NEW YORK (Business 2.0) - Last week Hewlett-Packard announced that it is acquiring two small software makers, Peregrine Systems and AppIQ, to bolster its enterprise software business. These deals, the first big software moves made under new HP CEO Mark Hurd, are a good start, but they aren't nearly enough to cure the company's software woes.

HP's software division, which lost $145 million on $922 million in revenues last year, centers on two product families: OpenView for IT infrastructure management -- in short, tools that monitor a company's vast array of servers and networks to diagnose and fix problems -- and StorageWorks, storage-management software that performs similar work for all of the specialized servers a company uses to store data.

Peregrine Systems, which HP (Research) is buying for $425 million, will add to OpenView's ability to track IT assets (cataloging what types of servers are on a company's network and what software they're running), while AppIQ, for which HP is spending an undisclosed amount, will bolster StorageWorks's ability to manage so-called storage area networks, in which companies hook storage devices directly into the network rather than attaching them to a server.

Software that manages servers and storage is a fast-growing category. IDC forecasts that system-management software will grow 62 percent to $9 billion by 2009, and HP is currently leading with about 13 percent of that particular market.

But HP is a nonentity in the rest of the software universe. Even if it doubles its market share in the one niche where it's currently strong, HP's software business would still be dwarfed by IBM's, which is about 15 times larger and includes major categories like databases and application servers for which HP has no equivalent.

How can HP become a widespread software player? There are three main options, all of which would require Hurd to lay down some serious dollars. With $12 billion in cash, he has enough to spare, but all of the moves come with possible downsides. Here's how various HP software deals could play out -- and the impact they'd have on the rest of the industry.

HP had a disastrous foray into the world of application servers, spending $500 million to acquire Bluestone Software, a company with a small market share, back in 2001. It didn't have much choice, since BEA Systems (Research), Netscape, and Sun Microsystems (Research) had already snapped up the good application-server startups years before.

Buying an also-ran proved a bad strategy, and HP soon shut it down, opting to resell BEA's software instead. Although BEA Systems has struggled to get revenue growing again in the face of tough competition from IBM (Research) and Oracle (Research), it's still a major player in application servers and other middleware. HP could strengthen BEA by using its vast sales force and channel partners to sell BEA's products.

Downside: It could worsen the relationship with HP partner Oracle, which wants to sell its own application server along with its database and business applications. Current BEA partners like EMC (Research) might stop selling BEA software if HP owned it, because HP competes with EMC in storage.

Novell (Research) has been struggling to shift away from its aging NetWare operating system in favor of selling its well-regarded commercial version of Linux. It has a range of other good software, including the Zenworks line, which manages both Windows and Linux desktops and could expand OpenView's ability to manage Linux systems.

Likewise, Novell's directory-management software could move HP into a new, fast-growing field of software. Novell has gotten tight with the open-source community, dropping its own proprietary application server in favor of JBoss, an open-source project. HP has already embraced JBoss and the MySQL open-source database, but bringing Novell's knowledgeable open-source engineers onboard could greatly expand its efforts.

Downside: HP would have to bet that its sales force could do a better job of selling Linux than Novell, whose sales so far have disappointed. Also, selling Linux and Novell's directory and e-mail software would definitely put HP in conflict with Microsoft, currently a major partner whose Windows software drives much of HP's hardware sales.

The Bluestone debacle showed HP that buying a small company to enter a new market is not a winning move for it. But extending the same strategy that led it to buy Peregrine and AppIQ, HP could target a number of small software companies that reach beyond its current offerings.

For example, HP resells data-center automation software from Opsware, a small startup best known for its chairman, Netscape co-founder Marc Andreessen. Opsware's software goes beyond OpenView's monitoring capabilities to actually update and reconfigure servers on the fly.

Buying more recently developed software could help modernize HP's older software lineup. Also, buying startups poses no partner relationship conflicts.

Downside: While buying BEA or Novell would get HP into entirely new fields of software and wouldn't require extensive integration with current product lines, buying startups to expand its current system-management niche would likely require costly and time-consuming efforts to revamp both old and new software code.

HP's software product lines are already in need of tighter integration -- both OpenView and StorageWorks have storage-management products, for example -- so buying several startups could worsen the problem.

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