing a new breach on average of once per day for the last 18 months or so. So when things are moving that fast, who wouldn’t want to know where their weaknesses are and what are the most important things they need to do to lower the chance of a being one of those companies breached? Our customers are telling us that once they’ve done the assessment, they’re able to set their priorities for the next 12 to 24 months. If you haven’t done an assessment, there’s a good chance you’ll buy a back-end product that doesn’t solve all your problems because you never knew what all the problems were in the first place. That’s how budgets tend to spin out of control.

So one big question around security is around the shift to the cloud. There are still a lot of people who don’t trust systems they can’t touch, but with the cost savings, the shift is looking more real every day. What does that shift mean for you and for your clients?

The first question you have to ask is “what do I have?” It’s kind of self-evident: You can’t secure what you don’t know about. Cloud services can make this trickier by adding another question into the mix: “Where is it?” And it gets even dicier when you take into consideration all the virtual machines that can be turned on and off at will and moved from one physical machine to another. The boundaries get a lot less well-defined. So the first step is discovery: What do you have, where is it, and what controls are in place? 

The next step is determining what types of threats you’re likely to face and figuring out what’s working to head them off and what’s not. After that you put together a strategy for improvement. 

Generally speaking, the best approaches we’ve seen start with basic hardening techniques. You take some concrete actions that are designed to make it more costly and difficult for attackers to establish a beachhead on your systems. Next, you lock down the perimeter as tightly as possible, and train employees to recognize and resist social engineering attacks.

When it comes to assessing the security of cloud offerings and software-as-a-service applications, it’s a matter of getting comfortable with the security that the vendor has in place. Our own experience with this has been pretty bleak. It’s clear that the industry as a whole has work to do there. 

Like what?

Attackers have the advantage right now. Even the largest and most sophisticated companies are getting breached on a regular basis. I think there are three things that need to happen: We need to do a better job of information-sharing about risks, methods, and actors so that companies don’t have to start from scratch. We also need to make security simpler. Right now it’s way too complex, and there are too many products that target specific problems that tend to be important to only the biggest of companies. And even those companies can barely stitch them all together into a coherent solution. For everyone else in the world it’s pretty much impossible to do that.

We’re working on a lot of this. We run an annual conference called UNITED to bring together innovative defenders to share ideas. It stands for “Using New Ideas To Enhance Defense.” We’ve committed $100,000 to sponsor some projects we like to call the “Magnificent7” and there will be no strings attached to the funding.

Washington seems to have finally awakened to the wider IT security threats. We hear a lot of talk coming out of Congress about cybersecurity. What, if anything, do you expect to come out of these efforts?

There are two security bills, SOPA and CISPA, that have gained a fair amount of attention lately. SOPA focuses on the illegal downloading of music, videos, software and other counterfeit goods that affect a wide variety of industries. These are the low-hanging fruit when it comes to online crime.

CISPA focuses on sharing private sector consumer data with the government to protect national security interests. The intent with CISPA is to legally protect private companies when they share consumer information with government and law enforcement entities. This information would not be available to the public at large and is highly scrutinized by privacy advocates. The information would be used to try to protect the country’s critical infrastructure. But if it were to become law, it won’t change the status quo of organizations and consumers fending for themselves when it comes to information security.

Also if they’re passed, they only affect U.S. citizens. These laws will not prevent foreign entities from engaging in piracy or breaching U.S. corporate or civilian assets. Companies will still be under non-stop attacks from persistent adversaries.

You raised a big bunch of funding last fall with a $50 million investment led by TCV. What are you going to do with all that money?

We’ll use it for three major initiatives: First, we’re doubling down on expanding our existing engineering teams. We doubled the team in 2010, nearly doubled it in 2011, and plan to double it again in 2012. Second, we’re accelerating our international expansion. We just hired a regional VP for Europe and are expanding our European and Asia-Pacific operations with new offices in Amsterdam, Hong Kong and Sydney. Finally, we’re looking to acquire terrific companies with passionate teams that want to join forces with Rapid7 to change the security world.

You acquired the Metasploit Project in 2009. How has that deal worked out and what does it say about the companies you may yet acquire? What are your plans for future acquisitions?

Metasploit has been great for Rapid7. We first started thinking about Metasploit when Chad Loder, one of our co-founders, came up with the idea of integrating an existing product with Metasploit. We discussed it with HD Moore, the founder of Metasploit, and he was equally excited about the idea of integrating the products together. In a week or two we had a working prototype. Right then we realized that we’d found something special: A passionate, driven entrepreneur who shared a lot of our vision and values, a product that logically works together with our existing product, a huge and engaged community of expert security insiders and a business that was ready to be commercialized. We asked HD if he’d like to join forces with us, and he agreed. We were able to build a team around HD, and together we’ve built the Metasploit business into a leader in its category. 

In that case we learned that founder and team are critical. It also made it easier to build the rest of the team around HD from the bottom up. Now we’re actively looking for companies that play in markets that make sense for us, and products that have a solid foundation for the future. We haven’t yet found another opportunity that fits all of these areas.

I get that Rapid7 is growing; you’ve got an impressive list of customers that includes Anadarko Petroleum, Teradyne, Liz Claiborne and the U.S. Postal Service. Can you share some basic metric that shows how much you’re growing?

Our revenue for the last seven years is over 90 percent per year, and we’ve grown more than 70 percent in each of the last two years. And we have more than 2,000 customers. We’ve been lucky to be in a market where the demand is increasing because threats are escalating.

The results could be even better. In a note to clients issued Monday, Chris Whitmore, an analyst with Deutsche Bank Securities, said that while he expects sales to be in line with the consensus, IBM could report earnings that are as much as 10 cents above the consensus. One reason he expects a beat is the services business: Past deals should start paying off, Whitmore says.

You can’t go very far with IBM before you hear the word “analytics.” IBM has this thing about making different bits of the world smarter. Commerce is one thing; cities are another.

Then there’s the planet itself: IBM says it wants to generate $20 billion from new initiatives by 2015, and one of those is making things smarter using its analytics technologies. There’s money to be made in taking data that has previously been ignored, finding patterns in it, then gaining helpful insights. Other companies are getting analytics religion, too: Hewlett-Packard spent $12 billion last year to acquire Autonomy, which specializes in analytics software. Meanwhile, Splunk is coming public in an IPO slated for later this year.

I had the chance to talk about all this recently with Mike Rhodin, the senior vice president of IBM’s Software Solutions Group, during a visit to IBM’s headquarters in Armonk, N.Y.

AllThingsD: Mike, we hear a great deal about how important the analytics business is to IBM, to the point that we rarely hear from IBM these days when you don’t talk about analytics. Yet I think people are still getting their heads around what it means. Walk me through how IBM sees this.

Rhodin: The observation we’ve made, and you have to be careful with observations, is that analytics is something that’s becoming embedded in everything else. It used to be a thing. Analytics was initially business intelligence and dashboards, and when you say the word, that’s what many people still think of. They think of a dashboard with statistics and pie charts that kind of show you what’s going on. We think of it different. It’s that plus real-time analytics, statistical models — it’s starting to look at analytics in real time versus the past. The idea is that you instrument your processes and capture the data as it’s occurring, using statistical models to predict potential problems. So you’re going from reporting on past events to predicting future events. It’s that combination that we find very interesting.

What’s a good example?

We’ve done a TV ad on this, so you’ve probably heard of it. But it’s Sick Kids Hospital in Toronto. [Also featured in IBM's Centennial film.] We instrumented their data flows, and then we built analytics triggers to look through their data. We’re finding anomalies 24 hours before the doctors and nurses do, simply by instrumenting the physical world, pulling data together, using analytics to gain insight and then using that insight to hopefully get to a better outcome. And that pattern of instrumentation through insight is a repeating pattern of everything we call Smarter Planet.

How did IBM come to see this as so strategically important?

The whole story behind how we put this organization together was driven around an observation we made in 2006 about how the world was going to change. And that we had seen enough examples of this to know that this was real, and it represented a fundamental shift. Some people thought Smarter Planet was simply a marketing campaign, but it’s not. So if you think about Smarter Planet in simple terms, it comes out of the digitization of the physical world, the instrumentation of physical processes that’s going to generate huge amounts of new data, which is going to drive issues around storage, and what to do with all the data, how to analyze it. That pushes you toward real-time analytics and streaming technologies, because with real time, you don’t have to save the data — you want to look for anomalies as they occur. It’s the combination of multiple things happening at once that give you that trigger. So that pattern you see repeating itself throughout the physical world: Smart transportation systems, water systems, intelligent smart-grid systems, health-care systems like the one I described, these are example of real change that are going to occur in parts of the world around us that have been less benefited by information technology in the past. It’s the next big wave of IT spending.

And yet it’s not all about the physical world — you can apply the same patterns to the digital world, too, right? I’ve seen a lot of analytics-related news coming out of IBM that looks at data gathered in the digital realm.

Sure. You’ve seen us do things like sentiment analysis, tracking people’s opinions on the social networks about the Grammy Awards and the Super Bowl. Those are just examples of the same pattern of instrumenting, pulling data together and then looking for patterns. We’re doing a ton around retail. Two years ago, I was at my house in Vermont, and I looked at the paper that morning, and saw a story saying that, according to IBM, luxury goods sales were up. And I wondered who at IBM would have put out that press release. And then, a few minutes later, it was my own group. That was after the acquisitions of Coremetrics and Unica. Coremetrics had previously put out these regular reports, and so they became an IBM report. As we went into Black Friday and Cyber Monday last year, we had enhanced it so that we not only knew what was being bought, but what device people were using to buy it. So we could track purchases on the iPad versus Android versus Blackberry. And we actually published the statistics on that.

