Last Monday evening, hours after Google’s $12.5B gamble on Motorola Mobile (MMI), I had an intriguing idea and began drafting a Monday Note to explore its ramifications. It started like this:
Larry, Please Give Us a Free gPhone
In three easy steps, you can finish the job you started with Android:
First, tell Motorola to make a single, really nice gPhone. One model, running a fine-tuned version of Android, with all Google apps and services nicely integrated.
Next, tell carriers that the gPhone is free. No upfront cost, just a modest percentage of the monthly bill, of the carrier’s Holy ARPU.
Finally, tell the world: Google customers, get your free gPhone from the carrier of your choice!
Building and dismantling the business case for such a bold move will have to wait for another week’s fiction.
Today, we look at HP’s new reality: The world’s largest PC maker wants out of the personal business. How its PC division will be “exited” is to be determined. As for the TouchPad tablet and the Pre smartphone, both of which are based on the WebOS platform that HP acquired from Palm in April 2010, their fate is more certain They’re dead.
As business decisions, both moves make sense.
First, the PC. For years now, HP’s Personal System Group (PSG) has been a drag on the company’s earnings. Take a look at the numbers for the most recent quarter (FY Q3) ending July 31st 2011. At about $40B/year and 31% of HP’s total revenue, PSG is a huge business…but it’s shrinking: -3% for the first 9 months with an even greater hit (-17%) in the Consumer PC segment.
Furthermore, PSG doesn’t make real money: 6% operating profit in Q3, a meager improvement over last year’s same quarter when that number was 5%.
And let’s add the working capital required to support the PC channel inventory. Every week of product in the pipeline means at least $500M. If the company manages its channel very efficiently, it’ll have 6 to 8 weeks of products in the channel: that’s $3 -4B.
By contrast, HP’s Imaging and Printing Group seems to be making (I’ll avoid the tempting pun) good money: 16% operating profit with modest but reliable growth (+3%). It’s smaller than PSG, but, at about $26B/year, it’s still quite large.
Despite its size, PSG must be sacrificed so Léo Apotheker’s HP can “go IBM”, focus on selling big iron, software (note the $10.3B acquisition of Autonomy), and professional services to Enterprise customers. Plus some ink on the side.
(Years ago, Lou Gerstner saved Big Blue by getting rid of the commoditized PC business and concentrating on IT services. The right chef to implement that recipe, he kept IBM in business, and, as the Wikipedia article rightly says: “[performed] one of the most remarkable turnarounds in business history”.)
Second, the TouchPad. The “perfect” launch promised by HP’s CEO failed to materialize. Although critics saw great promise in WebOS, most panned the TouchPad. HP promised quick fixes (and even delivered some), execs tried to re-position the product and cut the price.
Nothing worked. The market had spoken.
As All Things D’s Arik Hesseldahl reported, Best Buy is now (supposedly) sitting on most of the 270,000 TouchPads it had stocked, having sold no more than 25,000 of the devices.
Léo’s reaction was swift: no more TouchPads, no more Pre smartphones. WebOS devices are gone. The company is eating $100M to clean things up. (We hear rumors of a fire sale, with some retailers offering basic TouchPads for $100. If true, I’ll get one.)
HP’s explanation: The WebOS ecosystem isn’t strong enough to make the TouchPad a contender in the tablet race…and the company simply wants out of Consumer markets.
A difficult decision, certainly, but clear and logical. Investors might not like that HP has folded their hand in the fast-growing smartphone/tablet game, but the “Going IBM” story, and the associated profit picture, makes sense. Shareholders should be pleased…
…but no: HP’s stock went down 20% on Friday, losing 27% for the week:
Why?
Let’s start with the exit from the PC business. HP’s announcement was vague and unactionable. In reply to a question about the precise fate of HP’s PC business, this is what Léo said during the Q&A part of Thursday’s conference call:
“Let me try to answer this and we’ll try to answer this as a team. So what the board and the management team have been working very diligently over the last period is to really look at all of our options and what the board has decided to do, together with the management team, is to look at all of the strategic options around PSG. And we’re really examining all of them. The announcement of today will allow us to look at this much more closely, including all of the synergies and other aspects of this operation. And over time, a decision will or will not crystallize on what the most appropriate way is to deal with PSG going forward. That’s all I can say about this right now, and we will refrain from commenting on what the strategic options are until the board will make such a decision.”
