Dell, HP and the folly of the consumer PC business

Dell, HP and the folly of the consumer PC business

Summary: Dell clings to the consumer PC business in the name of the bring your own device movement, but the operating profits are just north of nil. HP is defending its No. 1 spot, but the profit and revenue lines are headed in the wrong direction.

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Dell and HP still play in the consumer PC market, but you have to wonder if it's really worth staying in the game.

Of the two companies, Dell's position in the consumer PC market is increasingly hard to justify. In its latest quarter, Dell barely made any money on consumer PCs. The problem: Dell has decided to focus on mid- to high-end systems and has stepped away from the high volume low margin PCs that happen to sell well in emerging markets.

In theory, Dell's move to preserve profit margins in the consumer PC business makes total sense. However, Dell is focused on margins and still not generating much profit. For instance, Dell in its fiscal second quarter had a consumer operating margin of 0.5 percent. Dell’s consumer business made $14 million in operating profit in the second quarter on revenue of $2.62 billion. What's the point?

Consumer notebook revenue was down 26 percent in the second quarter.

In other words, Dell's consumer business is a drag compared to its SMB, public and large enterprise units, which happen to bring in real profits. This consumer portrait is just ugly.

dell082312

On a conference call with analysts, Dell CFO Brian Gladden acknowledged that the consumer unit has issues. In fact, the corporate PC market looks better. So why bother? Gladden said that Dell has to play in the bring your own device market. Given that trend, Dell needs to be about consumer PCs too. Gladden said:

Our focus continues to be on mid and high value systems, which contracted at an industry level the second quarter. Our Latitude and OptiPlex products performed well in the commercial space. But we're seeing pressure on consumer and entry-level corporate products. There's particular softness in pricing pressure in key emerging markets like India and China, as well as Western Europe.

In the quarter we saw the channel drawing down inventory in anticipation of the Windows 8 launch. We also continued to see discretionary spending directed to alternative mobile devices like tablets and smartphones. In light of these results and market dynamics I think it's important to reiterate our client strategy. We're focused on continuing to drive our cost out initiatives to maximize operating income versus unit share. We'll continue to deliver a strong portfolio of systems targeting the mid-and high value spaces. We've refreshed our Latitude and XPS portfolios with products that are thinner and more powerful. We're building strong capabilities in security and systems management and have an industry-leading position in thin client solutions. And we're positioned to be a leader in addressing the emerging corporate BYOD trend with our current XPS 13, 14 and 15 notebooks and our upcoming tablets and converged devices. In addition you'll see new Windows 8 Ultrabooks, all-in-one tablets, and converged devices in the fourth quarter and headed into next year.

Dell's PC strategy can work---to a degree. Later in the call, CEO Michael Dell noted that his company is ready for Windows 8, but the corporate PC market, which makes all the dough, is likely to be slow to respond to it.

For HP, the decision to stay in the consumer PC business has already been decided. HP decided to ditch consumer PCs and then keep it for supply chain and other reasons. However, HP is seeing the same pricing competition as Dell. In fact, HP is facing bloated inventory levels because PCs and printers aren't flying off the shelves.

HP CFO Cathie Lesjak said on the company's earnings conference call:

In terms of the market conditions, consumer demand remains soft in PCs and Printing, resulting in elevated levels of channel inventory for us in PSG Consumer and IPG (imaging and printing group). We will look to manage sell-in consistent with the underlying soft demand. Additionally, the pricing environment in our hardware business remains competitive.

Meg Whitman, CEO of HP, noted that the integration of the company's printing and PC units is "well underway." The idea is that HP can combine scale and cut expenses by combining two consumer units arguably in decline.

hpq082312

HP's PC unit operating margins for the third quarter just reported were 4.7 percent. Simply put, HP's PC business is much better than Dell's on the profit front. Nevertheless, Whitman had to defend the PC business. After all, both revenue and operating profit trends are going in the wrong direction.  In its fiscal third quarter, HP's PC unit delivered operating income of $409 million on revenue of $8.62 billion. That operating profit trails HP's services, imaging and printing and enterprise server storage and networking units.

Whitman said:

Let me just give you a little perspective on our strategy for our PC business because I think that can help shape your thinking about where margins will go. So first is, we are focused on profitable growth and continuing to deliver a very strong return on invested capital in this business. But we are under attack by very strong competitive pressures and we're going to respond and what we're -- how we're responding is really three parts.

One is product lineup. I think we have among the best product lineup we've had in the PC business for a long time. A host of thin and light Ultrabooks, a Windows 8 tablet for the Enterprise. Two sort of tablet, if you will, tablet combined with laptops for the consumer space and we've also done a lot of work on our cost structure.
One of the benefits of putting IPG and PSG together is we have a much more seamless go-to-market. We see very good opportunities for freight, logistics, supply chain and we have got to make sure that our cost structure allows us to compete effectively because we're going to defend our number one position in this business.

