HP keeps its PC business: Price war, crumbling profit margins next

HP keeps its PC business: Price war, crumbling profit margins next

Summary: HP move to keep its PC unit makes sense for now, but low margins, hard drive shortages and tablet cannibalization are just around the corner.

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Hewlett-Packard CEO Meg Whitman crunched the numbers and determined that the company had to keep its PC division. The big question now is how far HP will go on pricing to defend its PC market share.

The reasons for keeping the PC unit were fairly clear cut (story, statement, Techmeme).

  • Without the PC division, HP would have incurred $1 billion in higher supply chain costs.
  • A spin-off would have cost $1.5 billion in separation and startup costs. For HP, $1.5 billion shouldn't be a lot of money, but the company paid $10 billion in cash for Autonomy. It needs to build up its cash hoard again.
  • The lack of PCs would have hurt HP's server, networking and storage business as well as the printer unit.
  • It's unlikely that HP had any realistic buyers and credit was tight for private equity to step in.
  • There's also a branding problem in a spin-off. “PSG benefits from HP’s global scale and innovation,” said Whitman. “It would be very challenging for a new PC company to build such a strong brand.”

In many respects, HP's decision revolved around the fact it couldn't afford to spin off the PC unit. The company wasn't ready. When IBM sold its PC unit, the company had other divisions doing well and the computer business was hived off. HP's PC business is too integrated to extract easily.

Analysts Friday morning were supportive of HP's move---actually they'll take any sign of stability they can. Deutsche Bank analyst Chris Whitmore summed up the consensus view.

While not a surprise, HP made the right decision (in a timely manner) and correctly assessed a PC spin would be value destructive in terms of scale/procurement, global reach and pricing flexibility (bundling etc). This is the first step in the right direction but many uncertainties remain.

Indeed, HP has to integrate Autonomy, cook up a tablet strategy beyond me-too Windows 8 devices, sell WebOS and fix its services unit. However, a lot of uncertainty still remains for the PC unit. Just because HP said it is keeping its personal systems group doesn't mean that it's all clear sailing from here. Whitman on Thursday's conference call already hinted that there was turbulence ahead.

Full coverage: First the PC business, perhaps the TouchPad is next in the revival line | HP: We're keeping the PC unit | HP making another run at tablets with Windows 8 | CNET stories: HP says it will soon offer Ultrabooks | For keeps: A brief look at HP's PC lines | Could HP bring WebOS back? BNET: If It’s Thursday, HP Must Have Flip-Flopped on PCs Again

Whitman acknowledged that the PC business is a low margin venture. But HP will be efficient on supply chain and ride the consumerization wave to appeal to both the consumer and CEO. Lenovo has the same plan. Actually so does Dell.

Add it up and Whitman is going to see PC margin pressure sooner than later. Toss in hard drive shortages from the floods in Thailand and HP's PC unit's financial profile isn't going to look so hot over the next two quarters.

Here are the issues HP's PC unit will face:

A price war to maintain market share. Whitmore noted:

While HP has stepped back from the ledge, it is unclear how much damage has already been done to HP’s reputation, brand and business relationships. At a minimum, customer trust and confidence has been damaged and will take time to repair. We believe Lenovo and Dell are benefiting from customer/partner defections and related dislocation caused by the review of PSG. We believe HP’s PC margins are under severe pressure as it fights to maintain share (pricing / bundling).

Barclays analyst Ben Reitzes also expects low margins to arrive quickly.

Unlike IBM, we think HP is not ready; its services and software strategies are still immature and not ready to shoulder the burden of driving the sales process at the company. Over the next year, however, we believe that HP may need to be more price-aggressive than it has been to make sure it doesn’t lose share and rebuild trust with resellers, especially in Asia.

A dreadful fiscal fourth quarter Nov. 21 for PCs and probably all of HP. Analysts expect Whitman to cut HP's outlook dramatically. First, she can easily blame Leo Apotheker and give herself wiggle room to top estimates in future quarters. In addition, the PC uncertainty also probably hit the server, networking and storage business. Whitman has to cut the outlook so she has the room to execute a PC price war.

There is no tablet strategy. Whitman noted that HP will get back into the tablet business most likely with Microsoft's Windows 8. Executives chafed when analysts said that tablet plan is too late. It's unclear what HP will do to differentiate a TouchPad 2.0. Whitmore added:

We expect HP to compete in the tablet space with Win 8 devices. This strategy is neither unique nor differentiated and is late (iOS and Android ecosystems / competitors have a multi-year lead). We believe HP’s Win 8 devices will have difficulty competing on both a cost and user experience standpoint.

While HP is figuring out its tablet plan, the popular devices will continue to eat away at consumer PC sales. Half of HP's PC business is consumer.

And finally there are hard drive shortages on deck. As reported before, the PC supply chain is reeling because of floods in Thailand. HP will take a big hit. Hard drive prices will go up, but HP won't have room to pass on the increases to customers since it has to maintain market share. Whitman knows the PC business is low margin. She's going to find out in a hurry how low margin PCs can go.

