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HP’s shedding of PC business follows IBM path

Aug 19, 2011 — by LinuxDevices Staff — from the LinuxDevices Archive — 1 views

After reporting poor third-quarter earnings, HP announced it plans to sell its industry-leading PC business and acquire U.K.-based Autonomy for $10 billion, a move that follows IBM's earlier transition to software and services. The news followed HP's announcement it would discontinue its smartphone/tablet OS — but some are speculating a Android vendor jilted by Google's Motorola acquisition might be interested in buying WebOS.

HP's decision to discontinue its WebOS-based tablets and smartphones, announced early on Aug. 18, was only the first part of a triple-whammy of HP news, including the Autonomy acquisition and the planned sell-off of its PC business. The latter announcements came later in the day as HP released disappointing quarterly earnings.

HP's gross margins were listed at 23.3 percent, down 70 basis points year on year. HP generated $3 billion in earnings, down 14 percent from the previous quarter and down from $3.4 billion a year ago.

HP generated about $41 billion in revenues on sales of 48 million PCs, but garnered only $2 billion. Overall, revenue in HP's Personal Systems Group fell 3 percent in the company's fiscal third quarter.

CEO Leo Apotheker announced Aug. 18 that the company is looking to spin off its market-leading PC portfolio within the next 18 months to enable it to focus more of its money and time on its higher-margin commercial systems, software and services businesses.

HP also announced it is buying infrastructure software maker Autonomy for about $10 billion. The move to acquire the U.K.-based e-discovery and storage provider should further boost HP's enterprise software portfolio, a strategy that closely follows that of IBM (see farther below).

Will Google's Mot acquisition drive Android vendors to WebOS?

HP decision to discontinue the WebOS-based TouchPad tablet and Pre and smartphones is more immediate than the PC sell-off. The company's plans for the Linux-based operating system remain vague, but it appears to be interested in selling the business entirely. 

The move followed reports of dismal sales of its new TouchPad tablet (pictured). HP didn't even give its latest generation of HP Pre 3 phones a chance — the phones debuted in Europe earlier this week.

A TechNewsWorld story speculates upon potential buyers for WebOS, and suggests that Google's attempt at acquiring Motorola could bring more interest in the platform than there would have been otherwise.

The story quotes Rob Enderle, principal analyst at the Enderle Group, as saying, "There are a lot of people willing to buy WebOS so they can stay in the mobile business in the wake of Google's purchase of Motorola."

According to Enderle, the acquisition would drive the mobile device market toward a vertically integrated model. "There will be three players left. Apple and Google-Motorola are the first two, and whoever wants to be the third one may be looking at WebOS," Enderle speculated to TechNewsWorld.

"HTC is probably the hungriest, but there's also Samsung and LG," Enderle added. "They all have the money and resources to buy WebOS."

HP follows IBM's path

IBM's decision in 2005 to sell its PC business to Lenovo has proven to be an incredible boon for Big Blue, which has seen sales and profits steadily grow over the last few years, even during the depths of the recession. Now executives with Hewlett-Packard are hoping for similar results as they prepare to rid themselves of their PC business. 

The sell-off would almost certainly include HP's netbooks, including the recent Mini 210 model pictured here. The tablet-fueled implosion that hit the netbook market late last year has now spread to desktop and laptop PCs as well.

Meanwhile, one rival PC vendor CEO found a bit of humor in the situation. "If HP spins off their PC business … maybe they will call it Compaq?" tweeted Dell CEO Michael Dell on Aug. 18.

Overall, HP's decision will put it into even closer competition with the likes of IBM, Oracle, Dell and Cisco Systems in the converged infrastructure and cloud computing markets. And if it works out as well as IBM's decision did, getting rid of the PC business will be a smart move by HP.

"The move by HP to cut away from its consumer computing hardware business will position the company to more effectively compete with rivals such as IBM and Dell, as HP will be less encumbered by low-margin consumer PC sales," stated Beau Skonieczny, an analyst with Technology Business Research, in a research note.