What did Unica bring to the table?

The level of information we’re gaining on instrumenting data sets is pretty dramatic. But it’s not just finding out what people are buying — you can also figure out what people are not buying. So you start to see trends in commerce that can tell you how you’re doing against your competitors. So one thing we can do is help companies figure out why things aren’t selling on their Web sites, so they can think through new tactics and offers they might create to get people buying again. The Unica acquisition comes in as a real-time automation of marketing. You feed real-time information into a marketing management program that automates the marketing of those things. And recently we closed in the acquisition of DemandTec, which can automate the pricing of those offers. So you can see how we’re stringing together a group of things we collectively call Smarter Commerce.

So if, for example, Best Buy and Amazon are going to have a fight over who has the best price on a TV, they can just automate it.

Yeah, they can automate it and just watch it go. It is a very interesting set of dynamics that’s unfolding around us. Commerce was one of those areas that we thought was ripe for transformation. We had some of our own internal technologies with our own e-commerce engine, WebSphere Commerce. But that was really about traditional order-capture e-commerce. Then we started thinking about commerce in a very broad sense. There are a lot of processes that exist between companies that do business with one another, and then helping those companies do business with their customers. So we put together a big process map that showed what products we had that addressed those processes, and where we didn’t have them, we had white boxes. Then we identified companies that did, and started to buy them. And over time, we’ve filled in that map.

Have you filled in the map entirely, or are you going to be buying more companies?

We’ve publicly said we’re going to spend $20 billion on acquisitions between now and 2015, and we haven’t finished yet. [Since this conversation, IBM has announced plans to acquire Varicent, a compensation and sales performance analytics company.] We’re always looking for good companies, and it’s part of our business model, and we have a stated intention to buy more.

We all know how that turned out. Dell first conquered the PC market, and the ultracompetitive environment it created drove several companies out of the market: IBM sold its PC business to Lenovo; Gateway sold itself to Acer; Hewlett-Packard acquired Compaq. Other lesser players are all but forgotten.

It’s as if Dell was a victim of the hyperefficient world it created. HP is now the world’s biggest PC maker, followed by China’s Lenovo, with Dell in third place on a global basis, as of last quarter.

PCs — consumer and business PCs — still amount to about half of Dell’s business. But there’s another way to look at Dell, and that’s from the point of view of its enterprise business. I learned this in a recent conversation with Steve Felice, Dell’s chief commercial officer. I also learned that the consumer PC business, for which Dell is still widely known in the U.S., amounts to about one-fifth of its business, while its enterprise lines of business, including commercial PCs, amount to 50 percent.

It’s all part of the long-term transformation that has been underway at Dell for a few years now. The company recently did three acquisitions in as many days, the most significant of which was for Wyse Technology.

That caught my attention. But first I wanted Felice’s reaction to the findings of a J.P. Morgan survey of 100 CIOs, saying that the release of Microsoft’s Windows 8 wouldn’t be much of a catalyst for PC buying at large companies.

(We had a pretty good talk, so, arbitrarily, I left in an eighth question from our exchange.)

AllThingsD: Steve, there’s a survey out from J.P. Morgan recently that says that CIOs from large companies don’t see Windows 8 as the sort of thing that would get them buying PCs again. That, to me, could be interpreted as bad news for Dell. Is it?

Felice: I don’t think so. Operating system changes have never been a catalyst, at least not in the corporate world. Consumers and small businesses take off with it right away. Corporations have rollout schedules, and they stick to them. Some of them are just starting to deploy Windows 7. They do their three-year roll-out schedules, and when it’s time they’ll go to Windows 8. About 55 percent of our business are the larger mid-sized and up public companies. The other 45 percent are small businesses and consumer. We’ll see some buying within that 45 percent. On the others, they will go on their normal schedule.

On the enterprise side, I was just with a bunch of CIOs here, and there are some very common themes about why I think they are going to spend some money. And it’s really to continue a transformation of their own infrastructure, to take advantage of virtualization and cloud computing and bigger pipes to transport information. There is a pretty common theme that there is more opportunity to get more out of assets. There is more optimism around moving away from legacy architectures and into open systems. The whole concept of being more “open to open” is there. We view that as good, because we’re the pure play when it comes to moving to open architectures.

What are the CIOs you talk to worried about these days?

Security. It’s easily in the top three concerns. We think we added to our portfolio two of the best assets out there. One is intended to tell you how to figure out what’s going on in their world. That’s what SecureWorks, a company we acquired recently, does. It analyzes your infrastructure and tells you where your threats are coming from and how to prevent them. And then we just announced the acquisition of SonicWall. They built a nice unified threat-management platform. From my viewpoint, it helps enable the movement to open. Some people are afraid to leave the proprietary world because they think it’s more secure.

Where are you on mobile? I read that you just killed a smartphone model. Where is Dell going on the mobile front?

I would characterize the last couple of years as us experimenting with what form factors and operating environments will work. The good thing is that we’ve never overextended ourselves in mobile, yet we’ve launched a lot of products, and we’ve learned a lot from them. We’ve launched tablets — 5-inch, 7-inch, 10-inch. We’ve launched them in emerging markets first, we’ve launched them in developed markets first. We’ve launched smartphones around the world. So we have an active smartphone that we just launched in China, and one in Japan. We just end-of-lifed one in the U.S., which is what I think you’re referring to. We have a road map of other products that are coming up. We are predominantly a commercial-oriented business that has some consumer business, but the lines are blurring.

What we’ve learned is to look at the consumer from the commercial side, not the other way around. Some companies who have done well in mobility are all about consumers and entertainment. And looking at the consumer as an individual, without any regard to how they might interact on the professional side of their life. Executives of any company I talk to say these devices are driving them crazy. They don’t know what’s happening to their information, how they get it back, nor how to interact with the other devices that people are bringing into the workplace. Or how to support them and control them. No one is dealing with that. So, generally, you’re going to see Dell think more broadly about the mobile ecosystem. When you next see devices from Dell, you’ll see us thinking more about the security of them, the end-to-end aspects of managing them, from the data center to the end user.

And yet what I’m hearing from a lot of companies is that they’re just adopting iPads, mainly because the bosses have them and love them. This is how Apple is penetrating the enterprise. How is Dell going to compete with that?

It’s unique, no question. And so it’s got some infatuation aspects to it. But then I talk to these customers, and because there isn’t a lot of alternatives, what they’re tolerating is pretty interesting. They say they have one of those products. Then the problems start coming out. First, the office applications don’t work very well, and they have trouble reading PowerPoint decks. And then they can’t wirelessly print easily, and some days they’re not able to get on the network at the office. And I look at that and say, they’re tolerating a lot because they like the form factor. Our conclusion is that there need to be some alternatives.

We’ve got the Dell XPS 13 Ultrabook, and we take it around and show it to customers, and invariably the decision-maker wants one. And then he says that if he had this, he never would have bothered with the tablet. So we took a consumer-oriented product and put pro support on it, and showed that to CIOs and said that if their executive team used it, they’d get the same support as they would on their Latitude product. So when it breaks, someone will come to the office and fix it, and you don’t have to go stand in line at the Apple store. Then we put image management on it. If you want a corporate image that has to be managed, we’ll do that. Institutions want thin and light devices, but they also want the options to secure and support them. The other thing that is happening, with ARM, you’ll get even more form factors.

Well, let’s talk about the PC, then. People keep talking about the decline of the PC. The research houses keep predicting market declines, and sometimes they materialize and sometimes they don’t. But even so, the numbers — at least globally — are flat to slightly up. Yet when you drill down to different regions, you see very different stories, with different countries growing like crazy. How does Dell see this right now?

This is a weighted math problem. The lowest growth rates are in the developed world, which will remain more of a replacement cycle world. The U.S. is like that because PC penetration is very high. Then you go to India and China, where it’s very low. What’s happening is that the emerging markets, where combined, they will be bigger than the developed world. And they are still growing rapidly, so the math is going to reverse itself. You’ll still see low-single-digit growth rates in the developed world, but healthy growth rates in emerging markets — but the emerging markets will be bigger. We still see double-digit growth in China. Look at Indonesia, there’s 300 million people just starting to buy PCs. As these countries industrialize and get more mature, they just need basic computing.

And how do those markets develop?

It comes back to the first thing I talked about. These countries don’t have the legacy baggage. They’ll grow, they’ll industrialize, they’ll need more infrastructure. And what will they buy? They’ll buy standard servers, storage, and open systems. This is happening in China, and its why we’re No. 1 in servers there.

Do you think people still associate Dell with the PC and don’t give it enough credit for its greater focus on the enterprise?

I’d have to say yes. Some of that is our own doing. We have this very large direct model, and we have a tendency to talk to customers one on one. So we tend not to do a lot of brand advertising. So our consumer advertising is more visible. If you ask people randomly what portion of our business is consumer, they’d say it’s more than half, but in fact it’s only about 20 percent. And if you ask people what portion of our business is servers and storage, they don’t know, but it’s more than 50 percent.