HP's PC and printer combination makes sense on paper. Analysts, however, were skeptical and pelted Lesjak and Whitman with inventory questions. If a Windows 8 surge doesn't materialize for HP, the company will be fielding a lot more questions about the consumer business. Meanwhile, Lenovo is hell-bent on being the top dog in the PC world.

Topics: Hardware, Dell, Hewlett-Packard, Laptops, PCs

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44 comments
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  • Dell & HP

    Both Dell and HP are in the consumer business because getting out of it would hurt their SMB and Enterprise business. The people that buy for business have computers in their homes and would want them to be the same as the ones at work. Familiarity builds sales.
    hayneiii@...
    • Scale economies

      There's also the parts and supply-chain issues. Even if all you do on the consumer side is wash money, the additional volume drives down your parts cost on everything you make. Plus you swing a bigger bat with suppliers in general, which helps when there are shortages like the recent one involving disk drives.
      Robert Hahn
      • They need consumer business till corporate business picks up

        The big picture from Dell, HP, (Bestbuy and Microsoft too?) is that they need the consumer business before corporate business picks up. Consumers won't bite with so many options out there in the form of Apple and Android devices/phones/tablets and also because they have not seen Windows 8 yet. Corporate business seems to be very far out in terms of Windows 8, nobody knows when you will see corporate momentum (if at all you see it) towards Windows 8. My guess is that even if Windows 8 is a success, things are not rosy, but if Windows 8 turns out to be another Vista/Me, then it is just thorns for all these companies.
        GoForTheBest
        • Good point.

          What they all need is for some of these desktops and laptops they built and sold in the last 4 to 5 years to start breaking down.

          The problem with Windows based computers over the last several years is they have gotten to be just too damn reliable. Gone are the days when a new desktop was in order every 2 to 3 years. Companies are looking at their hardware inventory and its really hanging tough these days. Remember, with many Windows based machines when a single part breaks down it can often be fixed with a fairly inexpensive replacement part thats usually much better than the original and suddenly the computer actually seems better than it was prior to breaking down.

          XP is still in use in many companies, and certainly in numerous home environments and its managing to hold up, so there is still small incentive to decide to go for new iron if the OS isnt even making for problems.

          Is some cases, if its seen that XP isnt keeping up the pace anymore, many companies wil still not go with new hardware if they can manouver into a situation where an update to Win 7 will do the trick if the hardware still seems strong.

          So...as I said, what the PC industry really needs right now is a rash of breakdowns in the PC world. Someone it appears to have forgotten to tell the componant makers they need to build a little more planned obsolecence into their products. And certainly by now, Microsoft is learneing exactly what the problem is with getting it too right when you build an OS like XP. They are likely going to find its going to be even worse for them with Win 7, imagine how long it might hang around?

          Its a tricky business.
          Cayble
    • Not entirely true

      It's true that many people want to have a home computer that works the same as what they have at the office. But that's more about software than it is about hardware or the brand of computer. For example at the office we use Dell desktops and laptops but at home my wife and I both have HP.
      My wife doesn't care what brand her computer is (I'm not sure she even would know if it didn't say HP on the lid in letters that light up when its turned on) - she cares that it uses Windows 7 and Office so the skills she has from the office apply at home too. The laptop itself is basically a commodity which is why the consumer PC market is so difficult.
      cornpie
  • Stop making ugly hardware!

    While Dell has improved a little bit in their design department, their hardware still looks unsophisticated compared to a MacBook. Dell and HP need to step up the game and pull out some hardware like the new Vizio line of PC hardware.
    spaulagain2
    • But that's one more thing business doesn't care about...

      The laptop the CEO carries might matter because he can make IT get him what he wants. But for pretty much everyone else, the purchasing decision is all about cost/benefit analysis and return on investment. What it looks like makes absolutely no difference for most businesses.

      Come to think of it, it doesn't much matter to me either. My computers are tools for getting my work done. Caring what it looks like is like carpenters arguing about who has the more attractive hammer.
      cornpie
      • Good example

        Ken Hess wrote a piece here the other day lamenting the fact that Apple doesn't seem to be willing to go that extra mile for enterprise customers. Yours is a good example of why they don't. If you spend money on razzle-dazzle industrial design like Vizio did (and as Apple regularly does), consumers will reward you by buying your stuff, even when it's more expensive than the ugly stuff.

        But businesses won't. If the ugly stuff saves them a buck, then ugly it is. The beancounters then point out that you can save 33 cents per unit by having just one design for both consumer and business. The next thing you know, you have ugly consumer gear that's really cheap. but you aren't making any money on it because it's the exact same ugly stuff that everyone else is selling.

