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By Keeping PCs, Is HP Betting that Tablets are Disruptive - or Not?

Unlike IBM, HP is going to keep its PC division. Why? I imagine for HP executives and employees there were two basic lines of reasoning.

The interesting thing to me about HP's wholly-expected decision not to spin off its Personal Systems Group is that its internal supporters were likely split into two camps, each holding wholly-different views of where the PC and mobile markets are headed.

Now, I have no idea what CEO Meg Whitman, PSG head Todd Bradley and HP's 325,000 other employees really think. But indulge my Inner Fiction Writer, as I imagine the inner monologue of members of each faction. Which one makes more sense to you?

Faction #1: "Yep, tablets are The Real Deal. They are, as Clayton M. Christensen wrote, a disruptive innovation, disrupting the PC market since the iPad debuted in early 2010. In 18 months, they already outsell netbooks 2 to 1. Laptops are next, and then desktops (though that's already shrinking).

This is more than a sea change; it's a tidal wave. Sure, we sell $41 billion worth of PCs a year. But even with all that scale, our profit margin is just 8%. The $499 iPad is 3x as profitable (25% gross margin) while stealing millions of people who'd otherwise be in the market for a Pavilion laptop. Imagine what the $199 Kindle Fire will do!

But hold on. We're HP. The Biggest, Baddest Guys in All of Tech-Dom (Yes, Bigger than Big Blue since 2006). If anyone's going to eat our lunch, it's going to be, um, us. So we'll do tablets, even at the risk of cannibalizing our PC business. I mean, Apple figured out this Innovator's Dilemma, right?

But this time, we won't copy Apple's Go-It-Alone strategy. webOS is slick, but it was still a $1.2 billion mistake. After iOS, Android, BlackBerry and Windows Mobile/Phone, there weren't enough developers left for us to woo. Besides making our investment bankers rich, the only upside of buying webOS was that it spurred Microsoft to finally commit to what we'd been wishing for all along - bringing Windows to the fast, energy-efficient ARM mobile chip platform.

Now that Windows 8 will run on ARM, we'll go back and Dance with the Partner who Brung Us to No. 1 in the first place. So goodbye to Pre smartphones and TouchPad tablets. Hello Windows 8 tablets on Intel and ARM.

Windows 8 on ARM isn't a perfect solution. It won't be compatible with all of those tens of thousands of Windows 7 applications. It does make things easier for our marketers, though. We'll price our Windows 8 ARM tablets at $199 to aggressively go after the Kindle Fire and other Android tablets. For our Intel Windows 8 tablets, we'll charge $399 - business-types that need Windows application compatibility will pay a little more. Our goal: to become the volume leader in tablets, just like we are in PCs."

And here's Faction #2:

"Tablets, schmablets. Tablets aren't disruptive at all. They're just a new category within the overall PC market.

Look: analysts on average forecast that 53.3 million tablets will be sold globally this year. Not bad. But that's just one-seventh of the 364 million PCs that Gartner expects to ship this year.

In 2012, even the most bullish forecaster (Gartner) expects PCs to outsell tablets by four to one (404 million vs 103 million).

And remember that old expression: what goes up must come down? That's what's going to happen to tablets. Look at the way netbooks rose and fell. Tablets are cool, sure, but they have their limitations: lack of keyboard, small screen size, lack of under-the-hood power, lack of serious business applications.

We're HP. The Biggest, Baddest Guys in all of Tech-Dom ($126 billion in revenue last year). 63 million people worldwide bought our PCs last year. You can't run software without hardware. Let others like IBM quit the PC business. They weren't #1 like we are.

And say what you want about our profit margins, but $2 billion a year in profit - what the Personal Systems Group is expected to reap this year, despite Apotheker's attempts to kill it - is nothing to sneeze at.

So yes, we're going to do tablets, Windows tablets. But rather than annointing them as the new King, we're going to treat tablets as one of many Potential Successors. No more, no less.

And we're gonna price them at $500-600, the same price point as our low-end Windows laptops. Because that's the value they'll deliver to customers."

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Which outlook and corresponding strategy makes more sense to you?

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