The man with the knife

HP's decision to spin off PSG is an admission that Apple has not just won, it's changed the game

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The man with the knife HP CEO Leo Apotheker might have been the one to pull the trigger on its personal systems group, but he certainly wasn't the man who caused it to be put down. (Getty Images)
By  Ben Furfie Published  August 21, 2011

There was a man with blood on his hands this weekend, but his name wasn’t Leo Apotheker.

Despite doing the metaphorical equivalent of putting a shotgun to the head of HP’s personal systems group, and pulling the trigger, he wasn’t the person responsible for the mess that resulted in HP shares diving 20% in out of hours trading.

No. The person really responsible for the slaughter over the weekend was Steve Jobs.

Razor thin margins may have drove HP PSG to the brink of suicide, but it was Jobs who handed Apotheker the shotgun he used to put the dog down.

The simple fact is that the PC market HP existed in on Thursday was totally different to that of 1968 when it launched its first ‘personal computer’. Commoditisation, competition, and most importantly, a fundamental shift in the very idea of what a personal computer is had conspired to make the PC market a high investment, low profit sector.

I firmly believe it was the latter that drove HP to the decision it announced over the weekend. However, it wasn’t Apple that drove the first nail into HP PSG’s coffin – though it certainly did drive the last one in. No, the company responsible for the first was Taiwan’s Asustek.

Its EEE netbook PC (which aptly was the noise I imagine many of HP’s investors made when Apotheker made his announcement) was the first device to truly breakdown the concept of the PC being an expensive commodity (but a commodity nonetheless). Most importantly, it changed people’s perception of what a PC should cost.

For HP, it was the worst thing that could have happened. Its consumer sales relied on a higher average selling price (ASP) per unit than its rivals. Now netbooks, with their ASP in the low hundreds was about to make HP’s ASP, which was in the mid to high hundreds look very expensive indeed.

Even worse for HP, netbooks came at a time when the global markets where reaching the peak of the bubble. Consumer spending on hardware was at its peak, but instead of spending their disposable income on a new HP PC, they were instead spending their money on netbooks, whose margins were even worse than a regular PC.

Then when the bubble burst, and people’s disposable income plummeted, the only computers they could afford were netbooks.

Luckily for HP, much of the revenue that was lost during the recession was made up by enterprise spending, especially with its software and services division, as businesses scrambled to convert capital expenditure into operation expenditure.

However, I very much doubt it was the plan for services and solutions to pick up the slack for too long. Consumer confidence would return and when it did, people would begin buying HP PCs again.

Unfortunately, while HP didn’t fail to see the iPad coming, it did fail to estimate the impact it would have on the market. Fundamentally failed.

By the time consumer confidence began to show the first green shoots, the market had already changed forever.

Netbooks had shown people who only browse the internet, send the occasional email and use Facebook that they didn’t need full PCs to do what they wanted to do. Apple’s iPad took that one step further showing them that they didn’t need Windows to do it either.

The problem for HP is that by the time consumer confidence had returned, the industry had emerged into the very beginnings of the post-PC market. By the time Apple’s competitors realised what was happening it was too late.

In some respects, the story reads much like the plot of the reboot of Battlestar Galactica. Apple is the Cylons – the robot race that skulks off to the far corner of the galaxy, apparently licking its wounds – while the twelve colonies of humanity (HP, Dell, Acer, Lenovo, Asus, Toshiba, Sony, Samsung, Google, and Microsoft, and so on in this case) crow in the glory of their victory, before going back to life as normal.

Cue the Cylons who’ve been working on building up their army in secret (the iPad) before launching a devastating surprise attack which utterly destroys the twelve colonies, leaving only the Battlestar Galactica (in this case, HP’s enterprise division) and a group of vulnerable survivors (Dell Enterprise, etc) to live on to fight another day.

Anyway, the point is that Apple’s iPad has proven to be the final nail in the coffin for HP’s PSG group. Regardless of whether HP pulls the shutters down on the group itself, or it manages to sell it off, the mere confusion over its future will kill off any enterprise deals it might have had in the pipeline.

In addition, consumer focus is still shifting towards the iPad market – and be under no illusions. HP’s immediate execution of the webOS division is the biggest signal yet that the rest of the industry is rapidly waking up to this fact.

There is no tablet market. Only an iPad market

So what does the future look like for HP? HP will be hoping to repeat the success of IBM at the very least. Much more likely is that it is hoping by shedding a division that had high costs, and most importantly, low profits, it will be able to focus on its high profit enterprise services and solution division.

However, going on the initial reaction from the market, it doesn’t look positive. While shares dropped by 5% before the markets closed, they had dropped by 20% on Sunday. I’d hedge a bet that unless there is a bear rally when the markets open, they might drop by as much as another 15%.

The issues main issue are that they markets feared Apotheker might do something they perceive as stupid. For the most part, most consumers and lay investors don’t know that HP has a huge enterprise operation running behind its laptops and desktops. Those that do, often don’t realise its scale.

In their eyes, Apotheker is a English Premier League manager who was sacked by a former top five team after he got them relegated, who is then hired by one of the top four and only to make the same mistakes again.

Faced with the impact Apple has had with the iPad, and the lack of understanding of HP’s enterprise business, the real risk for the vendor and its management is investors forcing Apotheker out the door in the next 12 months if the share price lost in the last 48 hours isn’t built upon, never mind recovered.

The next 12 months are going to be crucial for the future of HP, and its CEO Leo Apotheker.

There’s a shadow in the corner. And its Apple shaped.

2175 days ago
Martin Turner

Good analysis on the game-changing nature of the iPad. The pivot was that, even days before its launch, virtually no pundit could see what it was for. A year afterwards, it was hard to remember a time before the iPad.
However, HP's days of profit in the PC market were limited even before netbooks. HP's strength has always been selling robust gear for enterprise and government. There are still Laserjet IIs and IIIs in operation because they were virtually indestructible. Ditto early HP calculators. There is, of course, always a consumer niche market for highly robust gear, hence the penchant among the super wealth for Humvees, but it was always going to happen that computer hardware would commoditise once machines reached a speed at which faster computing made no appreciable difference to the user experience. That point was reached several years ago, when speed of internet connection became more important than processor speed. Increasingly since then, the PC has for most consumers been primarily the gate to the internet — it has become an adjunct to the experience, not the experience itself. Companies selling premium broadband to customers will turn a profit, but, as HP correctly identified, a premium front end to that broadband will become increasingly a losing proposition — unless you can command the top of the market category. But that place is already filled by Apple.

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