        There are a lot of these little subtleties, and they all add up to it being very difficult to play in both the consumer and enterprise worlds, and do a stellar job of both.
        Robert Hahn
        • Also

          You can get a 3 year warranty from Lenovo, HP, Dell for their computers and laptops, and you can have your own people work on those units without breaking that warranty. THAT is why enterprises flock to these companies. You buy a unit for somewhat more than a consumer unit that is fairly solid (although not "pretty") and will be guaranteed for 3 years. Add to that the fact that even with the three year warranty and loaded with Office and other software necessary in the enterprise you are STILL spending less than a Mac without the Apple Care 3 year warranty.
          benched42
          • Yep, and your employees,

            who are your number one capital expense wind up hating the crap you shove down their throats. It's called penny wise pound poor.
            baggins_z
          • my desktop sits under my desk at work

            why do I care if it is pretty?
            I would rather my business gets me a larger monitor than a prettier box.
            ForeverSPb
          • Great observation

            I've been using tech since teletypes, but the current generation WANTS the shiny.

            PHB says 'you don't need a Mac Book Air, the 17" HP 7lb laptop is our standard".

            The HP is $600 more than the MBA, but the employee will absolutely HATE lugging around that ugly brick.

            Your business is investing five figures on an employee's career / productivity, and you're going to chain them to an intensely undesirable object?

            Also, don't forget the "we don't want to support that platform" whining from the IT crew.

            The overhead costs for BYOD are higher, but not as high as the costs for turnover when the employee realizes the PHB is clueless and leaves for another company. As a percentage of the whole, it's insignificant. BYOD is much more about control than anything else.

            I remember when mainframes dominated IT (when it was called Data Processing) and the first Apple IIs and IBM PCs started appearing in the market.

            The "data processing" department said "no way", but the other departments bought PCs anyway, because they could take back CONTROL of their data.

            The fish ate the whale, PCs took over, mainframes acquired a lesser role in daily operations, and BILLIONS OF DOLLARS WERE SAVED.

            DP ended up having to deal with PCs, and it was their undoing.

            I guarantee you that the next billion-dollar silicon valley startup will let THEIR employees bring any damn device to work that they want to, and the gen-z manager will have the support staff just DEAL WITH IT.

            Genie's outta the bottle, it's not going back in and it's fun to watch the mighty get their comeuppance.
            vaporland
          • typo!

            "The HP is $600 LESS than the MBA" - wish we could edit posts here...
            vaporland
  • The business makes money or it doesn't.

    Right now it looks like making Windows PCs is a lot of work for no profit. If you want money for work, do something else.
    symbolset
  • The business makes money or it doesn't.

    Right now it looks like making Windows PCs is a lot of work for no profit. If you want money for work, do something else.
    symbolset
  • The business makes money or it doesn't.

    Right now it looks like making Windows PCs is a lot of work for no profit. If you want money for work, do something else.
    symbolset
  • The quality of their products has gone way down.

    The stuff that they are putting out is closer to junk, and the customer support is almost non existent. No wonder consumers are avoiding them.
    linux for me
  • Why all the doom and gloom, Larry?

    When has Dell ever made much profit in consumer?
    Dell-Bill B
  • Leave the consumer market space altogether...

    Dell and H-P should just get out of the consumer PC market space and sell to corporations. Eventually Microsoft is going to cut them all to shreds and start building its own hardware. Microsoft no longer needs those useless PC hardware vendors. Cut out the middleman and deal directly with the Chinese hardware manufacturers. I'm sure Microsoft can do just a good a job designing it's own hardware as the crap that's been designed by Dell and H-P.

    Besides, consumers should just start buying tablets and notebooks and toss their old Windows desktops into landfill. They don't need those rotting dinosaurs anymore. They use up too much material and energy. Save the environment and get a tablet, preferably an iPad.
    ConstableOdo
    • Look around and get a reality check...

      Most consumers don't have a tablet, and don't want one or don't even want one, and have no plans to get one. The majority of consumers are still using their laptops and desktops, and perhaps their smartphones, but, for the most part, it's the tablets which are redundant and unnecessary.

      Secondly, and what most bloggers fail to point out, is that, the economy dictates how much money people will be willing to spend, and, if they already have a PC or Mac which already serves their needs for a full-fledged computer, then, they'll just opt to keep what still works and wont be spending on a new purchase. People do cut back in their spending when economic conditions are bad, and this economy stinks to high heaven. But, apparently, neither you nor the bloggers have noticed that fact. But, the biggest fact is that, tablets aren't necessary and people will spend money on them only when they have "disposable" income, which is hard to come by in a recession. Heck, when tablets cost as much as PCs nowadays, people will be staying away from them too; that is, except the Apple crowd, which will take a second mortgage on their homes just to go out and get the latest gadget from Apple, even if they don't need it.
      adornoe