If you combine consumer and commercial PCs, how much is that?

About half is PC, and that’s global. But I think with all the acquisitions we’ve done, and a lot more customer testimonials we’re doing, the perception is changing. We’ve done some targeted testing of campaigns where we say, ‘Do you know that Dell does this?’ The perception of Dell as an enterprise provider skyrocketed. Brazil is an interesting case, because we entered the server and storage market there before the PC market. That’s because the only way to really be successful in Brazil with PCs is to have your own manufacturing there, because of the stiff tariffs. So in Brazil, Dell is thought of as an enterprise company. You’ll see more of a commitment this year to do more brand-oriented advertising around the enterprise.

You never think about it, and yet every time you attach a photo or a Word document, or practically anything else to an email message, you’re using it.

It was created by Nathaniel Borenstein, a computer researcher who, 20 years ago, worked for Bellcore, the research arm of the Baby Bell telephone companies. At the time, no one really gave much thought to the idea that email could or even should comprise any more than basic text messages, and when attachments were involved, incompatible formats caused the kind of headaches that we would consider unacceptable today. Curiously obsessed with the evolution of email, Borenstein teamed up with Ned Freed, a fellow Internet pioneer, to write the MIME standard that is the backbone of email attachments today, supporting more than 1,300 types of files and enabling billions of email users to ignore any worries about compatibility among email programs.

The first message containing a MIME-encoded attachment was sent on March 11, 1992, and today the standard is used something like a trillion times a day. And no, he didn’t get rich (but he did once turn down a job offer from Steve Jobs). He’s now the chief scientist of Mimecast, a cloud-based email outsourcing company that just happens to riff on the name of the standard he helped create. I got a chance to talk to him by phone a few weeks ago. Here are some highlights from our conversation:

AllThingsD: Nathaniel, no one really thinks about MIME, but everyone uses it. Tell me how it happened. The story goes, you thought that one day you’d like to use email to receive photos of your grandkids. Is that true?

Borenstein: I can’t say it was my primary motivation, but it was an easy way to explain what I was thinking of. Email had been around since 1965 on time-sharing systems, and then moved to the fledgling Arpanet. Then more and more people outside the English-speaking world started to come up with a lot of incompatible ways to encode their email. At the same time, people wanted to send around files occasionally. The only way that was really safe to do it was to package up a file with a program called UUencode, which had multiple versions that weren’t always compatible. There were all these ad hoc things that people were doing for these complementary needs. In 1980, I was a grad student at Carnegie Mellon, and I was put in charge of maintaining an email program. It was just a job at first. Then we got some Unix machines. I thought I could do a better job by rewriting the email program. And I was also in charge of running an email system. It became sort of a hobby. Then, later, after I finished my dissertation, my adviser asked me to write what he described as the world’s best email programs. Suddenly my career was my hobby.

So what was it you were asked to work on?

It was Carnegie Mellon’s Andrew Project, which was intended to envision the next generation of computing environments for campuses. What was really interesting then was that it had very advanced — for that time — multimedia capabilities. And so we had a chance to make multimedia work. There were a few programs with multimedia that came before, but we had the chance to get it into people’s hands. And then something interesting happened. Steve Jobs came to visit. This was in the days that he was running NeXT. [Jobs founded NeXT after leaving Apple in 1985, and ran it until he sold it to Apple in 1996. -Ed.] He came to the campus, and a light went off in his mind when he saw the mail system. He had not completely gotten email until he saw what we could do with it, and so he tried to hire our entire team. And he got none of us. None of us wanted to go to work for NeXT.

Why was that? Was it about Steve, or about NeXT?

I’m not sure we all had the same reasons. In my case, it was that I had heard from other people that working for him was difficult. I have enormous respect for him, because he was one of the captains of our industry. But I had a feeling that if you went to work for him and you had a disagreement with him, you lost. It was that simple.

And let me guess: He built email into the NeXT operating system anyway?

His team built NeXTMail, which looked a lot like Andrew did. In fact, if you use Apple’s Mail.app on the Mac, you’re using something that looked a lot like Andrew did. But he did something interesting. He created a way for people to send files around. And so you had two communities of users on NeXT and on Andrew who couldn’t send files to each other. So after I left Carnegie Mellon, I went to work for Bellcore, which was the research arm of the Baby Bell phone companies. My job was as a researcher, and my mandate was to work on things that would encourage the use of bandwidth. I thought I was done working on mail. Then I started noticing these problems with compatibility, plus I had an idea for something I called active messages. And Bellcore was a very heterogeneous computing environment. There were all these Unix hackers, and each person had their favorite email program — I counted more than 20 in use. And I wanted them all to be able to read these active messages. So what I did was start patching them all. That led to something I called Metamail, which would be triggered by a header in the email that would then call on any one of a number of other programs. So if you received a JPG image in Atomic Mail, which was one of the programs in use at the time, it would display the JPG in Atomic Mail.

So this led to the MIME standard how?

Metamail was already in use when the work that led to MIME started up. I got involved with some efforts at IETF [Internet Engineering Task Force]. I got introduced to Einar Stefferud, and he became a mentor of mine, and introduced me to Ned Freed, who became my co-author on MIME. I was worried about email and multimedia compatibility, and Ned was working on email gateways — the problems of translating messages between different email realms — because we weren’t all running SMTP back then. Stef thought we should work together. Now, Bellcore had allowed me to take Metamail and contribute it to the public domain, or what we would now call open source, and so anyone was allowed to modify it. So every time there was a new draft of the MIME standard, I could update to support the new standard. So when the first public draft of the MIME standard was ready, I was ready with Metamail, and it was just picked up at an incredible rate. I wrote it for Unix, and three days after the release, someone had already adapted it for Microsoft DOS. That’s what told me I had a hit on my hands.

What about MIME made it flexible?

One of the reasons I think we were successful with it was the fact that we had an incomplete vision. Yes, I was thinking about pictures of grandchildren someday — I am a grandfather now, by the way — but I knew that there would be things coming that I couldn’t forsee, and I didn’t want the system we designed to have to be completely redesigned in order to accommodate the new things. That is why the MIME type system is so open. You just go to the Internet Assigned Numbers Authority and register a new MIME type. The original supported 16 MIME types, and when I checked a few years ago, we were up to 1,309 different supported file types. When I tried to explain why I wanted it to be open-ended, I tried to explain things that you could, at the time, just barely imagine. I had two examples — one was smell. I thought that one day you might be able to send files containing smells, and one day you might, but no one is really focused on it yet. The other was one I thought of almost as a joke. I proposed a MIME type for matter transport. I thought we could send matter around as an email attachment, and in a way, it came true. When you think about 3-D printing and the models for that, people are sending around schematics for 3-D objects that can then be printed. So open-ended is very good in a world where science fiction is quickly getting overtaken by reality.

You now work for a company called Mimecast. What do you do there?

The short tag line is that we do unified email services in the cloud. We take all the things that surround and administer your email, and everything except the basic core operation of it, we outsource to the core. We archive your email, we set policies about how and when it can be deleted. We do data-loss prevention. We do continuity and disaster recovery. Our BlackBerry users didn’t notice when the service went down last year. And I’m not the founder. A lot of people think I am, but I’m not. I just work for the company as its chief scientist. Once you get all those things in one place, there’s a lot of potential. You can do things that you couldn’t do before. I’ll give you just one example: Imagine you’re composing an email, and as you type, there’s a sidebar next to it. In the style of Google Instant, it becomes an implicit search query that searches both your email archive, but also, say, news stories. The point is that it might help you shape your message or change what you want to say in your email, who you want to say it to, or whether or not you want to say it at all. Having an email archive solves a very deep problem, which is organizational memory. Everyone wonders from time to time whether someone knows the answer to some question. The point is that the bigger an organization is, the more often it’s necessary to rediscover the same thing over and over. Having an email program that searches for things that might help you would go a long way toward solving this.

Here’s the Infographic on the history of MIME. Click to see it bigger:

Cisco appears to have continued its recovery following a painful restructuring. Sales are up and setting records, earnings beat the consensus of analysts, and Cisco’s outlook for the coming quarter is positive, too. Cisco’s even reached a point where it’s at least close to fitting into its old skinny jeans. What a difference a year makes. Last year it was all about gloom and doom and some irritable investors were calling for Chambers to lose his job.

Since then the company has undergone a painful but necessary restructuring, shed thousands of jobs, shut down marginal business units and refocused on its core businesses, and as yesterday’s quarterly earnings report proved, the results are not only starting to show, but starting to stick.

So is the work done? Definitely not. Yes, Cisco is showing some return to its strengths, but there’s still a long way to go. We talked about that, the troubles Cisco’s competitors are facing, his long-held view that companies like Cisco should get a tax holiday to repatriate their cash held outside the U.S. and many other things.

Also Chambers, remembering that I dedicated “How Ya Like Me Now” to Cisco last quarter as it turned the corner on its troubles, asked me what song I might use to characterize its results this quarter. Taking inspiration from the headline of my first story and from his cautiously optimistic tone, I settled on “It’s Getting Better All The Time,” the Beatles track, performed by Paul McCartney and embedded after the Q&A. Enjoy.

AllThingsD: John, I don’t know if you saw the headline I wrote earlier, but I said you fit into your skinny jeans again. Is that fair?

