Techaisle Blog

Hewlett Packard (NYSE: HPQ) announced yesterday that its board of directors has authorized the evaluation of strategic alternatives for its Personal Systems Group (PSG), including the exploration of the separation of its PC business into a separate company through a spin-off or other transaction.

The company intention seems set on implementing a plan to fundamentally transform its business to drive higher value solutions to enterprise, small and midsize business and public sector customers and went as far as describing the HP of the future “through a portfolio that spans printing, software, services, servers, storage and networking.”

The company has also announced a strategic withdrawal on WebOS and the prospect acquisition of Autonomy Corporation [Cambridge -UK], a data mining software company.

It seems that the company is aiming to get out of the commodity hardware business and focusing on becoming a software & solutions company. New CEO Leo Apothekar seems interested in transforming HP for the future but we think this is done without some fundamentals of the past.

Such a move will be pleasing to financial markets, since a possible withdrawal from PC business will undoubtedly ensure better financial ratios [YTD PSG represents 30% of segment total revenue and 16% of segment operating profits but is the lowest OP generating segment at 6%] but such a move is unlikely to create strategic advantage.

Whilst delivering higher value solutions is a key survival aim, less than 10 years ago, HP had paid $25 billion [Compaq Computers acquisition] to become the undisputed market leader worldwide. A new PC brand [and company] can be readily made, but the synergies sought then, and what the current HP can benefit from, will largely be lost in a new outfit.

A broad portfolio benefits SMBs

Techaisle research shows that SMBs rely heavily on the expertise of others with regards to the ICT needs. This support requirement takes many shapes and forms but single brand sourcing is a major aspect of this “peace of mind”. By spinning off the PC business, this powerful lever will be lost – with probable consequences also affecting other printing and networking businesses.

Channel Management Lock In

HP over the last two decades has built one of the best channel partner networks in the industry. Our research shows that these channel partners have been very loyal to HP, partly due to the brand, but also due to HP managers’ ability to capitalize on the range. By laying out partner business plans that neutralize competition, many IT vendors have simply been unable to attract sufficient interest on volume sales by resellers – locked in on a combination of bonuses and accelerators spanning the overall range, thus making it not worthwhile to really push other brands. Take away the PC share, and now the game is more open for all. Epson, Ricoh, Xerox, Lexmark all can have a stab at the mixed channels.

Spin-Off / Sell-Off?

For the reasons above, a spin-off would be tough but a sell-off might just end up being the stuff of nightmares.  There are not many suitors that have the interest and clout to take on such business and so the list is short – and we think all are likely to bite back.  Rumored Korean giant could benefit as much as HP did when they acquired Compaq, but Compaq was taken whole and no longer exists. Passing just the PSG business may well make the rest open for flanking strategies – and Korean ICT vendors are world master at that.

The Move to Services

When IBM spun off its PC business, it made sense because IBM already had all the IT stacks in place and its PC business was never really focused on consumers. Q3 filing of HP puts services almost as important to PCs and with the undergoing shift in computing mode [from client/server based to power everywhere] perhaps a refocus can be good – but Oracle, IBM, Fujitsu, Cisco and HP are all focusing on the software & services markets which will soon become very crowded again. This is, however, “a soon” and not “a now” – so profitability is still there.

Web OS

Power everywhere also demonstrates that HP can lose out. WebOS’ attempt to compete in the mobile OS world seems uncertain and the market is well set on the iOS, Android and WP7 triad. HP today also announced they will stop production of devices loading WebOS and that is a clear sign of loss of faith in this arena.

Concluding Remarks

Although based on our researched facts, we acknowledge that our analysis is limited by the lack of internal soft guidance on matters such as politics or personnel skills. To fully evaluate the risks, these are just as key ingredients but, structurally, either Spin-Off or Sell-Off of its PC business seems a very risky decision. HP’s strategy is a clear nod for IBM’s successful software and services strategy but then IBM was never so fully entrenched in the Consumer and Small Business Markets.

Finally, if a new PC Company is formed, at current data this will be the most profitable PC Company on the planet. A company capable of operating with the sole purpose of PC business but without the CIOs relationships it has today.  Things will not be easy.

Structurally, another Lenovo style company might be good for the new Lenovo style company as it will be entirely focused on the market but it will not have the same relationships as today nor will have the new HP.

By the way - to save on branding, the new PC Company could be called “Compaq”...  plenty of people will be happy about that.