This is terrible. Worse than a terse ‘No Comment’. Either HP comes out and says ‘We’re spinning off PSG, Toff Bradley, its current head will run it, it’ll be called APC’, or it says nothing until it has a real announcement.
(See more abstracts in this PC Magazine post, and in Seeking Alpha’s full transcript. As the quote above demonstrates, the Q&A part of an earnings call is always more revealing than the “prepared statement” vetted by a brigade of lawyers, accountants and PR flacks.)
In my line of business, “the exploration of strategic alternatives’’ means you’re trying to pawn something off. It’s usually done discreetly for fear of making the merchandise look tired.
Here, HP trumpets that it wants to rid itself of the PC business. People or companies shopping for a new PC will look elsewhere, forcing HP to drastically cut prices to keep their current product moving. In turn, this will undercut the price HP can expect to get for its PC business. No wonder Michael Dell is snickering on Twitter:
(Of course, this is the same Michael Dell who, in 1997, told everyone Steve Jobs ought to shut Apple down and distribute the cash to shareholders…)
Shareholders don’t like this uncertainty, they don’t like what could happen to PSG revenue while the “alternatives” are “explored”. They’re becoming uncomfortable with HP’s erratic and bombastic public statements, and the premature release of financial information. The latter happened last quarter, following the leak of an internal memo discussing a “tough quarter”, and it happened again this past Thursday, when more leaks forced HP to release earnings while the market was still open. This might seem like a technicality, but the stock market is supposed to provide equal access to information. Insiders have an unfair advantage and, thus, are prohibited from trading. A selective leak gives an unfair advantage to a few outsiders.
To level the playing field, the SEC issued a Selective Disclosure rule, known as Reg FD, obligating companies to immediately disclose all information to all shareholders. This is serious because some investors stand to gain or lose millions of dollars when a company makes such mistakes. Two in a row reflects poorly on management — or on the organization’s loyalty to the boss.
Examples of HP statements that should have been avoided are, unfortunately, easy to come by. The latest is the “tablet effect” mentioned by Léo in the Q3 earnings conference call. Yes, there is the Unmentionable Tablet, but while affirming its impact on your business might sound courageous, it also downgrades PSG’s perceived value as the “strategic alternatives” are being explored.
(Contrast this with Microsoft’s PR: their chief propagandist, the witty, diplomatic and literate Frank X. Shaw doesn’t stray from Microsoft’s PC-centric party line. In his latest post, Where the PC is headed: Plus is the New “Post”, Shaw explains how irreplaceable the PC is and how these other devices are just PC companions. You agree or disagree, partially or totally, but Microsoft doesn’t waver. For a witty deconstruction of Frank’s post, see Brian S. Hall’s translation here.)
Then we have various “the WebOS isn’t dead” statements, HP’s messages to its staff and to the outside world saying there’s still a future for the platform. Does the company think it’ll find an Asian manufacturer – Samsung, perhaps – who’s eager to “go Apple”, to make integrated hardware/software tablets and phones in an effort to fight the Cupertino company?
Seeing an opportunity, Microsoft wastes no time:
Cheeky and effective, a well-run operation. (Go to Twitter to see the amazing response and Brandon Watson manning the ramparts.)
We’ve had HP’s CEO touting its company’s goal to snag Apple’s cool factor, an admirable but long term goal, requiring a lot of patience and money — and the right company culture. (How long did it take Jobs to turn the “marginal”, “on the losing side of history” perception around? This wasn’t a goal, but a byproduct. And, the “being on the losing side” meme still lingers.)
I’ll end the litany with the “WebOS running on 100 million devices” fallacy (see the March 13th, 2011 Monday Note). The Write Once, Run Everywhere mantra doesn’t work anymore. Credibility is sapped when “Run Everywhere” includes destinations as heterogeneous as PC pre-boot, printers, smartphones, and tablets.
Investors listen to HP’s pronouncements and wonder: Which of these statements do we believe? Which will stand the test of a few months? In the meantime, they dump the stock.
Let’s end on a humorous note. I found a buyer for HP’s PC business: Microsoft.
“Steve [Ballmer, that is], please give us a free PC!”.
