Low-Margin Consumers Do It Again, This Time To HP

Hewlett-Packard dropped a few bombshells yesterday. The fact that it is shelling out more than $10 billion to acquire U.K. software firm Autonomy, which makes software that helps big business keep track of corporate data such as emails, phone calls and other detritus, was almost lost in the revelations that it is getting out of its Web OS-based tablet and smartphone business and is looking to shed its market-leading -- but low-margin -- PC business.

The plan represents a "radical reconstruction of HP," as one commentator said, even though PCs represent only about a third of its overall revenue.

The main reason given for the reconstruction is similar to Cisco's announcement in April that it was discontinuing its market-leading Flip device: the consumer market, while profitable, isn't profitable enough. Then, factor in competition from Apple and Google's Android-powered devices and you have a bleak-looking future for the types of folks whose purpose in life is to "unlock shareholder value."

Not that "The Street" is giving a ticker-tape parade quite yet.

"The Street likes certainty, and HP is going to have a lot of moving parts now," Edward Jones and Co. analyst William Kreher tell the Los Angeles Times' David Sarno. "This is a massive transformation from a hardware company to a software and services firm. There's going to be a significant disruption in many of their major businesses."

The Wall Street Journal's Ben Worthen, Justin Scheck and Gina Chon call the thinking a "strategic flip-flop," pointing out that CEO Leo Apotheker said in a February interview that being in the consumer businesses like PCs gave HP "an immense competitive advantage." He now thinks "we need to sharpen our focus," and that the company must "take significant action," they were told.

"Mr. Apotheker said he had been analyzing market data and trends and talking with directors and advisers for some time about how to shift HP," they write. He concluded that 'to be successful in the consumer device business we would have had to invest a lot of capital and I believe we can invest it in better places,' specifically HP's units that target businesses. He cited the deal for Autonomy as an example."

Some analysts aren't surprised by the move, Sharon Gaudin says in Computerworld. "The quick rise of tablets, particularly Apple's iPad, is not good for companies that have invested billions of dollars in building and selling PCs." "Spinning it off rather than selling it is due to the fact that there aren't a lot of buyers who have the desire and the money to take it off HP's hands," Dan Olds, an analyst with The Gabriel Consulting Group, tells Gaudin.

HP's press release says that it "will continue to explore options to optimize the value of Web OS software going forward." One wonders, however, exactly what inherent value it sees in the software, which came with the Palm acquisition, though it certainly has a cadre of rabid fans.

Who'd be interested in acquiring the PC business? Reuters reports that it "may be too big for Asia's technology companies to swallow whole, but potential suitors are out there should HP decide to break the group into parts." China's Lenovo Group and Taiwan's Acer are two companies expected to take a look, Lee Chyen Yee and Clare Jim report.

"In the PC business, it's all about scale. It has become such a commodity that anybody interested in taking on HP's PC business will come from a point of grabbing more market share," one banking source tells them.

"You don't have to look very hard to find the Apple angle" in HP's announcement, writes Fortune's Philip Elmer-DeWitt. "This is Steve Jobs' post-PC era writ large." He then cites an analogy Job made at the All Things D conference last year.

"When we were an agrarian nation, all cars were trucks. But as people moved more towards urban centers, people started to get into cars," Jobs told the audience. "I think PCs are going to be like trucks."

Bloomberg's Dina Bass and Tom Giles say that the founders of HP -- ironically, yesterday was the 64th anniversary of its incorporation -- never wanted to get into the PC business in the first place.

"David Packard only reluctantly agreed to focus on PCs in the early 1990s. And Walter Hewlett, a board member and son of co-founder Bill Hewlett, mounted an unsuccessful campaign to block the 2002 acquisition of Compaq Computer Corp., a deal that vaulted Hewlett-Packard to the top of the PC industry," they write.

"Their DNA never included being a commodity consumer products manufacturer," Michael Cusumano, a professor at the Massachusetts Institute of Technology's Sloan School of Management, tells them.

I don't know about you, but I'm heading into the weekend feeling just a little bit guilty about being one of those lowlife, low-margin consumers when I doff the tie and jacket at 5 p.m. sharp. I mean, how many gentle giants are we going to disrupt before we're done?

Tags: electronics
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1 comment about "Low-Margin Consumers Do It Again, This Time To HP ".
  1. Adam Hartung from spark partners , August 25, 2011 at 3:22 p.m.

    Somebody forgot to tell Apple, Amazon and Netflix that the consumer business has no profit. HP simply mismanaged its business because it focused on "scale" and volume rather than innovation and differentiation. The PC business is now in decline - and HP is simultaneously exiting the high-growth tablet business. Clearly there is no coherent strategy at HP any longer, and the CEO is falling back on his roots from SAP as he buys a third tier ERP company. No wonder Forbes magazine says Apotheker is a lousy CEO and HP investors have little hope of things improving http://onforb.es/pVW5Ni