John Chambers: [Laughs] I think it’s fair. We were up about four or five inches there so I think we have an inch or two to go, but we’re getting close.

So let me ask about the quarter. It looks like a solid quarter where a lot of the troubles were starting to get behind you. In broad brush strokes, where were Cisco’s strengths? I know some of your competitors were having their own troubles, but where were you strong in particular?

The strengths were that we appear to be executing on the market transitions that are going on, and we appear to be reinventing ourselves, not just in terms of how we control our costs, but in terms of the productivity we’re getting out of our employees. So if you look at the major transitions going on in the industry from an economic point of view, to how customers buy, to where the high tech industry is going, which I would argue is all connected to intelligent networks, that all appears to be playing out as we had hoped. The other transitions that you think about, like data centers and the cloud, we saw 90 percent growth in an industry that is growing at best in the teens. Our ability to move in collaboration, where we grew 10 percent though I think we could do better — it remained solid for us. In video with set-top boxes up 23 percent to new video technologies growing well and seeing improvement in the margins. There are things we need to do to reinvent Cisco. I think I said this at your own conference a decade ago [Chambers spoke at D5 in 2007, but that is not where he made this comment. -Ed.] that voice will be free. It’s almost there. You could see the trend, and what it meant is that once voice would become a smaller part of the network load, that would be given away in order to make way for the video and the entertainment. The same trends are taking place all over again at multiple speeds and multiple gears, which if we’re right, they all play together. Everything from mobility to cloud to the intelligent network, to wireless to security, to video being pervasive, all of those are coming together at tremendous speed. And we’re pulling them all together pretty well for our customers. Now, this is just the beginning if we execute right, and we have plenty of hurdles in front of us, but this may be the voice-will-be-free trend times 10 in terms of the impact of the transitions going on. We appear to have managed them well; we did what we said we would do, turned in record earnings and record revenues, and earnings per share were up 48 percent. We’ve realigned ourselves and reinvented the company, which I think you have to do every five years. Sometimes it takes a crisis to reinvent. … It’s a journey and we’re just getting started.

What’s the number one hurdle that you want to get over this year, that’s in front of you right now and keeping you up at night?

I want to build deeply into our capabilities, a continued focus on gross margins and effectiveness, from product design to sales all integrated together. You probably know this, but we’re the only company who’s anywhere near this profitable with $45 billion in sales with open standards. It isn’t a mainframe business where everything is proprietary or like in Apple’s situation where it’s a wonderful company but it has an architecture. We do it entirely with open IP, so we can be challenged by a 10-person start-up or a by the biggest giants like Dell or IBM or Hewlett-Packard to come at us. With this type of margin but so low a barrier to entry, we’re doing relatively well. But we still have to reinvent ourselves at a faster pace. We have to do what I call the basic blocking and tackling to participate in the new capitalism that we’re heading into. That’s the attention to gross margins, getting the market transitions right, tying the products together so you can get the price premium on them. But what really keeps me up at night this last year was the realization that this has to be constant reinvention. Average is over. An average high-tech company is headed down. Those above-average companies are going to head down in 3 to 5 years. If as a company you can’t reinvent yourself every 3 to 5 years, you have a problem coming at you.

Does that then imply that Cisco had become complacent or even average? It was and is the biggest networking player, but did Cisco lose its way and try to do too much?

Well, I could give you a long list of things we have to do better. We’re a healthily paranoid company so we always have things we could do better. I do think we were fat. Four to five inches, not just one or two. We’re not back in our skinny jeans yet, as you put it, but we’re within an inch or so of getting there. We missed market transitions at the speed at which they occurred. We should have seen the drop-off in public spending coming at us sooner. Everyone else has still run off the turn, even though they saw what happened to us two to four quarters ago. We should have seen it sooner and reinvented ourselves before it hit us, and made the turn much more effectively, and I’m committed to doing that, and the leadership team is, too. It would have been easy to just cut a billion dollars in expenses, reorganize sales and how customers buy. We realized that gross margins can deteriorate not just because of what competitors do but what we do to ourselves, like what we did on switching. We should have been smarter there.

On the conference call you mentioned the possibility of getting back into the mergers and acquisitions game. Any hints on where you might go or whom you might buy?

I think it’s a fair question. Part of the reason we said that was to explain why we’re building up cash in the U.S. Part of it was for share buybacks because the price was attractive. A lot of people don’t realize that we use M&A deals to gain leadership. We were a routing company, we acquired three switching companies. We were an enterprise and commercial company, we acquired a service provider company in Stratacom. If you look at where it’s going to be, it’s probably in data center, collaboration and video, and combining those with security, bring your own device and mobility. A large part has to do with our government allowing us to bring money back to our country.

That’s always been a big issue of yours. You made some comments about it on the conference call as well. Care to elaborate?

I think that it’s going to happen in the next presidential administration whether the president is re-elected or someone else is. I’ve been disappointed that we haven’t been able to get our message out about this more effectively. Ironically, I was in Europe, the government leaders there look you right in the eye and ask what they need to do to bring jobs to their country and keep the ones they have. They are partnering with business. I think we’re following Europe in the wrong way and following more of what they did to get them in trouble in the first place.

There’s a bit of a disconnect, however, to anyone who sees on one hand a company that wants to bring cash back in a tax-advantageous manner in the name of creating jobs, while the same company just fired so many people in the restructuring. Can you connect those dots for the person who sees the apparent logical disconnect? If it’s about jobs, then why are you firing people in the first place? If you were having lunch with President Obama or any other political leader, they might be confused, so how do you explain it?

They’re related. The first thing you’ve got to do when you hit bumps in the market is find out how much of the damage was self-inflicted and how much was the result of the conditions of the market. It would be a cop-out to say it was all the general market. We had to look at what we were doing internally. Every government leader in the world who’s adding to government payrolls and adding government debt is going in the wrong direction. We have to use technology to deliver services better. You do see most government leaders saying they want to get their own houses in order. The second thing they do is look at ways to generate private sector jobs. I’m a strong Republican, but I think President Clinton got it right with business and knocked the ball out of the park. He partnered with business, he was critical where appropriate, but in six years he generated 22 million jobs, grew GDP on average by 4 percent per year, and he was America’s champion on the Internet. I think that’s a more practical example. He grew private sector employment versus government employment by a ratio of 9 to 1, and created a positive climate for business, and when business got out of line he’d whack ’em. I think it would be a major mistake not to let companies repatriate their cash because whoever is in the Oval Office next year is going to want to get private sector jobs growing again, and there really aren’t very many levers left to pull. We’ve never had this slow a recovery after this deep a recession.
–

Getting Better – Paul McCartney

Veghte joined HP in 2010 after 20 years at Microsoft, where he managed the $15 billion Windows business and oversaw the launch of Windows 7. At HP, he has been credited with growing its software revenue by 18 percent last year.

Given Veghte’s history as a software guy, his appointment to this role can’t help but be seen as a key signal by CEO Meg Whitman of the role she sees software playing in HP’s strategy going forward. That was one of the things I asked Veghte about when we spoke by phone earlier this week.

AllThingsD: What, in your view, is the role of the chief strategy officer at HP, and what do you expect it to entail in the coming year?

Bill Veghte: As we’re out talking to customers, they’d like to buy more from HP; they’d like HP to be more successful. They look at the advances we’re making in networking or storage or printers, but they want to know why the whole is greater than the sum of is parts. What is HP’s strategy for continued leadership in the market transitions that are going on? And some customers would say that where HP is concerned, that’s not a fully realized opportunity.

And you’re coming at it from the software part of the business, and we’ve heard from Meg saying she’d like to grow opportunities in software. Your appointment, to me, sends a bit of a signal that software is going to be a big part of HP’s strategy to get things turned around. Is that accurate?

I think, certainly, as I talk to Meg and Ray [Lane, HP chairman], and with the members of the executive committee, I’ve found that this is a catalyzing role. If done right, there are different models of strategy in different Fortune 500 companies. And the one that makes sense here is catalyzing with other business units. Whether that’s Vijay Joshi in printing and imaging, or with Todd Bradley in PCs, or John Visentin in the enterprise group, there’s a strategy that each one of those is trying, and which is accretive to a whole that is greater than the sum of the parts. And so, to the extent that software is glue or networking is glue, I think it’s a statement that has more to do with a pan-HP strategy than something that’s specific to software.

What’s Job One, starting on your first day?

Job One is making sure that as we have those conversations with customers, they see an HP that is unified around a set of constructs and offerings that deliver what they need. It’s different from having offerings that are, by themselves, individually great. It’s about having unifying themes and constructs.

It seems that you’re talking about finding a way to routinely and thoughtfully combine different things that HP makes or does, in ways they aren’t being done now. Is that what you’re getting at?

I think that very accurately characterizes the opportunity. When we talk to the leadership team, we hear a lot of the same thing. There is a lot of great stuff within HP, whether you get that in terms of market position, or IP, or people. I like how you put that: How do you routinely and thoughtfully combine things, particularly in light of the market inflections that are happening. We are in a tectonic shift, and that can be an opportunity, if you clearly spell out the value proposition for customers. Not only in each one of the units, but where you’re thoughtfully combining them so that the whole is greater than the sum of its parts.