Skonieczny went on to note that HP has aggressively invested in its converged infrastructure strategy and instant-on capabilities aimed at cloud solutions, and will likely continue to focus on high-demand areas such as "big-data, analytics, cloud and sustainable IT technology."

By divesting its PC assets, "HP will be able to allocate more resources towards driving growth and innovation in the areas that provide more profitable growth," he added.

In an interview with eWEEK, Gartner analyst Mark Margevicius said HP executives made the decision to ditch the PC business for the same reason IBM did six years ago: the financial numbers. "It's much the same reason IBM jettisoned its PC business off to Lenovo," said Margevicius "They just didn't make enough [money] off of it."

PCs in a tailspin

There are some key differences between the IBM and HP situations, one being the state of the PC market. The current PC market is under significant strain, to the point where Gartner analysts in June cut its shipment forecasts for 2011. They cited a continuing lack of consumer interest caused in part by the ongoing volatile worldwide economy, as well as the growing number of other devices, such as tablets and smarpthones.

It's unclear how that environment will impact HP as it looks at options for spinning off the PC business. Some analysts have pegged the business at about $12 billion. Lenovo and Samsung have been mentioned as potential buyers. Whoever buys it will get a business that saw commercial revenue in the quarter jump 9 percent, while consumer revenue fell 17 percent.

"When IBM chose to [sell off its PC business], there was a high degree of interest," Gartner's Margevicius said. "Now what's the interest?"

IBM also had been building up its other businesses — particularly software — for years before selling off its PC business, dating back to 2000. Big Blue has continued that push, particularly in the field of analytics. At the time that it sold its PC business to Lenovo, it had the second largest software business, behind only Microsoft, according to the Wall Street Journal.

Since then, IBM has only grown the business. In its second-quarter, IBM saw its software business revenue grow 17 percent, to $6.2 billion. By contrast, HP had software revenues of $780 million, a 20 percent jump.

"HP had already adopted much of IBM's services-based hypothesis, now with its proposed spin out of the PC industry," Gartner analyst Mark McDonald wrote in an Aug. 18 blog post. "HP is going full bore on the commercial services market hypothesis, seeking to buy Autonomy and shedding its [WebOS-based] tablet offering."

In Apotheker, HP now has a CEO with a deep background in enterprise software, given his previous position heading up software giant SAP. That will make a difference, according to the Enderle Group's Rob Enderle.

Selling the PC unit to Lenovo worked out "incredibly well for IBM and Lenovo," Enderle wrote in an email to eWEEK:

"The best practice that HP is following is modeling the company around the skills of the CEO, which has worked very well for Apple and IBM. So, given IBM and Apple examples, this should result in a vastly stronger HP. However, as with the Lenovo spin-off, it likely will take the spun-off company 18 to 36 months to hit its stride."

Not everyone is looking to get out of the worldwide PC market, which will still see 385 million units sold this year, according to Gartner. But it takes a particular kind of vendor — one that can live with the low profit margins and differentiate itself to some extent from its competitors — that will survive, according to Margevicius.

"The PC business is still a good business for a lot of companies," he said.

One of those companies is Lenovo. In its most recent quarter, Lenovo saw PC shipments grow 23 percent, with the company's overall revenues jumping 15 percent and profits rising 51 percent. However, few (if any) at IBM appear to be looking back in regret at the sale of its PC business to Lenovo.

Mark Dean was one of a dozen engineers who help create the first IBM Personal Computer. Marking the 30th anniversary of that event, Dean said he was proud to be part of that group. "It may be odd for me to say this, but I'm also proud IBM decided to leave the personal computer business in 2005, selling our PC division to Lenovo," Dean, now the CTO of IBM's Middle East and Africa group, wrote in an Aug. 10 posting on IBM's Smarter Planet blog.

"While many in the tech industry questioned IBM's decision to exit the business at the time, it's now clear that our company was in the vanguard of the post-PC era," he added.

Jeffrey Burt is a writer for eWEEK. Eric Brown contributed to the WebOS portion of this report.

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