HP’s Future: Apple, IBM–or Dell?

Steve Wildstrom / October 3rd, 2012

 

HP logoOn Oct. 3, Hewlett-Packard CEO Meg Whitman will give analysts her strategy for restoring the battered tech giant. A close look at the company’s financials and its business suggests that it has the strengths to stay around for a long time. But years of boardroom drama have taken a heavy toll that make it difficult  for the company to return to industry leadership.

How does HP make its money? As the table below shows, more than half its revenues come from personal systems, primarily Windows desktops and laptops for consumers and businesses, and from imaging and printing, a line of business ranging from $50 inkjets to Indigo presses for commercial printing. Services, largely enterprise systems integration and outsourcing, contribute about 28%, and enterprise servers, storage, networking, and software most of the rest. The problem is simple: The companies HP wants to be most like are Apple on the consumer side and IBM for enterprise. But the company is that the company it currently most resembles is Dell.

 HP 2011 Performance by Sector

Net revenueShare of salesEarnings from operationsNet marginShare of earnings
Personal Systems39,57430.4%2,3505.9%15.1%
Services35,95427.6%5,14914.3%33.1%
Imaging & Printing25,78319.8%3,97315.4%25.6%
Enterprise Servers, Storage & Networking22,24117.1%3,02613.6%19.5%
Software3,2172.5%69821.7%4.5%
Financial services3,5962.8%3489.7%2.2%
  Total from operations130,365100.0%15,54411.9%100.0%

A SWOT analysis–strengths, weaknesses, opportunities, threats–is useful for assessing HP’s prospects.

Strengths: For all its recent problems, HP has the most important thing for a company in need of reinvention–a solid financial base. It remains nicely, if not spectacularly, profitable and has strong cash flow. It is the dominant player in its two largest sectors, PCs and printing. It has mastered supply-chain and channel management, It competes on a global scale and enjoys strong worldwide brand recognition.

Weaknesses: Unfortunately for HP, this is a much longer list. The overarching problem is a consequence of endless boardroom turmoil. Mark Hurd replaced a flailing Carly Fiorina. He dramatically improved execution, but at the expense of ruthless cost-cutting that trimmed muscle as well as fat. Hurd’s dramatic ouster was followed by the brief, disastrous tenure of Léo Apotheker. When Whitman was appointed, she took command of a disoriented and badly demoralized company, knocked between post and pillar by ever-changing top-level strategies. Given that, it’s a wonder that HP isn’t in worse shape than it is.

Personal systems is #1 in many of its markets. According to Gartner, HP has been tops in worldwide unit PC volume for five straight years. It beat back a surging Acer, though it is now threatened by a rising Lenovo. The problem is that these are largely commodity markets in which HP’s products offer little differentiation and not a lot of profit. And the question facing the traditional PC business is not whether it will decline, but how quickly.

C0mpaq iPAQ (Wikipedia)The action is moving to phones and tablets, and HP is not yet a player in either market. HP was a leader in handheld devices in the pre-smartphone era. The Microsoft PocketPC-powered iPAQ, acquired when HP bought Compaq in 2001, was the most successful challenger to Palm in the PDA market. But unlike other PDAs, the iPAQ failed to evolve into a phone and HP was left behind.

HP’s 2010 purchase of Palm was supposed to solve two fundamental PSG problems: Its weakness in mobile and its total dependence on Microsoft for critical software. It was a bold plan, and PSG chief Todd Bradley talked bravely of a version of webOS that would run on Windows PCs to give a unified experience across PCs, phones, and tablets. Unfortunately,  Apotheker wanted to dump PSG, not invest in it. The webOS operation was tossed in a cell, starved, and ultimately taken out and shot, leaving HP without a dog in the increasingly important mobile fight.

HP’s enterprise businesses–hardware, services, software, and financing–contribute about half of sales and about 60% of profits, but they are hardly industry stars. This years, HP took an $8 billion writedown of its 2008 acquisition of EDS and its 2011 purchase of Autonomy enterprise analytics software–at an $11 billion price that many analysts considered too high–has yet to pay dividends. HP continues to be a pale challenger to industry leader IBM in nearly all enterprise categories and the jury is still out on its challenge to Cisco’s dominance of enterprise routing,

Threats. The failure of the webOS strategy left HP more beholden to Microsoft than ever. HP have a reasonably attractive line of products including Ultrabooks, hybrid tablets with keyboard docks, and straight tablets ready for the Windows 8 launch. For the time being, HP has decided to forgo entering the Windows RT (ARM-based) tablet market infov of Intel-powered Windows 8.