I thought of an example around meeting the needs of the market. There was an IHS iSuppli report out earlier this week about cloud servers, which are growing. But customers are going to Taiwanese ODM companies to get customized products, while at the same time cloud servers are growing generally. Is this the sort of thing that might affect HP?

I was talking to Dave Donatelli [general manager of Enterprise Servers] about this recently. It’s interesting, because it seems like in more recent months it has flipped back, because of the integration within that customization. A great example that Dave and I have been working on is the whole cloud system piece. You’ve got a lot of great stuff in automation and orchestration software that is inherently cross-platform, and which crosses virtualization engines and marrying that deeply with the converged infrastructure. We’re the only company that can give you a single stack, soup to nuts, from a single vendor. The core construct is that there’s a lot of private cloud build-out going on, and those customers who are doing it are saying they don’t want to be the systems integrator for six different vendors, and they also prefer not to be locked in to a single vertical stack. That’s a huge advantage for us. And to your point about routinely and thoughtfully combining, we should do exactly that. It’s been doing well for us in the marketplace, but how do you make that routine against the opportunities we see in the marketplace?

You spent about 20 years at Microsoft. How does that inform what you’re bringing to this job?

At the core, any of these jobs are about identifying and exploiting market shifts for customers. I had the privilege of having a front-row seat during some big marketplace disruptions, and helping catalyze businesses and delivering superior market positions and solutions. It’s all about handling change, and turning it into an opportunity.

And while it was something of a publicity stunt to put a sophisticated and specialized IBM computer in people’s living rooms, the fact remains that Watson is, well, a pretty sophisticated and specialized computer.

Since schooling humanity at “Jeopardy” — which was the subject of a book — Watson went on to get a real job working for the health insurance company Wellpoint.

Now IBM has decided it is ready to tackle something a little more involved. Watson is about to go to medical school, and will even study a specialty: Oncology. Sometime this year, after studying and even taking exams to prove what it has learned, Watson will be assigned to assist human physicians in the treatment of breast, lung and colon cancer.

If this seems like kind of a big deal, it is. Watson won’t be the first computer to serve as a reference tool, helping doctors do their jobs. But then there has never been a computer quite like Watson, which can learn so readily from natural language — and play TV game shows and win.

Last week, I talked with Manoj Saxena, general manager of the Watson program at IBM, to talk about what Watson will — and won’t — be doing in helping doctors treat humans with cancer, and what that might mean for the future of medicine.

My first question was about what Watson has been doing since its big win:

AllThingsD: So, Manoj, last I knew, Watson had been working for Wellpoint, which is a large health insurer. What exactly has it been doing?

Saxena: Let me bring you up to speed. In August, we announced the first commercial relationship of Watson with Wellpoint, one of the nation’s largest health insurers. They have 35 million customers in 14 different states. One out of nine Americans are covered by them. The first area was around utilization or approval. Let’s say you or I call up a clinic or hospital saying we have flu-like symptoms. Where Watson would come in is on the approval process, saying we’re covered. Then Watson looks at the history that the hospital has in its records. It might say that it’s early December, and I come in at this time every year saying the same thing; and the last two times it was a ragweed allergy, not the flu. And the medical journals say there’s a connection between ragweed and fever that looks like the flu. And by the way, the newspaper says there was an outbreak of ragweed in Central Texas. And then, in addition to treating for flu, also look for allergies. So Watson is considering the medical record; the patient history that the insurance company has; and third, the medical journal and news information about what may be causing a certain thing. So that’s what it’s doing with Wellpoint so far.

How then do you make the pivot to working with cancer?

We’ve installed another adviser — these solutions are called Watson Advisers. This one is called Watson Oncology Adviser, and this is a big one. As you may remember, medical information is doubling every five years. Doctors tell us that they are spending only five hours per month going through new information in medical literature. On one hand, you have all this medical information coming out. We’ve decided to focus first on breast, lung and colon cancers as the three to apply Watson to. And Cedars-Sinai has partnered with Wellpoint to help come up with the right cancer solutions. And the point is to build the expertise within Watson to help treat cancer.

So Watson won’t be directly involved with the treatment, but rather to build up its own knowledge base?

Watson doesn’t make the decisions. It’s a physician’s assistant. But before it becomes that, it has a lot to learn. Out of the box, Watson has the knowledge of a first-year medical resident. That is where it’s at today. With Cedars-Sinai and Wellpoint, we’re going to teach it all about cancer during the next six months. We’re going to show it actual cases that were solved in the past. And over time, we’ll tweak and teach it, using things we already know.

Is there a human analog to this process?

A good human analog is how we learn. As children, our teachers and parents sit with us and ask questions to understand how well we learned from what we read. And then, later, we learn by doing. This will address the first two phases. Watson will read on its own, and then oncologists are going to ask questions of Watson to understand how well he has learned and then understood. And then once we feel comfortable that it has learned enough, then we will let it begin working as a physician’s assistant, and then it will go from there.

Since, in the end, there are humans being treated, do you have to get any kind of regulatory approval to do this?

No. It’s very similar to how doctors refer to medical journals. Doctors might turn to Google or something like that to look up info from their medical journals. That doesn’t require any approvals. Someone else asked me what happens if Watson suggests a particular treatment, the doctor accepts it, and the patient dies. Or what happens when Watson suggests something and the doctor doesn’t take his advice. Our view is that it’s the same as looking up textbooks and information. The physician is the one who makes the final decision.

And that will always be the case?

That will always be the case, yes. We are far, far away from computers doing medical treatments. I don’t even see it in the forseeable future.

How do you actually go about feeding information to Watson? How does it learn?

It’s a good question. There are four different types of information that’s fed into Watson. At the base of the pyramid, it’s general information like Wikipedia and Google and general information like that. And a lot of that is general knowledge; and a lot of that is already in place, because we needed that to play Jeopardy! Then the second layer is the medical textbooks and medical journals and vocabularies, and those are fed in as natural-language information. It can be any scanned information or text information because Watson understands natural language. So that information is the second part. It can process text and tables, but it can’t process pictures and videos, but we’re working on that. And then there’s the actual test cases, the information on people with 30 years of cancer treatment history. We feed that into what are called “answer keys.” The fourth layer are new domain-specific information models that are specific protocols and procedures that the health insurance companies will want to feed into Watson.

Where do you draw the line? There is an accepted mainstream body of knowledge and accepted treatments for different cancers, and then there are newer things that may be controversial for some reason.

The way we approach it is in two parts. One is the body of knowledge that is already known. But it does not get applied and in context, and often doctors don’t have access to it in context. There are things like cancer treatment guidelines and well-understood things about radiation and effects on different cancers. Call them the known treatment pathways. The second are the emerging treatment pathways, particularly in the area of genomics. That is the one that can get added on. It’s the one our partners are looking at. In about a decade, most cancer treatments are going to shift to genomics-based treatments, rather than chemotherapy-based treatments. There’s a deluge of information about converting the knowledge about DNA into biological knowledge, and then converting that into treatment knowledge. That is the second part of what we’ll be doing.

Do you have other diseases that you think Watson can help treat in the future?

Yes. Diabetes and cardiology, heart problems are next on the horizon. We’ll also be applying Watson in financial services.

When you consider the fact that Lexmark is a printer company — and not even an especially large one by comparison to others in the business — you might intuitively conclude that it’s a company on the defensive.

“People don’t print anymore,” goes the refrain of conventional wisdom, “not even at the office.” It’s easier and more efficient now, when you need to refer to a digital document and have it close at hand, to send it to a tablet like an iPad, or even to a smartphone.

And yet, Lexmark is anything but on the defensive. It has been expanding in recent years, primarily by acquisition. In October, it spent $50 million to acquire Pallas Athena, a Dutch software firm specializing in managing and automating business processes — the flow of information through a company. Lexmark combined Pallas Athena with its previous acquisition, Perceptive Software, for which it paid $280 million in 2010; Kansas-based Perceptive specializes in managing unstructured data. Lexmark CEO Paul Rooke says that the two companies combined give Lexmark a position that is unique among companies in the printer business: The ability to help a customer manage and access information in whatever format makes the most sense.

While Lexmark is significantly smaller by revenue than its biggest rival — Hewlett-Packard’s printing division booked $26 billion in fiscal 2011, while Lexmark is on track to report about $4.2 billion in revenue, according to the consensus view of analysts — it is still able to win business away from its larger rivals, and keep those customers. I asked Rooke about this in a recent conversation:

AllThingsD: Paul, the conventional wisdom has held for a long time that printing was a dying business, and that paper was going to go away because everything would be digital. I think that’s been the general criticism of Lexmark since it first spun out of IBM 20 years ago. What do you think of that?

Paul Rooke: We’ve always seen ourselves not so much as a hardware company. When we started, back in 1991, we were evolving from printers to multifunction printers to fleet management. You can see that in our actions. We also want customers for life. We create industry-specific solutions in a responsible way. It’s not just the blocking and tackling of managing a company’s fleet of printers, but it’s about getting intimate with their business processes and managing the paper and ink and so on. And as we’ve evolved, we’ve become more of a solutions company. We like to say “print less, save more.” When we say that, we’re all about helping with smart devices and managing that fleet. But it also refers to capturing, managing and accessing content within the context of a business process.

Well, let’s talk about that a little. When you say “capturing and managing content and information,” what does that mean?

