HP’s tablet strategy – A couple of pages to borrow from Amazon’s book


HP is the world’s largest PC maker and it has been holding that position for quite sometime. However, their attempts to enter the tablet market which is looked as a natural evolution to PC market, were futile. Let’s list HP’s attempts in this direction. HP has initially started working on a tablet that runs Windows mobile OS. This initiative was abandoned after failing badly at it. They bought Palm in the hopes that Palm’s WebOS could be a good alternative to other mobile OS’es like iOS and Android. Even though WebOS received good reviews from critics, it never gave a decent fight to the two most popular OS’es. HP released the Touchpad with WebOS before it finally discontinued its production. All in all, it has been a very bitter experience to HP.

When an ecosystem starts adopting a new technology, the leaders of old technologies of that ecosystem often make lazy and late decisions. As a result, they lose the edge in their core businesses. That’s what is the fate of HP today. However, there is counter example to this opinion. When the world started adopting the client-server architecture by abandoning the mainframes, IBM made it up well. They retained their leadership in servers business until today. The market leaders must lead the new developments if they wish to remain leaders. However, HP failed at it and now its own presence in hardware field has become questionable. Of course, we don’t see this happen in a year or two. But, that’s what is going to happen eventually if HP fail to respond properly and quickly.

May be HP can try out a new strategy with their Touchpads. Instead of developing and using its own WebOS or a new OS, they should start using Windows Phone OS or Android. Developing an Operating System has never been HP’s expertise nor its strength. Of course HP-UX is one exception. However, it is NOT a mainstream OS. Therefore, it makes sense to leave that part to the experts – Microsoft or Google. The problem with this approach is low profit margins. The hardware market has been so commoditized that achieving more than 10% profit margin has become a daunting challenge. Most of the profits are taken by the software providers such as Microsoft. In fact, Amazon was quoted to lose money on their Kindle fire devices. In other words, Kindle Fire is sold at a discounted price which is less than the manufacturing cost. Then why do I suggest HP to go that route? Let’s see here.

HP’s obvious strength lies in designing hardware that performs better. They have been manufacturing PCs for decades now. So it’s highly possible that they can come up with better hardware than Amazon Kindle‘s or Google Nexus tab’s. As a result, they can even charge a premium on it. That means, instead of selling it at $199, they can sell it at a higher price so that they see a decent margin on hardware. Is that all for HP in it? No. We are NOT done yet.

If Amazon has been losing money on Kindle Fire, why is it still willing to produce this device. Where they get the money from? They get the money by selling the content like Music, Videos and Books/Magazines/News Paper subscriptions. HP can do something similar to it. HP can let Microsoft take the burden of promoting Windows App Store. HP can leverage Windows App store or they can have their own Windows mobile app store just the way Amazon developed Android app store. To compete with Amazon, HP can acquire an online book retailer – like Barnes & Noble, an online music provider – like Pandora/Spotify and Netflix for online video streaming.

Of course, HP won’t get all the functionality with the mere acquisitions. They need to alter or enhance/extend the already existed platforms in these companies. For example, Pandora/Spotify don’t sell the music as the way Apple iTunes does. So HP needs to work on extending the company’s platform and its partnerships with the content producers. I believe, by making these acquisitions and integrating them into the HP Windows Mobile App Store could bring HP back in to the play. Even though success cannot be guaranteed, it’s better to try something instead of not trying anything.

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A close look at HP


In recent times, Hewlett-Packard’s stock price has become a concern to its investors. On Friday, 19th of Aug 2011 itself it lost 20% of its market capitalization which is equivalent to $12 B approximately. A day before that HP announced its plans to either spin-off or sell its PC business. After I heard this news, I was shocked initially then thought of doing some math on HP revenues and growth rates.