Paolo Puppoli
Techaisle

Intel today announced, Thunderbolt, a technology that allows a user to connect multiple devices with only one cable with a bi-directional transfer rate of 10 Gbps. Now, that is a massive speed and certainly takes the pain and guessing game away from finding the right cables to fit into their relevant slots acoss devices. Imagine a case where a PC is connected to a TV to a printer to a storage device to a phone - all with the same cable and with almost instantaneous data transfer.

It is certainly a very excitement development. However, I feel it is several years out in its full adoption, implementation and pervasiveness. In a world that is increasingly becoming wireless do we still need cables? Why would I want to stream my music or video to my TV through a cable? But no, no. I feel that wireless is becoming important but not all devices are suitable for wireless connections. Wireless transfer rates of 10 Gbps at consumer level are still far out. But would it not be nice. At my home, or even in the office, behind the TV stand or the desk are hiding plethoras of cables gathering dust. Such tangled cables are also known to be bad feng-shui.

If we understand correctly, using Thunderbolt, all the cables can be replaced in one uniform daisy chain. Would that not be nice? It would be.  But only now we are all learning the use of HDMI and probably USB 3.0 and not all devices have them. What about legacy systems that are still in use? And there are many and will remain so for many years. Especially, in the case of SMBs where devices and form factors get amassed organically with no one clear overhaul.

Nevertheless, I am rooting for the technology. However, Intel will have to move very fast to get device-makers on board. Granted it may be expensive to begin with but such pricing becomes secondary when wide adoption begins.

WiGig is also coming into play with data transfer rates of 7 Gbps and Intel is among its board members. To those who say that WiGig will win, I say, wait and watch, both Thunderbolt and WiGig will co-exist. With Apple taking the lead in the introduction of Thunderbolt it is definitely a defining moment which many will take note of, especially the eco-system that thrives around Apple.

Anurag Agrawal
Techaisle

Microsoft today announced that they were developing a new OS to be deployed on ARM based devices. This is the final acknowledgement that the world has moved past the Windows – Intel controlled computing sphere. Announced initially in June as Windows EC7, this has been on a steady development path leveraging earlier Win CE efforts that have been successfully deployed on ARM devices albeit as an embedded OS. The Company is not giving up on x86 development which will continue to dominate the PC computing market. It is however giving a nod to the fact that newer devices which are expected to drive additional volumes of web usage have different requirements from a hardware and software perspective. The key has been being able to balance battery power and performance requirements – something Intel’s Atom has not done very successfully leading to a huge opportunity for ARM.

What impact does this have on developers? Microsoft’s move to support ARM provides an incentive for developers to port mainstream apps to ARM. But ARM based development is not a new beast for developers to tackle. Those that have jumped into developing apps for Android and/or iOS are already familiar with developing for the ARM platform.  What developers need to focus on are the unique usability requirements related to consumption of apps on these various mobile devices.

Overall, the impact on existing Wintel market should be minimal but it seems that Intel will lose out on newer opportunities to come. You cannot count Intel out completely though for the company is fully capable of competing and “arm”-wrestle its way back into the game.

Abhijeet Rane

Microsoft released a new ad that has been making the rounds on various web video sites and on TV. The new ad shows a lady who states she is not too cool to afford a Mac. Clearly Microsoft is taking a swipe at the higher cost of Macs in a down economy. During  discussion last night with some friends, they all liked the ad (Disclosure: they all work at Microsoft. That said, they are generally pretty objective people). They liked the ad because they believed it was on target. I respectfully dissented and here's why -

1. Everyone knows that the Mac is more expensive. That fact does not need to be reinforced. If at all it should be reinforced in good times when people are spending freely. They are not.

2. Windows rules. And will for the foreseeable future. People don't buy PCs for low prices. They buy them because they are the standard. So what is the point of this ad?

3. Mac is a luxury brand and is consciously positioned as such. Luxury brands are forced to sustain their cache during rough economic times. That is the risk they take. You don't see Mercedes and BMW lowering their prices because their image is linked to those prices. And once you lower prices you can't bring them back up again. Occasional rebates, yes. Lower MSRP, no.

4. Finally, this approach can backfire. The PC ad indirectly heightens the "aspirational status" of the Mac. Like the guy who goes from driving a Honda Accord to driving a BMW, the current ads suggest that when times are better, it is OK to buy a Mac and indeed a consumer should aspire to do so but for now buy a PC.

[youtube=http://www.youtube.com/watch?v=EIS6G-HvnkU]

The Microsoft ads that have "I am a PC and I am not alone" are therefore on target and beautifully made. The other set of "I am a PC" ads that show kids doing stuff are awesome. Perhaps the best tech ads I have ever seen. Both of the above evoke a strong sensory reaction. Exactly what is needed to counter Mac ads that have done this so effectively on the past.

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