As we found ourselves managing these multifunction devices that have scanners built into them, we found ourselves capturing content off of paper and into digital infrastructure, and we’re looking to do more of that than we have been. You’ll see us do more interpretation of content and automatically routing documents according to what’s on them. But it doesn’t stop there. We found ourselves scanning documents and putting them somewhere and managing them. Our acquisition of Perceptive Software last year has really strengthened that as a value-add for us. A lot of the content that comes in is this messy unstructured content, and with Perceptive, we’re able to help customers manage this unstructured content and finally access it in the context of their business process. And that’s where our Pallas Athena acquisition comes in. When you put it all together, it puts us in a unique position in the industry. We’re not just a printer maker, but we link into the business processes and provide added value for our customers.

“Unstructured data” is a phrase I hear a lot. What does it mean, specifically, to Lexmark?

It’s anything that doesn’t fit in massive databases that are arranged in traditional rows and columns, like financial information and shipping information. In contrast, you might take something like an admission system at a university. It might have some core intake information that’s structured, like a name and birthdate, but then there’s a lot of other information around it, like transcripts and reference letters, that goes into making a decision. Another example is in hospitals, where you have a doctor or nurse looking into a patient file. All hospitals have information systems that keep track of the basic information on a patient. But then there’s other information — like blood tests and X-rays — that’s unstructured, which the doctor will want to look at in order to make a better-informed decision. As you go around in all industries, there are a lot of examples of this sort of data. It really appears in all business environments.

And yet, the core business is still printers and printing. And for myself, I find myself printing a lot less, sending things I need to refer to to my iPhone or iPad and skipping the printer. Do people like me represent a long-term danger to you, or is that really just an issue of perception?

When you look at information generally, the amount of information and content that’s being generated just continues to grow. The ability to access it in an organized fashion is a key challenge for customers, whether they print it or not. But with that growth in information, even if a smaller percentage is printed, there’s still an opportunity for growth in absolute terms. But having said that, as our strategy has evolved, if a customer chooses to print it or store it, we’re going to be there for them. We’re trying to put the tools and technology in place for whichever way the customer goes. There’s a number of industries — government is one, social services is another — where there are customer-facing industries, where you need to fill out a form or a document that requires a signature; many still prefer paper, because it’s inexpensive and easy. Some choose to do that digitally, some choose paper. And when we talk to customers, they’re asking for help in bridging those two worlds. That’s where we jump in and help.

What is the most important thing that customers are saying to you, in terms of their needs? Is it all cost control, which is top of mind so often these days? Or is it something more?

Cost control is certainly there, as is lower-cost devices. These are certainly propositions that play well with customers who want to reduce the cost of their imaging infrastructure. When we engage customers in the managed-service relationship, they often don’t even know how many printers, copiers, fax machines and scanners they have, until we help them assess it and optimize it and hook their devices into a system that helps them control it all. And our managed print services are helping them keep those costs under control. The other thing we’re hearing about is process improvement. With Perceptive, and now Pallas Athena, we help them understand better what their processes are. We have a lot of technologies that map these processes out — not what you think they are, but what they really are. So many times, when you do process improvement, you spend months in a conference room, drawing out what you think the process is on a white board. We can eliminate that step by plugging in the tools and doing a quick digital assessment of what the process actually is, and map it for you digitally. So if you think your process is made up of steps A, B and C, we can come and show you that there’s also D, E, F and G that you didn’t think of. We’ll show you why they’re there, and where the bottlenecks are, with factual data you can work with. Which is a lot better than speculation.

Where do you think your competitors — and name whomever you want — are vulnerable? Where are you winning business away from competitors?

We turned 20 years old this year. Many thought we wouldn’t survive. I think, while the technologies have certainly evolved, the thing that has differentiated us from our competitors is our depth. We go deep with our customers, and get very intimate with them in their industry and their environment and their processes. That’s why customers buy Lexmark. When we’re up against people like HP or Xerox or others, we’re able to get closer to the customer than they are, and do things in a more customized fashion. I think we’ll be doing more of that as we fill out our technology set.

So what kinds of things should we expect from Lexmark in 2012? Are you done doing acquisitions?

You’ll see us enhance our capabilities. Some people think we’re moving away from printing, and that’s not it at all. But we’re adding to it. In addition to that, we’ll continue to integrate Perceptive and Pallas Athena into a more integrated suite of solutions. That will put us in a unique position. The acquisitions are part of the strategy. When we identify gaps or holes in our offerings, we look to fill them either organically or inorganically with acquisitions. We’ll continue to look at those as part of the strategy. We’re not looking for a big one. The ones we have done have been smaller, but of companies with technologies that have high potential for synergies. But we’re still looking.

Taleo’s CEO, Mike Gregoire, has been in this position before. As executive vice president of Global Services for PeopleSoft, he lived through Oracle’s hostile acquisition of that company. In an interview with AllThingsD, he didn’t comment directly on the speculation that Oracle might make a bid — Oracle hasn’t hasn’t said anything on the subject, either — but it was clear that he didn’t exactly seem to relish the thought, either. Having run $2.3 billion of PeopleSoft’s $2.7 billion in revenue, he was with that company “until the bitter end,” he told me.

After a stint as an angel investor and sitting on the boards of a few companies, Gregoire decided he was “more of an operational guy.” He joined Taleo and took it public in 2005, and has been at its helm since then. Taleo was at that time the second cloud-based software company to go public after Salesforce.com. It was so early for software-as-a-service (SAAS) companies, where customers pay a subscription fee to use the application, that when he approached banks for some financing, upon hearing the word “subscription” they would initially compare it to a magazine. Eventually they understood, and Gregoire got his loan. Now some of those banks are his customers.

Cloud-based enterprise software companies are suddenly hot acquisition targets. Aside from the SAP-SuccessFactors deal, Oracle acquired RightNow in October. As a growing cloud-based rival to SuccessFactors, with a protein-rich customer base, a solid operating model and an affordable market capitalization of about $1.6 billion, Taleo’s shares have shot up on speculation that it could be next.

On Dec. 2, the day before the SuccessFactors deal, Taleo shares closed at $32.96. On Dec. 5, the first trading day after the deal, Taleo rose almost 20 percent to $39.50. The move by SAP — long a vendor of traditional on-premise business software — to embrace the cloud-based or SAAS model is an important acknowledgement that the business of selling business software is fundamentally changing, Gregoire says. Indeed, it’s a fact that SAP’s co-CEO Bill McDermott acknowledged even before bidding on SuccessFactors.

And it’s hard to argue that Taleo (pronounced Ta-LAY-oh) isn’t making an impressive showing. The company has been growing its sales at between 17 and 20 percent since since 2008, and it’s on track to hit $325 million in sales this year, up from $237 million last year. It has 5,000 customers, including 180 of the companies on the S&P 500, and its product is available in 38 languages.

Naturally, my first question for Gregoire was about his thoughts on the SuccessFactors deal.

AllThingsD: Mike, it has been a busy few days since the SAP-SuccessFactors deal was announced. What did you think of the deal? And what, if anything, does it mean for Taleo?

Gregoire: I think it started a few weeks earlier, with the Oracle RightNow deal. It’s a confirmation that the on-demand model is moving into the next phase of its adoption. We’ve got 5,000 customers. We’ve been the No. 1 on-demand player in the enterprise. No one has as many Fortune 100 customers as we do. We drive the second-largest number of transactions volume of any on-demand player. It kind of felt like we had been pushing this rope, trying to get people ready for that next phase of adoption. So Oracle and SAP are acknowledging that the on-premise solution is running out of gas, and they need to augment that solution with some off-premise cloud solutions. Second, it’s important that SAP has recognized that talent management is extraordinarily important, and it complements a back-end Enterprise Resource Planning (ERP) system. Taking care of people helps your company grow, and without it, your company is at a competitive disadvantage.

A lot of people look at the the phrase “talent management” and think it’s kind of specious — or even boring — software that only the human resources office needs. What does it mean?

If you want to talk about an application that moves the needle for business performance, there’s nothing better. The No. 1 expense in businesses is people. We see the news about the unemployment rates, and then we see that companies can’t hit their productivity goals because they don’t have the right people in the right jobs. Its absolutely crazy. That’s the problem we solve. Talent management is about getting the right people into your company, having them work on the right things, because you’ve got performance goals, measuring those goals, tying that to pay-for-performance and compensation. And, by the way, the chances that person has the right skills at the right time is about zero, so you want to tie those goals to a learning management system, and making that happen in real time, and then providing intelligence about the whole ecosystem of employees. That moves the needle with respect to business performance.

What’s a classic example of this software in action?

I’ll talk about SunGard, which is a customer of ours. They use an Oracle ERP system, and they use our learning management systems. Let’s say you’re a SunGard sales rep and you just got promoted. The day that your promotion goes through in the ERP system, it kicks off a transaction in our learning system that checks your history to see what courses you’ve taken and whether you’ve got all the certifications you need. And then it automatically builds out the courses you need to take to be successful in your new job. We also do succession planning. And the days when you’re only going to consider people inside your company are over. You’ve got to think broader than that. United Airlines, which is a customer, when they think of succession planning, they’re not only thinking about the 200 high-potential individuals within the company. They’re talking to people in the industry so they can take a look at the people inside and outside the company and consider different scenarios. Our application is graphical, so you can drag people around in a visual tree and see what each scenario looks like. And then you can save them for later, so that if someone gets promoted, fired, or leaves the company for another job, you’ll know what to do, should any of those three things happen. Most people do this sort of thing in their heads.