Responding to a promo on Microsoft’s on-line store last Thanksgiving, I bought a version of Office 2010 for $199 and got a free PC to go with it. The PC was a cheap Dell netbook running a castrated version of Windows 7 that caused no end of trouble when attempting to connect to the office Exchange server. In spite of years of experience in such setups, I was stymied. It took our IT person a good 20 minutes to get it done, muttering expletives at the Windows 7 Starter Edition’s artificial limitations.
Ballmer could put an end to that suffering, make sure everything runs smoothly and have nice products to sell — or to give away with a software purchase — in the 75 expensive Microsoft Stores opening across the country. Come to think of it, Ballmer could snatch Borders stores before Google does in order to get choice retail locations for the gPhone blitzkrieg mentioned above. There’s a great one on University Avenue in Palo Alto, right across an Apple Store.
And just like makers of Android smartphones profess happiness at Google’s $12.5B acquisition of Motorola Mobile, we can be sure that Acer, Asus, and others would rejoice when Microsoft starts making its own PCs and Windows 8 tablets.
Isn’t the end-to-end integrated Kinect, Microsoft’s fasted growing business, making a good case for Ballmer’s next move?
Just kidding.
PS: For me, HP’s move is an especially sad one.This is the (formerly) great company that gave me my biggest break in business. In June ’68, they hired me to launch their first desktop computer on the French market. Later, as reminisced in the May 9th, 2010 Monday Note, I saw HP rise to the top of the nascent personal computer market, only to lose it to machines using “cheap” microprocessors, and to rise to the top again after the Compaq acquisition. And now, HP exits the PC business from the top.
Gizmodo has a related recollection of HP’s early personal computing days. —
No related posts.
79 Comments
> Years ago, Lou Gerstner saved Big Blue by getting rid of the
> commoditized PC business and concentrating on IT services
He might well have done that, but actually, Gerstner left IBM in 2002, well before the PC division was sold to Lenovo in 2005.
@ Jack Schofield: Thanks, you’re right, I stand corrected. I misread the Wikipedia article I quoted. “To Gerstner, focusing on the desktop PC ran counter to IBM’s view of where the tech world was headed.” But the spin-off took place after he left.
I love this post. I’ll read you forever. Makes perfect sense to me.
“. There’s a great one on University Avenue in Palo Alto, right across an Apple Store.”
right across ^ an Apple Store
Totally agree with this analysis. Since when did a successful Poker player turn his (poor) hand face up? Perhaps Apotheker is a Bridge player? In any case, HP seems to have left the battlefield with one of those sneaky “Call of Duty” pulled pin grenades under its body. By dumping its inventory of TouchPads at $99/$149 it has sucked the air out of (for a week or so) the low-end tablet market. It might even have given the dead platform some developer oxygen although I can’t see how someone spending $99 on hardware is likely to support many apps (not that there are many apps). The BOM of the 16 GB TouchPad is estimated by iSuppli at $318. If there are 500K in the channel, that’s a straight loss (never mind development and other costs) of $100 million, the amount that HP says they will write off next quarter. But that likely is an underestimate. At least they’ll get a bit more for the Palm patents, if, as predicted, they are unable to palm off the WebOS business…. But why telegraph this? And what must HP employees be thinking when entire divisions are kept in the dark until the announcement and their C-level execs admit they haven’t got a plan? Instead of luring WebOS developers, Microsoft might want to go after the engineers (just not those responsible for the TouchPad).
Years ago, I watched as Be sold the IP to 3Com/Palm. For years, I hoped that a device running the Be IP would reach consumers. ACCESS actually had this readied for developers once upon a time. See:PalmOS Cobalt.
My thought was that a transition would work similarly to the transition from Mac OS 9 to Mac OS X – old applications run in emulation, while developers are encouraged and supported to get to the new OS as soon as possible.
Essentially, we’d have had a multitasking powerful mobile internet phone years before iPhone.
Here, we had WebOS, and it fell victim for similar reasons – companies didn’t support it and get developers on board.
Hurray for the technology we had, and shame on what-ought-not-go-on.
Jean-Louis,
I had a 32 year career at IBM from 1974-2006 under Akers, Gerstner, and Palmisano. Your link to the wikipedia article on Lou had me go back to the one on Akers, someone dammed with faint praise indeed. I recall the feelings of those of us who were aware of what was going on in the non-IBM part of the industry, knowing out out of touch the executives were.