One challenge is that the introduction of the Surface tablets, Microsoft is also becoming a competitor. For HP to get into the mobile game, it needs Windows 8 to make it big, but without Surface becoming the iPad of Windows products. This could end up being a very narrow path.

HP also has to complete its portfolio with a smartphone line. Having blown the webOS opportunity, HP’s only real choices are Windows Phone 8 and Android, and HP’s general Windows-centricity argues for WP8. But once again, that would leave HP at the mercy of Microsoft’s success, and competing as a new entrant against HTC and Nokia, the latter having bet the company on Windows Phone.

The printer business continues to be a cash cow for HP, with sales of high-margin ink and toner providing reliable annuity income streams for some years to come.  It’s also true, however, that printing is in a long term secular decline that is likely to accelerate as tablets replace printed documents. This will cut into HP’s sales of generally low-margin printers and hihgly profitable consumables.

HP’s enterprise service business is big and reasonably profitable, but it is concentrated in the relatively low end of the business, such as operations outsourcing, rather than the high-end integration dominated by companies such as IBM and Accenture. HP has to find a way to push its way up the food chain.

Opportunities.  The data center switching and routing market is ripe for disruption. HP is pushing its OpenFlow technology hard as a software-based alternative to specialized, dedicated hardware (read Cisco.) HP is right about the direction of technology, but Cisco has read the same tea leaves and has shown itself to be a nimble competitor.

Autonomy was a big play to get into the fast growing but fragmented enterprise analytics market. The high price will limited the return on investment in purely financial terms, but if HP makes it work, it could make the company a much more significant enterprise software player.

HP’s culture—the vaunted “HP Way” created by Dave Packard and Bill Hewitt–has taken horrible blows in recent years. HP Labs, once second only to IBM Research in the industry, has been hollowed out by savage budget cuts and staff reductions. But HP is still an engineering company at heart and retains a great deal of talent waiting to be used effectively. That–not spending cuts, better marketing–is the only real route to HP’s long-term success,

 

 

 

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • Grwisher

    Very nice analysis.

    The thing I remember about HP was it’s promotion of RISC architecture in the 1980’s. My company was an OEM for them at the time. That was also the time that a company called Acorn (later to become ARM whose processors are used in 90%+ of all cell phones and tablets) introduced its version of RISC. Acorn introduced its RISC architecture in April, 1985 and HP in February, 1986. It is safe to assume that they were developed independently. HP was much further along with RISC at that time and certainly had much more resources than little Acorn. The point of this is that HP had a huge head start on the architecture of the future. IMHO, this will be proven indelibly when Intel proves, once again, that it is unable to compete with ARM in the next series of tablets which run Windows 8.

    • steve_wildstrom

      HP abandoned its PA-RISC architecture to partner with Intel on the development of Itanium, another not-too-great decision.

      I wouldn’t be so quick to write off Intel in mobile though. There’s some evidence that after a bunch of unmet promises, Clover Trail actually delivers the right performance/power consumption tradeoff. We’ll how well it performs, both technically and in the marketplace, when the Windows 8 tablets ship.

      • Grwisher

        I have been patient. I have waited year after year for them to do what they said they were going to do the year before. Lately I have been reading articles about yet another delay by Intel. Google “intel tablets delayed” and you will get a number of articles. Example (Business Week, Oct 1, 2012):

        http://www.businessweek.com/news/2012-10-01/microsoft-intel-alliance-weakens-tablet-challenge-looms

        “Intel Corp. (INTC)’s delayed delivery of software that conserves computer battery life is holding up development of some tablets running the latest version of Microsoft Corp. (MSFT)’s Windows operating system, a person with knowledge of the matter said.

        … Microsoft hasn’t yet approved any tablets featuring an Intel processor code-named Clover Trail because the chipmaker hasn’t produced necessary power-management software”

        From what I understand, the software they are talking about is the firmware used to manage power consumption. I believe that the Intel version of the tablet was going to come out 90 days after the RT version, so this may have been planned for in advance. However, battery life is one of the main problems Intel has in being competitive in mobile. They have had several years to correct this problem. IMHO, there won’t be many more years left for them to succeed. That train has left the station some time ago and Intel better get on track at a high rate of speed if they hope to catch up.

  • FalKirk

    Nice article, Steve.

    The death of webOS makes me particularly sad. Léo Apotheker should be shot. I have nothing against the man personally and I don’t even object to his vision for HP. But if his vision for HP didn’t include webOS (and it didn’t) he should have sold it. Instead, as you said, he starved it to death.