How do you think Taleo stands up against SuccessFactors competitively?

Going forward, we’ll have to see how that works out. [With] due respect to what I’ve read about the deal in the press, I don’t think the integration with SAP is going to be a walk in the park. There’s at least seven platforms in SuccessFactors. And in this deal, you have two companies who have struggled to do SAAS at scale. SAP doesn’t have a very good track record executing on SAAS. They spent a lot of money building Business ByDesign. Rumor has it that SAP spent as much as $500 million building it. Their track record has been very marginal. The same is true with SuccessFactors. They’ve done a good job with one product that’s on an old platform for between 5,000 and 10,000 employees. They don’t have a good track record in the upper end of the enterprise, and they haven’t been able to get revenue from outside of their core, which is performance management. They went and bought a company in learning management. We’re dominant in recruiting; they’ve been trying to build a recruiting engine for five years. I don’t know that they have any significant reference customers on that yet, but they should have some soon, because they’ve been at it for so long.

So why did SAP buy SuccessFactors, then? Was it for the customer base?

SuccessFactors has a pretty small customer base. We’ll know more after they publish the 10-Ks and 10-Qs, so we’ll see more of where the synergies really are. But the synergies that have been reported is they want to be able to take the SAP technology and repurpose it into the SuccessFactors stack, which sounds expensive and time-consuming, and then take that stack and combine it with Business ByDesign and compete with Workday. We work pretty closely with Workday, and often go in with them shoulder to shoulder on deals when a customer needs recruiting and learning. And they use our recruiting products.

So, let’s handle this one piece of business. I’ve seen no fewer than five analyst reports saying you’re going to get taken out by Oracle. Have you been contacted by Oracle, or anyone else, about a possible acquisition?

We don’t comment on that kind of speculation. But a first-year MBA student could connect those dots. We’re positioned to be the only independent full-suite SAAS player in the market right now, and that’s a good place to be. How everyone reacts to that, I can’t control. But we’re on track to do $325 million in revenue this year, and we’re growing at about 20 percent per year. We have 12 percent operating margins. Who else has that? We’ve not only figured out how to do SAAS at scale, but we’ve done it profitably. And we continue to innovate. That’s where we want to be.

What are your priorities for 2012?

Three things. Selling back into our customer base. Most of them came to us for our recruiting heritage. If you take a look at last quarter alone, 36 percent of our net new bookings were in products other than recruiting; we’ve been reporting that number every quarter. So there’s a big push to sell our other products into our existing customer base. Second is geographical expansion. We bought a company in France that effectively doubled the size of our European salesforce. Despite what you hear going on Europe, they are not going to spend as much on technology in 2012 and 2013. If they are going to spend any money, it’s not going to be on upgrades of perpetual software licenses. I think they will spend it on SAAS, and I think Europe is generally way behind on SAAS. If I were to tell you our biggest deal last quarter was going to be a seven-figure deal with a Swiss bank, you would have said I was crazy, and that it would never happen. But it did. The reason it happened is that SAAS is orders of magnitude cheaper than paying maintenance fees on perpetual software licenses. The same thing happened with Société Générale, the French bank, which stopped an upgrade of either Oracle or SAP midstream, and they went with us. There is definitely room for SAAS in Europe, and there will be more room for SAAS in Europe in 2012; I think we’ll be a net beneficiary of that. Third is innovation, both organic and inorganic. We’ve been acquisitive, and every transaction we’ve done has been accretive and has worked out well. We’re good at either buying technology or customer bases and integrating them very quickly. Organically, we’ll be doing a lot of work on mobile and social features.

The country is now beginning the arduous job of cleaning up from the floods that killed upwards of 600 people and dealt a body blow to its industrial and manufacturing base.

One industry hit especially hard is the computer business. The world relies on factories in Thailand to turn out critical components used to build hard drives, and factories there are out of commission for now. This is not a trivial problem — the factories in question are not easy to replace, retool and restart once they dry out. Nor is the answer simply for the hard drive manufacturers to build new factories somewhere outside the flood zone.

This is the kind of supply chain disruption that the computer industry hasn’t seen in many years. I had a chance to talk with Steve Luczo, the CEO of Seagate Technology, for his view of the situation. Seagate has been relatively lucky in that its factories haven’t been directly impacted like those of Western Digital and Toshiba. But many companies that supply Seagate with necessary components have been hit, and it will be some time before they’re back on their feet.

Luczo told me that the computer industry as a whole — including companies who make PCs, servers, workstations and any other device that contains a hard drive, whether a set-top box or an enterprise storage device — can expect acute supply-chain disruptions to last well into 2012, and that it will take until the end of 2013 for the industry to return to its pre-flood operating posture. You read that right: It will be two years before the supply of hard drives is anywhere near “back to normal,” and there are simply no easy solutions for getting it fixed.

An estimate by the market research firm IHS iSuppli pegs the available supply at 125 million units, which is about 29 percent short of demand of 175 million units. By its reckoning, more than one-quarter of the world’s hard drive manufacturing capacity has been disrupted in one way or another, including 45 percent of the capacity devoted to making hard drives for personal computers. I spoke with Luczo by phone yesterday, and tossed in an extra eighth question because of the importance of the subject.

AllThingsD: Steve, at a high level, I think everyone understands the problem. There’s been a terrible flood in Thailand, and a lot of factories that make crucial parts for hard drives are out of commission. To that end, I think people expect this to be a temporary problem that works itself out in a couple of months. But you say it’s a much more complex problem than most people realize. You’re tracking this situation day to day, and probably hour by hour. So, how bad is it, really? And what’s likely to happen?

Luczo: What’s surprising to us is that even with all the data out there — we’re six weeks into it — there are a lot of fairly sophisticated companies that haven’t fully come to grips with the depth of the problem and the duration that is likely to occur. What is going to happen in the next couple of weeks is that the real shortage begins to show up right about now. There was already a lot of built inventory and a lot of finished goods moving through the system. And now all that is gone, and I think customers are starting to see shelves of parts go empty, and realizing that they’re not going to be filled for anywhere from one to two months. So the concern is heightened.

We heard Meg Whitman talk about this on HP’s earnings call Monday. She said HP stepped in and started doing some strategic buying. She says HP is going to see effects at least through the first half of next year. Apple talked about it on its earnings conference call, too. Are you hearing from them?

Tim Cook at Apple was way in front of this. I saw Tim the first week it happened, and took him through the situation, and in 15 minutes he understood the magnitude of it. Meg was on the second week of her job as CEO when I went to see her, and she got it right away. HP’s procurement VP, Tony Prophet, was also early to understand this. Companies like that reached out to us early on, because they understood that this is going to be an extended problem. They started asking for longer supply agreements. Deals that would typically last about a year, they’re now asking for two years.

How bad is it really going to be? What’s your outlier worst-case scenario, and then what do you think is a little more realistic?

If you think pre-flood, a mix [of products] that the customers need, the industry had the capacity to ship about 190 million units a quarter. Pre-flood, we expected the demand to be pretty consistent at about 180 million a quarter, with a bump in September 2012 for Windows 8. We now believe the March quarter is going to much more difficult than the December quarter, and December is going to be about 120 million or so. We think the March quarter will be about 120 million, in the best-case scenario. And that’s with customers mixing down pretty aggressively; and by that, I mean companies like Western Digital, who don’t have access to the sliders [a critical component in a drive], are shipping one- and two-headed devices so they can ship more units. So instead of shipping a drive that contains two disks and four heads, which is what the market needs right now, they’ll be shipping a one-disk, one-head or one-desk, two-head product. They’ll be maximizing the units they can sell, rather than shipping the product the customer actually needs. … So we see something like 130 million for March on the optimistic side, and then 150 million for June, 170 for September and then 190 million for December. And so by the end of 2012 you’re back to being close to industry demand. But even then, you’ve not included the impact of that missed 100 million units. And that will take another year to absorb, because it’s not like the industry is building new factories to chase that demand. We can’t over-invest to meet some bubble and then get stuck with excess capacity.

I think, intuitively, people expected companies like Seagate to just build more factories outside of the flood zone, but it’s not that simple, is it? Would this not be a moment to add capacity?

There are some in the investment community who think that’s what is going to happen, and that there will end up being a supply glut after all this is over, but it’s not the case. For us, it’s more a function of how to recover the supply chain and then work with the customer to get a good read on what their needs are for the next several quarters. If we see a multiquarter shortage that goes beyond what I described before, then we would think about maybe putting some capital in place. But we’re not going to do that to solve a temporary problem, because we end up being stuck with the excess capacity. Now if it turns out there is no recovery, and then the industry is more constrained than I first described — and that, by June, the industry is still 30-40 million units short and looks like it will be for the next six quarters — we might revisit. But then we’d want longer-term commitments to make sure we’re not overinvesting. But we’re not to that point yet.

What is this doing to prices? And what does that mean to the person who wants to buy a computer or server this year or next year?

