HP Ponders Exit Strategy from PC Business

In 2002, HP bought Compaq in a $25 billion merger that created the PC market’s de facto leader. Nine years later, HP is contemplating what amounts to a U-turn in its strategy. It is thinking of leaving the PC business altogether.

This week, HP’s president and CEO Leo Apotheker announced, “We believe exploring alternatives for PSG [Personal Systems Group] could enhance its performance, allow it to more effectively compete and provide greater value for HP shareholders.”

The alternative he’s considering is “the separation of its PC business into a separate company through a spin-off or other transaction.”

So what might PC-less HP pursue? The company’s plan to acquire software maker Autonomy suggests it hopes to buy its way into the enterprise software business. To explain the $11.7 billion bid, Apotheker said, “Autonomy has an attractive business model, including a strong cloud based solution set ... We believe this bold action will squarely position HP in software and information to create the next-generation Information Platform.”

HP’s new plan is to “focus on its strategic priorities of cloud, solutions and       software with an emphasis on enterprise, commercial and government       markets,” the company outlined.

The Pad Push

In the announcement of its strategy for PSG, HP noted, “The personal computing market is quickly evolving with new form factors and application ecosystems.” One of the notable “form factors” is the tablet, now threatening to take over a chunk of the computing market previously owned by the PC.

Apotheker himself acknowledged, “‘Consumers are changing the use of their PC. The tablet effect is real and sales of the TouchPad are not meeting our expectations” (”HP To Apple: You Win,” TechCrunch, Aug 18, 2011).

HP tried to step up to the tablet market with the launch of its own HP TouchPad. But even with a marketing campaign involving Britain’s funny man Russell Brand and Glee’s Lea Michele, HP’s device couldn’t seem to wrestle away enough market share from the iPad. Consequently, HP is killing off its webOS and TouchPad business—“a difficult but necessary decision,” according to HP’s online FAQ document.

Shifted Market Landscapes

PSG, the division that HP plans to part with, oversees commercial PCs, consumer PCs, workstations, and handheld computing devices. According to the 2010 HP annual report, “In fiscal 2010, net revenue from notebook PCs increased 12% while desktop PCs revenue increased 20%. Workstations revenue increased 42% while handhelds revenue declined 49%.”

A breakdown of HP’s revenues for 2010 shows PSG pulling in $40,741 million, which accounts for roughly 31% of HP’s total consolidated net revenue of $126,033 million.

According to HP’s published numbers for the third fiscal     quarter of 2011, “PSG revenue declined 3% year over year with a 5.9% operating margin. PSG remains the PC market leader in       terms of units, revenue and profit share. Commercial Client revenue       grew 9% and Consumer Client revenue declined 17%.”

By contrast, HP’s software business pulled in $3,586 million, or 2.8% of HP’s 2010 revenue. Perhaps Apotheker, a former SAP man (he served as co-CEO from 2008  to 2010), has what it takes to turn a household name in PC into an enterprise software brand. But, in this blogger’s simple-minded personal view, giving up a division that churns out one-third of the company’s revenue to focus on the untested enterprise software business seems like an uphill battle.

Whatever HP’s reason may be, its departure from the PC business leaves Lenovo and Dell more room to expand. And HP will have to combat IBM, Oracle, and—Apotheker’s former employer—SAP to carve out a market for itself in its new battleground.

PC Still Has a Place

HP’s withdrawal from the PC market signals HP’s shift of focus, but not necessary the end of the era of PC. Caitlin McCabe, Microsoft’s Corporate Communications, noted, “The PC ecosystem is strong and constantly evolving to address customer and market needs. HP and Microsoft remain strategic partners and will continue bringing solutions to customers across many areas of our business.”

With its portability and touch interface, the tablet is quickly becoming the darling of consumers, road warriors, and field technicians. Many data management operations, viewing and markup tasks, and collaboration functions may soon shift to the tablet, because of the ease with which it can execute them. But for professional applications  in digital content creation, industrial design, and mechanical engineering, personal computers—specifically, workstations—will continue to remain the standard.

In the third quarter of 2011, HP PSG revenue shows a decline in notebooks and desktops, but a 19% gain in workstations over 2010. Pulling in $9,592 million in the third quarter, PSG revenue still accounts for 30%  of HP’s net revenue of $31,189 million for the same period.