I served as a techie on several high level IBM task forces during the Akers era, one involved the decision on whether IBM or Microsoft would do the graphics kernel and windowing system for OS/2, this was a joint task force and involved both IBM and MS folks including Nathan Myrhvold. The IBM senior VP who chartered the task force decided to go with the IBM team, but a day or two after we were told this, the decision was reversed by Akers after Bill Gates went “open door.”
Later also during the Akers era, I was on another task force to look at the Pink project at Apple. Larry Tesler was looking for outside investors to help him convince Scully not to kill it. Again I was asked for technical advice, and although I personally argued against it, IBM did indeed jump in, and Taligent was born, and as part of the deal, Apple switched from 68000 processors to PowerPC, and IBM ended up licensing PowerPC to Motorola, so as not to hurt it’s relationship to a big customer.
So Gerster was kind of a Mosaic figure in IBM from my perspective. He set us free from the Pharaoh (Akers) and led the company through the desert, but retired before it completely got to the promised land, leaving that to Palmisano, if IBM is in a promised land today.
I don’t think the Microsoft suggestion is crazy at all. Since they make a 65% profit margin on Windows, they may be the only ones who can afford to make a 5% profit margin selling Windows PC’s.
Right now they are begging hardware makers to make Windows Phone 7 devices. In a couple of years, they will be begging them to make Windows 8 ARM tablets. In both cases, there will be no users and not enough apps. Half their users are still on XP … PC makers will be selling 7 for years after 8 ships. And they are going to leave out Thunderbolt and touch features and thin construction because they can’t afford to make them, but Microsoft could.
As much as Leo Apotheker’s comments may have hurt the value of PSG, they also definitely hurt the value of Windows. He basically said that making PC’s for Microsoft is for chumps, a fool’s business, especially now that iPads are replacing PC’s. Maybe the strategy is to make Ballmer buy PSG to make Leo shut up about Windows PC’s and how it’s better to just put your money in T-bills than work for Microsoft. Also, Leo is pointing out how the future is iPads and servers.
Quick, vmware! Get your software onto the touchpad! Let it run Solaris or let it run TandySoft, or maybe even Ubuntu! Then find a manufacturer, buy HP’s IP, feed it to the developing world as a universal textbook for school kids!
Of course HP wants out of the PC/consumer business. They, Dell and the rest of the PC industry ran a race to the bottom and commoditised their golden goose. The product got cheaper and crappier, while the margins eroded away. They realised that they’ve hit bottom and can’t make good money selling computers any more which is a damn shame. I see Dell heading the same direction.
Apple, on the other hand, refused to participate in that race and remain highly profitable selling the same Chinese-made computers.
Since this HP division is in a fire sale would it made it a good idea that a corporation with deep pockets and a taste for this sector (like for example in France Free or Bouygues) get also RIM shares to merge them so to build the fourth “horsemen of the apocalypse” (or nicer the musketeers)?
Jean-Louis, it’s always interesting to see how the things we do on my team are interpreted. Thanks for noticing. The 550+ emails I received in just the first 48 hours, on a weekend no less, tells me that there’s a hungry developer base. That’s good. Now the onus is on us to demonstrate the value prop of building on Windows Phone – and shower them with love. Apple relies on installed units to sell the value prop for them, but they are notoriously difficult to work with – and that’s if they deign . Google appears somewhat confused about how to manage a developer ecosystem. Every developer matters, and it is not my intention to miss making even one of them happy.
Why no mention the 10b+ acquisition of Autonomy amouncement? That is one to raise eyebrows. The stock market reaction is much more likely in response to the anticipared value destruction for HP shareholders as a result of the premium paid.
Seems there are two main ways to make lots of money in (the technology) business:
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1. Develop, and hold onto, a monopoly, or at least an oligopoly — see Wintel. This MO takes all the oxygen in a business and leaves nothing for others — see HP, Dell, a few dozen others.
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2. Bust your ass to develop something new, and steal all the growth from the incumbents. See Google or Apple.
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The original HP was filled with inquisitive, exploratory, innovative engineers who applied their craft with passion. Google seemingly has some pretty talented people, but all the passion is in their hugely competitive OEM pool, and that’s enough for capable devices at lowest possible cost, which is seemingly all Google cares about. (Until it rescued MMI from a likely ignominious failure, that is.) Today’s Apple is driven maniacally. It is this seldom-remarked-upon feature that most obviously distinguished the iPad introduction from the TouchBook’s: Apple busted its tail to get first-class performance and a minimum of bugs, then left out stuff like Flash that it couldn’t optimize.