For simplicity purposes, all the numbers mentioned here are rounded to the nearest integer. For 2010 FY, HP’s total revenue was $126 billion. Out of this, PSG (Personal Systems Group), its PC business, has contributed $41 billion (approx) towards that number. PSG’s revenue was nearly $41 billion, one-third of the total revenue. Total earnings from operations was $11.5 Billion out of which earnings from PSG were just $2 Billion. That means the group that contributed 33% of the total revenue has only resulted in 17% of the total earnings. As a result of this drag, HP’s margins look too low. IBM’s operating margin is 20% which is twice as HP’s. Let’s see how HP’s numbers look if we exclude PSG from HP’s portfolio. HP’s revenue excluding PSG was $85 billion and its earnings were $9.5 billion. HP’s operating margin with PSG is 9.12% where as without PSG is 11.17%. Either way HP’s operating margin doesn’t look as good as IBM’s 20%.

On the other hand, the growth of HP is also not on par with IBM’s. HP’s total Y-o-Y (Year over Year) growth including PSG for 2010 was 10%. Enterprise Servers, Storage and Networking group (ESS) grew at 21% and IPG (Imaging and Printing Group) grew at 7%. These numbers too don’t look so good. ESS grew at a good rate 21%. On the other hand the growth of Services was a meager 0.7%. This group is mainly composed of its $13.9 billion acquisition of EDS. PSG group grew at 15.4%. In fact this the second best growth after ESS.

The numbers for the first three quarters of 2011 compared to the first three quarters of 2010 look a little different. These numbers are the three most recent quarters numbers. So we can give more importance to these over 2010’s numbers. Services almost remained same between 2010 and 2011 (1% growth). Growth of other Organization Units are as follows ESS +14.6%, Software +14%, PSG -3%, IPG +3%. PSG actually contracted by 3%. On the other hand, their services definitely seems to be in bad shape. They are hardly seeing any growth there. IBM and other players in Services area are growing well in that sector with good operating margins. IPG growth is also NOT so appealing. However, it might be the market which is already saturated where it’s hard to see any rapid growth.

Good Decision to spin-off/sell PSG (Personal Systems Group)

By looking at these numbers, HP definitely doesn’t look good as of today. Investors’ concerns are NOT meaningless. In my opinion, HP has a lot of work to do at hand. As they declared last week, it’s a good idea to spin-off its PSG group. With narrow margins and weak growth prospects of the market, it’s a good idea to get rid of that division which IBM did long time back when there was no concept of tablet PCs which are the reason for PC market shrinking. However, IBM was not a big player in that market. Therefore it was an easy decision to them. On the other hand, HP is the world’s largest PC maker. But considering the industry’s growth prospects, the decision is wise on HP’s side to divest in this market. It will NOT reduce HP’s profit a lot but increases the operating margin by 2% which is a good metric to please the investors to some extent. By selling this business, they can release the money that’s been stuck in it and spend the money in a growing sector.

Lurking Danger – Services Group

In 2008, HP spent $13.9 billion to acquire Electronic Data Systems (EDS). I believe it was a good decision although it was a little pricey one. Services industry is the one where margins are high. HP is more like a follower in this sector than a leader. IBM has entered sector long before HP did and remained the market leader. Though the decision was good, its implementation doesn’t seem to be right. This group grew by 1% between 2010 and 2011. Between 2009 and 2010 it grew by 0.7%. In my opinion, this seems to be a disaster waiting to strike. Unless, HP solving the problem that’s hindering the growth, this group would also lose its steam. HP’s history with acquisitions is not-so-good, if not bad. Last year, they acquired Palm for $1.2 billion dollars which they are simply throwing it away, today. For the same money around the same time it could have got someone like Pega Systems which is a good player in BPM software world. In 2001, when the Application Servers were ruling the enterprise software world, HP acquired an application server vendor, Bluestone Software. Given the time at which this decision was made, one has to agree that it was a good move. However, the execution part of that strategy was not so good as HP had to discontinue the product. So, one of the things that HP has to address is it’s Services group’s growth issues.

