HP PC unit spinoff 'viable'

Feasible for Hewlett-Packard to spin off PC unit into independent company but challenges ahead, says analyst. Another, however, says IT giant's credibility as predictable IT supplier takes knock.

Hewlett-Packard's plans to run its PC business as a separate company will be "viable" if the company keeps the brand name and work on its cost structure to compete with other PC players, said a Gartner analyst.

Among other announcements, HP said Thursday it will explore carving out its "PC business into a separate company through a spinoff or other transaction".

Lilian Tay, principal research analyst at Gartner, told ZDNet Asia in a phone interview Friday that the separation of HP's personal systems group (PSG) is a "viable option". However, things may not be easy for the new separate entity, she added.

If the standalone PC entity keeps the HP brand name and does "some magic to the cost structure" to ensure that it is as competitive as hardware rivals Acer and Lenovo, it can become a viable business, explained Tay, who is based in Singapore.

The new company will also face less pressure than being part of a "bigger picture" as the PSG is now compared with HP's other business units, she said.

However, if HP takes the other route and sells the PC business to another company, there will be further market consolidation and the buyer will end up with a bigger market share.

Figures from market analyst IDC showed that HP was the top player globally in terms of shipment and market share during the second quarter of 2011.

Another analyst views HP's plans to let of its PC unit as a wise move despite it being in the top ranks of PC manufacturers. In an e-mail interview with ZDNet Asia, Phil Hassey, founder of Australia-based CapioIT, noted that being on top is not as important "if margins are continuing to tighten" and the lack of grip of the tablet market continues to become more evident.

In HP's latest quarterly financial results, the company reported that revenue for the PC unit declined 3 percent year-over-year with a 5.9 percent operating margin. Services revenue grew 4 percent year-over-year with a 13.5 percent operating margin while the imaging and printing group saw a 1 percent dip in revenue with a 14.7 percent operating margin.

Gartner's Tay agreed that margins are tighter for the PC business. While computers were "good as a revenue contributor" to HP, they are not an ideal earnings contributor especially with hardware becoming a commodity.

She added that the strategy change shows that HP now wants to focus on the "more profitable side of business" which is software and services side.

Different competitive landscape
According to Hassey, HP's decision to spin off its PC unit as well as acquire enterprise search and data analysis player Autonomy highlights that HP is investing to focus on the corporate, rather than consumer, space. "IBM did effectively the same thing in 2005, and is consequentially ahead in enterprise share and capability," he pointed out.

Moving forward, Hassey believes that HP's change in strategy will make it a "one-on-one match" against IBM in product lines, but noted that Big Blue has a much larger software business while HP has a larger printer business.

On HP's top competitors, Hassey said: "Clearly, IBM is the priority, alongside Cisco Systems and its friend EMC.

"Oracle, Accenture and others will remain focused competition in key markets."

With the PC business out of the door, HP is now in less of a competitive mood with Dell, Hassey noted but said he does not expect both companies to "become friends too quickly".

A Singapore-based Dell spokesperson did not comment directly on HP's move, only noting that Dell "is committed to expanding our reach beyond PCs with a targeted set of tablets and smartphones designed for commercial and prosumer customers".

The PC maker was second after HP in market share in the second quarter of 2011, according to the IDC report.

In his e-mail, the spokesperson highlighted that the company delivered "strong gross margins at 23.2 percent" and attributed it to "disciplined pricing and our ongoing shift to Dell intellectual property and higher value products".

Asked if the company will be follow in HP's footsteps and focus on software, the spokesperson said: "Hardware devices are just the starting point...as we must also offer comprehensive solutions, including software, services and peripherals that fulfill the needs of [our] targeted user groups."

"We're always looking at picking up potential intellectual property that will help build out the future of computing, whether software, cloud or services," he added. "We continue to identify potential acquisitions based on their strategic fit, management track record and fit into our existing infrastructure. In short, our product and services line-ups are the strongest they have ever been, giving our customers the power to do more so they can grow and thrive."

HP's credibility as predictable IT provider shaky
While Tay and Hassey expressed optimism about the possibility of a PC spinoff for HP, another analyst begged to differ.

In an statement, Ovum's research fellow Carter Lusher pointed out that while the split "might make strategic sense", it will impact HP's credibility as a predictable strategic IT supplier in the short run.

Lusher noted that HP had reassured the importance of PC to the company at its analyst summit in May this year. "For enterprise and public sector IT executives, predictability is a critical trait for major technology vendors and HP continues to reinforce the impression that it is unpredictable."

In addition, the plan to spin off the PC unit can also cause ripple effects far beyond products in the unit, he said. Areas that could possibly be affected include the "overall supply chain that also feeds the enterprise server, storage and networking products; partner ecosystem; commitment to countries and regions; enterprise services, and strategic customer relationships".

Lusher added that enterprise and public sector IT managers should use this "period of disruption at HP as an opportunity to drive hard bargains in product and services procurement projects", as the company will need all the revenue it can get to offset the drop in sales that will come.