    What a waste. Not only was it a loss of the 1.2 billion purchase price and whatever resources HP dumped into creating their short-lived webOS phones and tablets but, far more importantly, it was a lost opportunity that will never come around again. MAYBE, just maybe webOS had a chance to be a viable player in the mobile markets. I am of the opinion that it is far too late for a new entrant now. (Are you listening, Microsoft?)

    As an aside, HP may have inadvertently and indirectly hurt Amazon too. It’s pure speculation on my part, but I think Amazon’s tablets would have been much better if they were running webOS rather than an Android variant.

    webOS – a total disaster for everyone who touches it.

    • steve_wildstrom

      I trust your recommendation re Apotheker is metaphorical. He certainly should never work in the tech industry again; I don;t believe I have ever seen a CEO who did so much damage in so little time, not even Gil Amelio at Apple.

      I spent a fair amount of time with the folks working on webOS at HP, even did some consulting for them. I’ll admit I really bought into their vision. If it had worked–and it was risky–it would have put HP in a vastly better position. Unfortunately, it never got a chance.

      • FalKirk

        “I trust your recommendation re Apotheker is metaphorical.” – Steve

        Yup.

        I guess that – metaphorically – Apotheker was “shot” since he was “fired” (upon). But it was far too late by then. The damage was done.

    • No, Apotheker should neither be shot. He was another job loser — like Mitt Romney at Bain Capital Partners — which is an easy-enough thing to do, investment economists say, when the short term goal is to please heartless and cold-blooded investors while not considering what is better for America. People forget that, as part of good citizenship, corporations sign a charter giving them permission to operate within the US. The basis for the charter is to try to assure that it behaves patriotically, putting America first and to assure the well-being of the economy. Apotheker lost jobs, but it’s not just him, it’s others too, not excluding Apple and other popular companies.

      HP and Dell are not working for the American people, so I would not feel any sorrow if the companies were scrapped for parts as their vision is bottom line heartless because they are not job creators. If they had it their way, they would eliminate all American jobs and outsource even the CEO; There is little loyalty to improving the American economy which is an unpatriotic value. This is how Randian capitalism works which is the core value in business. It’s corrosive and metastasizes down from the CEO to those he hires, trains, and fires. I hope that world is changing, and that people are recognizing that unbridled, selfish capitalism, in which more and more people live on the river bottom (I see this on my daily bike ride), is bad for the general welfare.

      • steve_wildstrom

        In the U.S., corporations are chartered by the states. And that’s a funny word, because they don;t actually have charters that obligate them to do anything. Legally, they are responsible on varying degrees and in varying ways to their shareholders, debt holders, customers, and employes. Unless they are government contractors, their only responsibility to the government is to pay their taxes and obey the laws. The concept of a social contract implies broader responsibilities, but they are not and cannot be enforced.

  • Hi Steve,
    Perhaps the part about HP’s eventual decision to slice and dice and sell off all of the segments of HP to achieve more profitability for investors will be in your next column.
    Fiorina, Hurd, Apothecker, and Whitman, with the first and last being bit time Rightwingers and political aspirants who failed at transforming aspirations to profit-making legislative offices. While we don’t know if the other two, Hurd & Apothecker, are also Rightwingers, we do know is that all of them lost jobs through cutting them or outsourcing them to China and India, thus taking jobs away from Americans. No, Rightwingers are not job-creators; They are job eliminators. So, when Teabaggers like Ryan or Rightwingers like Romney tout their job creation credentials, you better think job terminators. It’s what they know best. They are good for wealthy America bad for normal America.

    • steve_wildstrom

      I don’t think politics had anything to do with it (in fact, I don’t believe Apotheker is a U.S. citizen.) HP didn’t outsource any more or less than other companies, including the more left-leaning Apple. And at a time when a lot of companies were outsourcing to Chinese companies, HP sent a lot of its wirk to an American company, SCI Sanmina.

    • TheEternalEmperor

      Hi Wikileaks. Thanks for commenting for it makes this site valuable. But please, could we PLEASE leave the politics at the door? There are many, numerous sites for political commentary. Could we agree to stick to tech, exploring all opinions to the fullest, in a vigorous manner, but without the inflammatory politics?

      Thanks!

  • Jeff

    Steve, your articles are a pleasure to read. You can think, you can spell and you know basic sentence construction. This puts you a towering mile above 99.999% of every writer currently working. On top of that I like your colorful metaphors. Hell, I’d enjoy reading a list of ingredients if you were the author. Thumbs up.

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