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I’m surprised nobody comments on the lah-de-dah attitude that the HP introduction communicated. First, a bunch of macho PR BS about Best Plus or whatever, then, “when we get around to some fixes.” If Leo doomed WebOS, it was from the start when he failed to challenge the division to greatness. No matter what industry you’re in, you don’t get top profits if that’s your corporate ethic.
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Unless you’re in a monopoly position. And as we see with WP7, where MS has no monopoly, they command some invisible market share and there’s no likely reason on God’s Green Earth that their placeholder product will offer anything to developers or customers. In a stunningly short time, mobiles have gone to a two-horse race.
@ zato: Thanks. My English not so good, better getting everyday, yes? Not sure what you meant. I Googled around and “across from an Apple Store” might be more felicitous.
@ Canucker: Yes, I failed to mention the Palm patents. They were rumored to be a factor in the $1.2B or so HP paid for Palm, but we’ve never heard much about those since, even with all the suing/buying/PR BS activity.
@ victor: Yes. Some day I’ll write a Monday Note about the difference between recipes, ingredients — and the meal, the product… You need chefs.
@ Rick DeNatale: Ah… You lived inside (the sausage factory). The Pink project was a misyake of mine: nice goal in the abstract, but too many people, too much money et no hard-ass (sp?) to keep everubody in line. On my way out, at a Claris party, beer in hand, I told John Sculley he ought to kill Claris and put the blame on me. That was the least I could do, I said, for his generosity. He looked at me, not sure whether I was pulling his leg (another less appropriate phrase comes to mind…). I assured him I was serious. We know the rest of the story.
The “Let’s start with the exit from the PC business” section of the article demonstrates that Léo Apotheker should be fired for incompetence.
I’m typing this on an HP computer, but my next computer will be a Dell.
@ Hamranhansenhansen: Yes, MS _could_ do it, especially now that Google has given them _permission_. And, it’s be a way to deal with the muddy statements Ballmer made about doing both x86 and ARM Windows 8 versions. Forking is dangerous, you get to riase the children you sire.
BTW: I love your comments on Asymco — http://www.asymco.com — a must-read, must-RSS site. The comments thread is as learned and civilized as Horace Dediu’s main posts.
@ Eric Schatz: Universal textbooks for kids. Great idea. Probably happening right now. See Amazon, or the next wave of very inexpensive tablest/e-readers running Android. There’s a big bid out in Turkey for 15 million tablets: http://bit.ly/r8zu5N
What I’m wondering is why no real mention of Bradley and how HP came to acquire Palm? Perhaps that’s another story for another day, but it seems to me that it was his idea — having been at Palm — and in his position was jockeying to remake HP as Apple. Apotheker had different ideas.
If I’m correct, then Bradley has to finally put up or shut up:
Memo To HP’s Todd Bradley: Man Up!
@ jinushaun: Right. Runners in the race to the bottom have crossed the finish line. As you point out, all or most manufacturing is now in China. This said, allow me a friendly quibble. At the end of your comment you assert Apple is “selling the same Chinese-made computers”. Nope. That’s why “ultraportable” PC laptop makers complain they can’t match Apple’s BOM and demand an additional $100 “marketing subsidy” or price cut from Intel in order to compete with the MacBook Air line: http://bit.ly/qpfKcd
@ JohnJ: There are other choices besides Dell
And I don’t mean a MacBook Air running Windows 7, although I have die-hard Windows-using friends, yes, I do, who tell me this is the fastest Windows laptop they’ve used.
Sony has neat machines and, depending upon your location, nice friendly stores, unlike Dell. And, sample of one, I had terrible experiences with Dell sales and service for office computers and projector.
@ Fafnir: That’s a daring idea. The opportunities are out there. But merging those cultures is a big, big challenge…
@ Brandon Watson: Yes, go for it! Windows Phone 7 comes with refreshing UI innovations, strong technical credentials and plenty of integration potential with Microsoft products/services in its enterprise and entertainment businesses.
And…
While you were doing great at the beginning of your comment, it seems you later fell into the rut dug by Coach Ballmer. The man, great leader, extraordinary public speaker with presence, wit, amazingly clear enunciation and the booming voice to carry it all, can’t resist the temptation to knock his opponents. And he does so in quotable (and durable, this is the Internet) ways. No need to retell those here.
