HP, Apotheker prep master plan: Five top issues

Summary:When Hewlett-Packard CEO Leo Apotheker outlines his master plan for the company in San Francisco Monday he will face a lot of doubters. Here's a look at the top five hot topics Apotheker will have to address.

When Hewlett-Packard CEO Leo Apotheker outlines his master plan for the company in San Francisco Monday he will face a lot of doubters.

After all, Wall Street analysts have become quite skeptical about HP, especially after the latest quarter and outlook. HP's quarter wasn't a disaster, but did highlight a few worries about consumer PC demand and lackluster services growth.

Here's a look at the top five hot topics Apotheker will have to address Monday.

Software. Apotheker has made it quite clear that he intends to solve HP's software problem. The question is how he plans to do it. On one front, HP faces SAP and Oracle. SAP is friend. Oracle is foe. Then IBM has gobbled up software companies at an astonishing rate in recent years and now covers analytics, middleware and a bevy of other areas. In comparison, HP has a weak software hand.

Obviously, acquisitions will play a role here. But Apotheker has to pick a specialty. One idea is that HP could go heavy on the open source, potentially acquire Red Hat and aim to commoditize non-critical workloads. That message would definitely resonate with technology executives. Another path for HP would be to go heavy on software as a service. My list of SaaS players highlights an industry that could be consolidated on the cheap. HP could be that consolidator and pluck off many key areas.

How will services be fixed? One big trouble spot on HP's last quarter was the services business. The growth just isn't there. While IBM, Accenture and others have claimed the high ground in services, HP's unit is flattish. Why?

Here's my take: Under former CEO Mark Hurd, services headcount was frequently cut. Hurd also didn't quite grasp business process outsourcing. Add it up and Hurd thought services was a lot like the hardware business, but you simply can't automate everything. Relationships matter in services. The former EDS saved HP's earnings in the recession, but Hurd milked the cash cow dry. Now Apotheker has to clean up the services mess while IBM fires on all cylinders and companies like Xerox, which acquired ACS, get their groove on. Xerox is melding printing and document management intellectual property with ACS' services. HP could have done the same, but lacked the vision.

WebOS: In a recent Bloomberg Businessweek interview, Apotheker said that the WebOS would be embedded on HP PCs. Just because you have distribution doesn't mean consumers will use the WebOS. What will HP do to make the WebOS the glue that ties mobile devices, printers and PCs together? The theory is there, but the vision of the secret sauce needs to form.

Can HP innovate? Apotheker also indicated that HP lost its soul. If you look at HP Labs' big bets a lot of the topics sound me-too. HP Labs is an asset that needs to be beefed up. Hurd cut HP's R&D spending down to the level of Dell as rivals like IBM remained steady at about 6 percent of revenue---even as sales ballooned. There's a balance between pure research and creating products. HP needs to get that R&D balance back. The problem: Apotheker will raise R&D spending at the expense of profits and get reamed for it. Innovation investments don't pay off in two quarters.

Apple envy and the future of the PC business. The innovation issue quickly leads to HP's consumer business. With consumer PC demand flagging, can HP come up with the designs and toys that will wow the masses. The parts are there and HP is capable of good design. In addition, the tablet field is open. Apple's iPad is the clear leader, but there isn't a No. 2 player established. HP could be a tablet player with the WebOS. However, HP lacks the focus of Apple. If HP can't compete with Apple on tablets---not that other PC makers have---there's an argument to be made that the company shouldn't bother with PCs. Why would you want the PC business in the post-PC era?

The numbers certainly add up. The consumer is low margin. The enterprise is high margin. From a business perspective, it makes sense to focus on the enterprise. Could HP exit the consumer business like IBM did? It's possible, but not today.

Look for Apotheker to combine WebOS, tablets and PCs and see if he can compete with Apple. If that strategy doesn't work out, Apotheker could ultimately exit the Apple-envy game. Barclays analyst Ben Reitzes wrote in a research note:

We are getting questions from investors on HP's commitment to its PC business, which accounts for about 32% of total company revenues and 15% of profits. While we think selling the PC business is unlikely, we believe over the long term the potential sale of HP’s PC business (in an IBM-like move to shed lower-margin businesses) would be a positive event given persistent secular threats in PCs. Near term, however, execution would be crucial as there would likely be some additional pressure on other segments such as servers, given a lack of purchasing scale.

Reitzes also noted that HP's profit margins would surge if it dumped the personal systems group.

We believe that HP’s issues in the PC business have reached a critical point. While those linked to the Wintel value chain may tell you differently, it appears increasingly clear that consumer PCs are facing significant long-term challenges from the rise of smartphones and tablets – these challenges are not going away. While HP has Palm and the ability to even make PCs with its own OS, it just seems too little too late. HP is the only company we cover struggling in China and while that country is likely to improve for HP, we believe that tablets will cannibalize PCs there too.

Topics: Hewlett-Packard, Hardware, Laptops, Mobility, Operating Systems, Tablets

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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