Positive Signs – ESS (Enterprise Servers, Storage and Networking) Group

Except for servers, the other two are HP’s recent initiatives. They ventured into storage and networking sectors recently. The growth in this group seems to be really encouraging to HP. Before and after, Palm, some of HP’s acquisitions are in this sector. These acquisitions include Opsware, 3Com, 3Par, ArcSight etc. I believe HP is doing the right thing here and needs to continue to focus on this sector. May be, Juniper Networks would be a good fit to them to compete better with Cisco in Networking.

Untapped Market – Software

Though HP has the presence in Enterprise Software market, it is still a small player in this sector. Out of HP’s $126 billion revenue, Software contributes only 2%. I believe this is where HP can look for more growth in near future, along with Services and Data Storage and Networking (ESS). It has announced, some time back, as its focus is to expand into the enterprise software. Its main intention is to concentrate on Cloud based software which is an upcoming trend in Software world. By making this decision, HP is going in the right direction. However, it is already too late for HP to enter Enterprise Software market which is already filled with a lot of big players like Oracle, IBM, SAP etc. Their current presence is negligible compared to these other players’. So HP has to make the decisions quick. We need to wait and see how the acquisition of Autonomy would help HP to lay the first steps in this direction. However, I doubt if it could help them to enter the Cloud Computing area. While acquisitions stimulate the inorganic growth, HP has to concentrate on Organic growth as well. It has to put more focus on getting more and more talented people in to this division. New products have to be developed in-house as well. Being the highest margin market, Software can take the HP’s growth by leaps and bounds. It’s going to be HP’s cash cow, provided the right decisions are both made and implemented.

To conclude, HP has some serious problems in hand to solve. They have to work on their margins. In my opinion, the recently announced decisions, if correctly executed, can save HP from current crisis. HP is not the first one to be in this situation. In 90’s, IBM had the same problem and they were able to turn the things around in to their favor. Now it’s HP’s time. All it needs is a right person who can drive HP’s growth engine in right direction. Can Leo Apotheker be the one? We need to wait and see. May be, an experienced hand in M&A and post M&A activities is what Mr. Apotheker needs at this moment.

Personal Experience with HP: I like to see HP make a come back. I started my career at HP as an intern. I wish HP good luck !!!

References: Key Stats Page at Yahoo Finance Annual Report 2010  and 2011 Q3 Financial Report

Change is Imminent


As an avid reader of Technology news, I felt a major shift in PC market. Most of the analysts are already talking about the shift from PCs to Tablets, Smart Phones and other kinds of hand held devices. Here are my opinions about these changes. I am NOT an expert in anything that I discuss in this post. I am just an observer with some interest in both business and technology.

I feel that we are witnessing the raise of a few new leaders and the fall of a few giants. Could Apple, Samsung or Motorola can be replacements of HP
and Dell? Can Qualcomm and TI overshadow Intel and AMD? Is it possible to see Microsoft making way to Google as the largest Operating System vendor? I feel the answer is “Yes” to most of these questions. If you are interested to see my views on these, keep reading…

PC market is contracting fast. New hand held devices market is all set to fly high. We are witnessing one of the great technological changes in the history. Most of us might have seen the evolution of computers at the end of 20th century. Now it’s the turn of hand held devices. Demand for PCs is reducing at an alarming pace. PC makers are busy with redefining their strategies. We may witness disappearance of some of the today’s technology giants. At least some of them will lose their relevance eventually.

With the introduction of iPhone, Apple has created a new wave of technological change. iPhone introduction erased the boundaries between powerful PCs and
not-so-powerful hand held devices. As most of the PC users use them for accessing Internet, Apple wanted to lock them in a whole new market. Apple, in fact, created this new market. iPhone let the users access Internet at their finger taps. Users don’t have to be at home or to carry a big ~7lb laptop/netbook. Users don’t have to be technically sound. Even a lay man can easily use it. Apple’s focus on user interaction made things much easier to the end user. As the trend setter, Apple has established its brand very well in the hand held device market. Thanks to iPod, that laid the foundation to Apple in consumer market.