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

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21 comments
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  • RE: HP keeps its PC business: Price war, crumbling profit margins next

    I just got a new Acer with I-5 because of HPs games. Would have gotten the hp I-7 other wise, been a HP or Compaq buyers for 25 years
    james@...
    • <a href="http://www.tran33m.net/vb/">2012</a>

      @james@... Please, can we get off this insanity. I've shown people tablets at Best Buy and laptop computers. Most people like the laptop computers and can do without the 'touchscreen' stuff, which will be coming to laptops soon as well.
      jku1
  • RE: HP keeps its PC business: Price war, crumbling profit margins next

    We'd looked at HP prior to their sell off plans and were considering a move to them from our current vendor, once they decided to sell off we told them to piss off. Our contract was only thousands of units, wonder how many sales they lost.
    relwolf
    • RE: HP keeps its PC business: Price war, crumbling profit margins next

      @relwolf

      If you are losing money on every PC, does volume mean anything?
      NoAxToGrind
      • RE: HP keeps its PC business: Price war, crumbling profit margins next

        @NoAxToGrind

        Big ASSumption there, AxToGrind. The fact is that laptops considering what is in them right now are about the highest margin computer equipment, including the iPad, out there.
        Lerianis10
      • RE: HP keeps its PC business: Price war, crumbling profit margins next

        @NoAxToGrind
        yes, services! the biggest pie even in the case of ibm, their main competitor.
        kc63092@...
  • If HP wants to make a profit off of pc's again

    They need to regain the public's trust
    By repairing products with obvious design flaws
    HP Customer Support
    "Oh,well your 1 yr is up
    we know your laptop is bricked because we did a poor job of soldering the video chip
    We did the same thing on thousands of them
    Sorry, but we won't help you"
    zmud
  • Why a price war?

    Does Apple lower its prices to sell machines?
    Why should HP?
    davebarnes
    • Because Apple ensured that there where no other OS X capable machines

      @davebarnes
      if you want an OS X based computer, you buy an Apple.

      If you want a Windows 7 based machine, you buy a Dell, HP, Lenovo, Acer, .....
      William Farrell
      • RE: HP keeps its PC business: Price war, crumbling profit margins next

        @William Farrell

        No, more like if you don't want an OVERPRICED piece of crap, you buy a Dell, HP, Lenovo, Acer. etc.
        Apple is tops for the look of the computer and that's about it.

        For power? A Windows computer always tops the overpriced Apple computer, and with Windows 8? It looks like they are ON THE RIGHT TRACK!

        My battery life in my computer went up from 3 hours to about 5 doing regular e-mail and surfing. For hardcore gaming? From 1 1/2 hours to 3!
        Lerianis10
    • RE: HP keeps its PC business: Price war, crumbling profit margins next

      @davebarnes

      If you have to ask the question then you don't get it.
      Alan Smithie
      • RE: HP keeps its PC business: Price war, crumbling profit margins next

        @Alan Smithie
        Actually, the Apple Fairy Dust, is very hard to explain. A certain magic transforms the normal laptop, made of same parts, possibly in the same factory, into pure mystical supremacy. Maybe HP should raise the prices, roll-out bright white factory retail stores, and have salespeople afraid to admit the slightest flaw, calling it instead a feature which is unique.

        I am looking at an HP monitor, sold for $180 on sale, which is obviously a mistake. Add 30 to 40% like Apple would, and they would sell much faster. ;)
        mytake4this
    • Apple offers a differentiated product

      @davebarnes HP offers the same windows PC as everyone else, different badge albeit with better quality than some ( but selling into a market that doesn't value it - see ZDNet talkbacks).

      My advice; simplify the product range by reduce the number of units on offer. The enterprise demands for computers are really quite basic, the majority of home users the same (significantly more price focused primarily due to lack of information).

      It's important for the HP brand to continue in the PC business, as I believed was the case for IBM branding. They just got to stop the losses. A fail in this market seriously undermines their management ability of the company.
      Richard Flude
  • I was about to purchase an HP Netbook

    Before they announced the sell-off. I bought an Acer instead once they announced they were selling theor PC unit. I have to say I am very happy with my purchase decision. I think HP is going to have a tough road ahead if they can recover, allot of trust & respect has been lost!
    tgschmidt
  • I don't know..

    I -like- H/P and their PC and printer products. Of course I also like my IBM and Dell notebooks. Each one has little good and bad things about it but what I like the most is the Choice. Trust was mentioned in an earler post. I think trust of a big company (like H/P) is earned over time, sometimes a very long time, and shouldn't be abandoned quickly either. When H/P spun out their test equipment line, the original famous product of the company, to "Agilent", I was not happy with that but it didn't really affect my trust of them for the products they had kept and have subsequently developed.
    opcom
    • RE: HP keeps its PC business: Price war, crumbling profit margins next

      @opcom

      There is a rather amusing anagram of Agilent.
      Alan Smithie
  • RE: HP keeps its PC business: Price war, crumbling profit margins next

    "We believe HP???s Win 8 devices will have difficulty competing on both a cost and user experience standpoint"

    Now that is an interesting statement regarding W8.
    Alan Smithie
  • RE: HP keeps its PC business: Price war, crumbling profit margins next

    HP has to give the impression to the buying public that it has a real commitment to its PC products. After the disastrous decisions by HP CEO Apotheker, trust in HP is at an all time low.
    johnsmith9875
  • Tablet strategy - You're asking too much!

    "cook up a tablet strategy beyond me-too Windows 8 devices". That's like me standing over you while you sit at your desk, and I say "Write something creative.". There are going to be at least three tablet OSes and lots of hardware vendors covering those. what do you expect HP to do? About the only, truly useful thing they could do would be to use C and assembler to write a brand-new, hand-crafted, tablet-dedicated OS which would be superior to all the others. It would take at least two or three years, though.
    peter_erskine@...
  • HP stands for great brands and trustworthiness

    They will rebound from these difficult times and deliver great value for money technologies - as they always have done. <br><br>I don't agree with the doom and gloom prophets that claim that a price war is looming - or that the OEM's stand to be crippled by one. Bear in mind Windows still accounts for approx. 90% of all new computing systems: so the reality is, there is enough business to go around for all the major OEM partners of MS .. not least, HP.
    thx-1138_