HP's 'End Run' Around Windows

As Hewlett-Packard steps up efforts to make Microsoft's operating system easier to use, some want to devise a rival version with Linux

By Aaron Ricadela

The carefully crafted ecosystem of tech companies built around Microsoft's Windows operating system is showing signs of strain. Hewlett-Packard (HPQ), a longtime Microsoft ally, has quietly assembled a group of engineers to develop software that would make Windows Vista easier to use, or bypass some of its more onerous features. A Skunk Works of engineers at the company is even angling to replace Windows with an HP-assembled operating system, sources say.

HP's "customer experience group"—formed nine months ago and headed by vice-president Susie Wee, a former director in the company's research labs—is developing software that can complement Microsoft's (MSFT) Windows operating system to make it accessible to more users. Wee's team is tackling touchscreen technology and software that lets users circumvent Vista to watch movies or view photos, as well as transferring ideas from HP's Halo videoconferencing system to mass-market products. "Our customers are looking for insanely simple technology where they don't have to fight with the technology to get the task done," says Phil McKinney, chief technology officer in HP's personal systems group. "For us, it's about innovating on top of Vista."

Others in HP's PC division are exploring the possibility of building an HP operating system for mainstream desktop and notebook computers based on the open-source Linux system, which competes with Windows, say people familiar with the company's plans. The goals may be to make HP less dependent on new releases of Windows, and to strengthen HP's hand against Apple (AAPL), which has gained market share with computers that boast innovative features and inspire a loyal following of users.

Apple Is Seizing Share

McKinney didn't deny that those conversations had occurred, but said any discussion happened below senior management levels. "Given how many engineers are in my R&D organization, I wouldn't be crazy enough to say, 'No, we haven't made those inquiries,'" he says. But he adds that HP isn't devoting large-scale resources. "Is HP funding a huge R&D team to go off and create an operating system?" That "makes no sense," he says, given the compatibility problems with users' software programs that such an effort could introduce.

HP has long been an advocate of Windows, and there's no indication that the relationship will change any time soon. HP is the world's largest supplier of PCs, with about 19% market share, and analysts estimate overall sales will grow 10.3% this year, to $115 billion. Yet the tepid market reception of Windows Vista (BusinessWeek, 5/15/08), the latest version that made its debut in early 2007—combined with a fear that Apple could cut further into Windows' shrinking U.S. share—have led HP to inject proprietary innovations into its computers as a way to differentiate them, analysts say.

Meanwhile, Apple has been gaining share in the U.S., where it accounted for 7.8% of PCs shipped in the second quarter, according to market researcher IDC. Mac shipments grew nearly 32% from a year earlier. Apple also enjoys fatter profit margins and more loyal customers than makers of Windows PCs, thanks to its delivery of both hardware and the Macintosh operating system.

Fear of Microsoft's Wrath

A concern at HP is that Apple could develop a low-priced, sub-$1,000 notebook that could cut into a core HP market, says one person who has advised HP executives about their PC strategy. The customer experience group would constitute a preemptive strike against such a development.