Apple is able to manage a much impact by its later releases of iPhone too. However, this new market attracted new players as well as its future has become very
attractive. Google entered the hand held device OS market with its Android Operating System. It’s already out numbered Apple in the number of pieces sold. Its open software strategy worked well to promote Android in less time. As a result, most of the smart phone vendors readily grabbed a well developed, well designed and free-to-use Operating System. Motorola, Samsung, HTC are the first to release smart phones with Android on them. As of now, Google didn’t
declare their strategy on Android, to make money out of it. However, they are keen to compete Apple in smart phone software market. Android is all set to become the Windows of hand held devices.

Tablets are the devices which might make PCs look awkward. People are preferring to use a light weighted , easy to use and easy to carry tablets to PCs. PCs gave way to laptop which in turn made the way to netbooks. However, Netbooks didn’t enjoy the supremacy for a long time. They had to give up the market to tablets. Again Apple is the one to ignite the craze. Though iPod and iPad are not the first devices of their kind, they made their categories popular. There were iPod-like devices and iPad-like devices before they entered the market. However, Apple was the one to nurture the consumer interest in those markets.

After observing the developments in PC market, I strongly feel some companies are going to get affected negatively and some positively. Here are a few players to start with.

HP

Being the world’s largest PC maker, Hewlett-Packard is going to get hurt with the diminishing PC market. They acquired Palm some time back to have a jump start in hand held devices market. Though HP had their presence in smart phone market in the form of iPAQ, I don’t think they commanded any significant share in that market. With the acquisition of Palm, HP got their hands on Palm’s positively-reviewed OS, WebOS. This new move changed its plans for its table PC, the release which was deferred as a result. Back when HP Slate was introduced in CES 2010 (Consumer Electronics Show), it was running Windows OS on it. Rumors are, HP might release it with WebOS on it.

Pros:

 

  • As HP has expertise in PC manufacturing and marketing, it won’t be hard to them to turn a corner. They can easily jump into the tablet PC market.

  • They can leverage Palm’s expertise to fare well in smart phone market too.  WebOS has already received kudos from critics.

Cons:

  • Obviously HP is not the forerunner in this market. It has to compete in this market as a follower, at least initially.

  • Palm’s WebOS doesn’t enjoy the existence of plethora of Apps that iPhone’s OS and Google’s Android do. In fact, lack of Apps could even rule out WebOS or any other smart phone OS of the market.

Microsoft

Yesterday’s software leader, Microsoft could be another loser. As per one of the reports, Microsoft’s Windows phone OS could fall below 4% of the market share
by 2014. Already phone makers like Samsung and HTC joined the Android bandwagon by ditching Microsoft. Microsoft itself released a couple of mobiles with their Windows OS on them. However, many people are unaware of their existence too. Kin one and Kin two, the two Social Networking based mobiles, hardly made their mark which were eventually abandoned with in a couple of months of their inception.

Pros:

  • As we all know, Microsoft Windows is the most widely used Operating System and it would be so for some more time. With their expertise in OS, they can come back again with a well revamped Windows Phone OS (Windows Mobile was recently renamed to Windows Phone).

  • Considering their deep pockets, they can go for shopping. Dell could be a choice of interest. Dell can give Microsoft a quick jump into hardware market. (It is still a mystery to me why Microsoft is not in to hardware market yet). Otherwise, not many companies are left in this domain to grab.

Cons:

  • It seems like Microsoft is losing their ground in their PC OS market too. Vista was one of the worst reviewed operating systems that Microsoft has ever produced. It was so bad that most of the Vista users were allowed to upgrade their OS to Windows 7 for $0 (zero dollars).

  • iOS and Android are ahead in the race of hand held device OS market. It might be too late for Microsoft to regain its lost market share.

  • Microsoft has been fighting Open Source community for a while now. Even if it manages to get some share from iOS, Android would be a hard nut to crack. It might not be easy for Microsoft to grab share from Android, given Windows’ not-so-open platform.

  • Unlike Apple, Microsoft doesn’t have any hardware unit to back its operating system. It has to depend on hardware vendors like HP, Dell etc.