If you look at a 10-year moving average trend, the industry has in general seen prices come down about 2 to 3 percent a quarter, and that is for a particular product. In 2009, there was a little price erosion, and that was because the storage industry recovered quickly from the recession. And there had been massive capital cutbacks, so there were big shortfalls through all of 2009 and into 2010. Then, when the Greece crisis happened, that put a big flatline on a lot of growth, and the industry had put in a lot of capital because everyone expected there would be growth. So, since spring of 2010, the price erosion has been higher than normal, which would show that supply is greater than demand. And what this flood has done is drive the supply curve down, while the demand curve has stayed constant. For OEMs [original equipment manufacturers, or the PC and server manufacturers like Apple, HP and Dell, who buy directly from Seagate], you’re seeing an average increase of about 20 percent, and in the channel [resellers who sell parts to smaller PC and server vendors], probably much higher. So all the sensational quotes you see about pricing are about those that occur in the channel, where we have no control whatsoever.

The markups in the channel are much higher? Are the channel guys taking advantage of this?

Yes, they’re higher, but I don’t think they’re taking advantage. I’ve heard stories about drives that we sell to OEMs for $60 that show up in the channel at $105. Normally the channel price is within about 10 percent of the OEM price. It’s just the law of supply and demand. They can’t get supply. The channel is getting about a third, at most, of the supply they would typically get. The OEMs are the ones with the supply agreements, so everyone in the channel is way short. In some market segments, supply is about 70 percent below what the demand is. And so those shortages are very acute. The channel is selling the few drives that are out there to whoever needs them the most and is willing to pay for them.

So what does all this mean for Seagate, specifically?

For us it’s a different story, because we’re going to be driving more volume than our competitors, because we’re not as directly affected, and we’re going to be making some  technology transitions. When we do that, it lets us take cost out of our product, so we can offer more capacity for the same or fewer parts. That helps us drive down pricing. Our goal is to recapture some of the more aggressive pricing of the last eight quarters, in order to sort of get our business back in balance. Our long-term business model calls for gross margins of 22 to 26 percent. And we use our manufacturing expertise to drive down our costs and then pass that on to our customers. This quarter, end users really won’t see it, because product has been built and has been on the shelves. As the shortages just started occurring, you’re starting to see prices increase in the channel. And then at the OEM there will be shortages in some high-value areas like enterprise storage or cloud computing. You’re going to have to see price increases, because there’s such big shortages.

One thing that occurred to me when I first wrote about this a month or so ago is that it represents an opportunity for the flash memory chip companies to make some inroads against hard-drive guys like you, mainly on notebooks. Is there a threat that flash could pick up some of the demand?

Some of it, but not very much. I think to the extent that there is a high value purchaser who can afford to pay $200 for 100 gigabytes, then that market will expand from 1-2 percent to 3-4 percent. Of the 35 to 40 percent shortage that exists, could you see a little of that get absorbed by silicon? The answer is yes. But there’s a cap. There’s just not enough of a raw supply of silicon to meet all the demand. Our industry will ship 400 exabytes this year. We would have shipped 450, were it not for the floods. Of that, 180 exabytes is notebooks. Reduce that by 30 percent, and you get about 55 or 60 exabytes. If you were to take all of the capacity from Samsung’s newest state-of-the-art flash factory, and dedicated it just to notebooks, it would only put out 7 exabytes a year. Plus, there are already other markets demanding flash, like  tablets and cellphones and other things. So it’s not like you can steal from those other markets. You’re not going to take a $32 product and replace it with a $350 product. Can you do it at the edges of the market? Sure. But the threat is capped by the amount of silicon available and the price point for flash storage, which is still an order of magnitude higher.

Having last week reported that quarterly earnings surged — in part because it’s likely to pay smaller legal damages to Oracle than had been expected following the TomorrowNow lawsuit — SAP showed strength across all its geographic regions as sales of its software licenses increased 28 percent.

The next day, McDermott stopped by my office in New York, where we talked about SAP’s plans for the cloud and mobile applications. But first I asked about SAP’s role as one of two targets that cloud application companies like Salesforce.com and Workday are gunning for.

AllThingsD: Business at SAP seems pretty good, as your recent quarterly results bear out, but you have all these different companies gunning for you. Whether its Marc Benioff at Salesforce.com or Aneel Bhusri at Workday, and several others, they all say they want customers from Oracle and SAP. You’ve got a lot of these high-protein customers that everyone wants to take away from you. What does that mean for you?

McDermott: If you look at the market we serve, we have 176,000 customers, and the best names in the world run SAP. It’s no mystery that a Salesforce or a Workday or any number would want to take some of that away from us. They want a bite at that apple. The difficult thing to replicate is what it took 40 years to build. The big themes we have in our favor is one, we have this consistent core platform. If you think about it, you’re a CEO, you have a company, you build things, you have financials, you have supply chain, you have customers, you have suppliers, and on an end-to-end basis you have to make the business network logistically sound and operationally excellent because there’s a lot of endpoints, and margin points in doing that well. And by the way, if you don’t do it well, odds are your competitor will and you’ll lose the game. This is a foundational layer. That took 40 years to build into a masterpiece.

And so what are some of the newer themes?

One recent trend that’s important is this idea of the real-time enterprise. Most of these companies are dealing with heterogenous environments for one reason or another. They had legacy systems, they bought other companies, they’ve done things with maverick buyers, so they have a lot of stuff. They’re looking to aggregate all their data into one comprehensive master data strategy. That’s where the magic of the platform happens because if I can get the data aggregated in the right way I can ask the platform any question I want. So we layered on business analytics technology and this thing called HANA, the high performance application appliance, puts all that information in main memory, so you don’t have to go to the disk to get your data. It’s right there in main memory. For example, let’s say I’m an auto manufacturer and oil prices spike. Smaller cars are going to sell better than big ones and so my mix is going to shift accordingly. What’s that mean to my earnings per share? In the old days that would mean lots of analysis and lots of spreadsheets and after three months you get sort of an answer. Now you can just ask the system the question and it will give you the answer based on data.

When I think of SAP I think of an older-world type of software that has to run on-premise, and as we both know that’s a model that’s constantly under attack from people who say the cloud is where it’s at. But SAP has its own cloud strategy and product, doesn’t it?

We also have our own cloud strategy. And we have a serious plan to promote SAP Cloud. And in that cloud we’re going to unleash Business ByDesign. We’ve been on a slow roll to 1,000 installs this year. That is the commitment we’ve made. The beauty of Business ByDesign for small- and mid-sized companies is that it does all the things an on-premise suite can do except it does them in the cloud. So we’re going to let the tiger out of the cage. The second thing we have is Sales OnDemand. It’s very like Facebook in its orientation. It’s a people-friendly app. The sales professionals love it. It doesn’t take a management hierarchical point of view. This is taking a more people-to-people, community-to-community approach, where you’re in pursuit of a sales opportunity and everyone in the flow who needs to participate. We think that is going to make a big difference. So far the feedback is that the customers love it.

Is this essentially a case where you have a cloud offering and it’s really just not promoted all that well?

Yes. I think there’s a lot of it that we don’t market and there’s a lot that we’re assembling for scale right now. And that’s because we see a market opportunity. When we look at the participants in the market, we’re not overwhelmed, and let’s leave it at that. We want to turn on our best SAP playbook and get busy being the standard in the cloud. We think we can do it in business applications.

Then lets talk about applications. Where do you see your strengths and weaknesses relative to the competition?

That’s an important part of this quarter. We chose an innovate-the-future versus a consolidate-the-past strategy. Others chose to buy companies, consolidate them, rationalize the headcount, leverage the margin and improve shareholder value. It’s a viable strategy. But what we chose to do was to innovate and let that be our guidepost. And we think if we can innovate and make the customer the first, middle and last part of our story and encourage a large part of our ecosystem to do the same, the customer can see the difference between consolidation and innovation. I think customers are seeing a new SAP in terms of attitude and speed of execution.

SAP is also widely exposed to Europe and yet you seem to be hanging in there nicely. The conventional wisdom says you’d be worried sick about the economic troubles on the continent. What are you seeing in Europe, good and bad?

I’m hanging in there because — take a company like Carlsberg, the beer company. And they have an interest in point of sale right now. So they’re using SAP to connect on their mobile device at the point of sale to their supply chain so that the shelves are always filled with Carlsberg beer wherever it’s selling so that the customer always has that choice. These companies are living in uncertain times but they’re investing because they know that if they do and others don’t they get a leapfrog advantage. If they don’t do it now, and others do, they lose the game. The companies that invest in downturns and uncertain times always come out the leaders in their industry when things improve. CEOs know this is not a choice anymore. Technology is not just an enabler of business anymore. It often is the business.

So what are your big bets for the time we’re in?

Bet number one, we’re going to remain the world’s leading business software company. We have a 2.5x lead on the number two and we intend to extend that. We are absolutely going to a be cloud player. The SAP Cloud is a real strategy and we’re going to turn the corner on that by letting the world know that we’re here and we’re here to win. We have a very interesting company in terms of database technologies. HANA is part of that, but we also have SyBase. We think we can be a strong player not only on the database side, but also on the main memory side with HANA as the flagship. We believe we’re the mobile business software standard and we’re now the number one and industry standard and we’re committed to remaining the business analytics leader. We have a 1.5 to 2x lead. Those are the five things we’re going to do to absolutely change the world. Whether the European debt crisis is serious or not, we’re not backing down on the strategy. Like I say to all the CEOs who care to listen, don’t let all this make you back off your strategy because if you decide to slow down or sit on your hands and wait for things to improve, you might just get wiped out by your competitors.