Research In Motion

Another sufferer by the change in smart phone market would be Research In Motion. Its smart phone brand, Black Berry is already seeing decreasing growth levels while losing share to its rivals. We still have to wait and see how RIM can perform in days to come. At least as of now, it doesn’t seem to be in a good shape.

Intel

Another big giant that could get affected by this trend shift is Intel. They have recently lowered their outlook on revenues of next quarter, sighting, the decrease in PC demand as the reason. Lately, they announced their purchase of Infineon’s unit that manufactures processors for smart phones. I see this as a desperate move to get into hand held devices market. Intel processors are impeccable for PCs. However, their hand held device counterparts are always complained as power thirsty. High power consumption is an intolerable aspect to the mobile vendors. Either Intel has to make their processors more power efficient or inves some money to invent better battery technology. The latter would not be a real solution to the problem. However if the research pays off, the invention could patch the problem temporarily. Currently Hand held devices’ processor market is dominated by the companies like Qualcomm, Texas Instruments etc. Intel-bought Infineon unit has a meager 5% market share approximately.

Nokia

Nokia is the largest mobile phone maker in the world. It has been enjoying this place for more than a decade now. Today, it sells one mobile out of every three
mobiles sold world wide. Though Nokia has one third of the mobile phone market share, company’s future doesn’t seem to be bright. During last few years it has been losing market share to other companies. They have to impress the consumers with a real smart phone yet. Their prestigious N-series is far from competing iPhone-like smart phones. As the mobile phone world was changing very rapidly, Nokia doesn’t seem to be responding to any of those changes.  Their yet-to-be-released N8 is coming with a new and revamped version of their Symbian OS (Symbian 3). However, it looks like, Symbian couldn’t be an answer to iOS or Android. Unless Nokia embraces Android OS, it might be hard to them to retain their position. Nokia is also betting on a Linux based OS called MeeGo. MeeGo is also open sourced and it uses the same Linux kernel as Android does. Nokia is developing this in collaboration with Intel. However, it could be too late by the time Nokia releases a mobile with MeeGo.

Dell

Dell could be the biggest sufferer of this shift. Historically Dell did well as a reason of their procurement process efficiency.  They made the purchase, a pleasant experience to the customers. As the practice paid back, Dell has become the largest PC seller in the world before it lost the position to HP. Dell is a living example (living at least as of now) to the fact – Operational Excellence can’t be a strategy. Dell has believed and overly relied on operational excellence which was easily recreated by their competitors, like HP. Now Dell is at number 3 after HP and Acer.

Dell has foreseen the technological shift coming in the PC market. It recently came to the market with their new hand held device – Streak. Dell Streak falls
somewhere between a smart phone and a tablet. However, response from consumers doesn’t seem to be overwhelming if not, disappointing. Unless they come up with a very impressive device with good quality hardware, the state of the art technology and best design, days are numbered to them. An acquisition could give Dell some oxygen. Could that be Microsoft or Google? Could be.

AMD

AMD is another company that would be hit very badly. It is the only major alternative to Intel in PC world. However, this market itself is losing the demand.
Hence chances of growth at AMD are minimal.

While struggling to cope up with the dynamics of the market, the current leaders are making the way to smaller/newer players like Samsung, Qualcomm, TI, ARM Holdings etc. This month, Samsung launched their tablet with Android OS on it. All four major carriers, AT&T, Verizon, Sprint-Nextel and T-Mobile are going to sell this tablet. Samsung might emerge as one of the leaders in this field. Its new Android based smart phone Galaxy S already hit the market and reaping fruits to the company.

Qualcomm and TI are the current leaders in hand held device processor market. They could become the Intel-like companies in this arena.

Bottom line:

Change is imminent. It’s always been in the air. Those who foresee it and respond to it, can reap the benefits. While others who fail to respond will face loses,
may even disappear. Corporations could be big. But they can’t afford being so big that their own progress is impeded by their size. That’s what, I feel, has been happening with Microsoft and other few big companies.

Pisupat Venkata Krishna