Another coach, Bill Walsh, alwyas praised the opposing team before a game: their coach, a great friend of mine, is a gifted strategist, the quarterback, I knew him in high school, has a terrific arm and so on.
Is knocking Apple and Google going to help you with developers?
@ iphoned: You’re right, the Autonomy deal deserves more discussion, the price paid raises all sorts of questions. BTW, I _did_ mention the deal and its price, see the above paragraph:
“Despite its size, PSG must be sacrificed so Léo Apotheker’s HP can “go IBM”, focus on selling big iron, software (note the $10.3B acquisition of Autonomy), and professional services to Enterprise customers. Plus some ink on the side.”
@ Walt French: I see you’ve noted what you call HP’s lah-de-dah attitude during the whole TouchPad pre- during and post-launch. I find it errily similar to what happened at Palm with the Pre, sorry for the alliteration pre- during and post-launch.
@counternotions nail it on Twitter: Hardware guru, Jobs-wannabe Jon Rubinstein failed to deliver Apple-class product. Twice. Stop the nonsense.
@ Walt French: Also, love your comments on Asymco
@Jean-Louis you’re spot on…if you ever have occassion to hear me speak about, or read my blogs about, GOOG or AAPL, I think you will find I praise quite a bit, and rarely (if ever) have a bad thing to say. I slipped up here. We have a long way to go, and a lot of work to do for sure.
@ Mike Cane: Re. Todd Bradley. I’m biased, I knew him when he ran Palm, liked him and know he left because he couldn’t deal with the founders, who left later. I see him from time to time in Palo Alto, he’s a gentleman and won’t say a single bad word about his company. I think he’s ready for new adventures, there’ll be plenty of companies (or PE funds) vying for his experience, especially the bad parts…
@Jean-Louis Gasée
Well Pink was one of several attempts at an object-oriented, inheritance based operating system back in those days. Having seen both the power of application frameworks, like MacApp, and the problems of trying to turn this into an OS API and be able to maintain backwards compatibility when the framework inevitably got refactored (as MacApp had several times) I was skeptical. It was okay for MacApp then, as it is for frameworks today, like Ruby on Rails, because the app developer can decide when and if to move to the new version of the framework, but an OS built this way means that old apps won’t run on the new system.
I had another opportunity to review Microsofts plans for such a system, and sat right next to Bill Gates in a small conference room while I pushed back on this problem
http://talklikeaduck.denhaven2.com/2007/06/15/a-meeting-with-gill-bates
I had an interesting job back then. I also got to meet Jean-Marie Hullot at Expertelligence in Santa Barbara and see the interface builder in it’s original form (in Lisp), before Steve Jobs lured him to NeXT. Then I met him again along with Steve when we went to look at NeXTStep. I’m sure you know that IBM also put some money in NeXT and had a version of NeXTStep on AIX, which is the precursor to OpenStep, if I’m not mistaken.
@ Brandon Watson: Thanks for the gentlemanly way in which you took my comment. Much appreciated. The WP 7 fight is a worthy one. I’ll be watching. Hope you tweet your upcoming public appearences.
@ Rick DeNatale: Thanks. No I didn’t know or don’t recall IBM had money in NeXT. But I’m not surprised. I recall Canon telling us, in 1986, they’d put $100M in NeXT at a $600M valuation… The Great Hypnotist at work.
As for NeXT itself, Steve built a great team of computer scientists who managed the slow, painstaking feat of remaking the Mac’s foundation without destroying the building above: Apple 2.0.
Why “just kidding” on the Microsoft / HP’s PC business?
@ Johannes Ernst: Just like Microsoft didn’t buy Nokia, a far more strategic move in the new, fast-growing smartphone market, I don’t really see MS buying up HP’s PC business, yesterday’s big wave.
Now, with Google buying Motorola, MS might change its mind about Nokia.
I usually like your analysis, but I think this is sloppy (though something many people get wrong about HP’s PC business).
You write:
“PSG doesn’t make real money: 6% operating profit in Q3, a meager improvement over last year’s same quarter when that number was 5%.
And let’s add the working capital required to support the PC channel inventory. Every week of product in the pipeline means at least $500M. If the company manages its channel very efficiently, it’ll have 6 to 8 weeks of products in the channel: that’s $3 -4B.
PSG is actually very efficient, so I am guessing your estimate of working capital is high (more like 4 weeks). But let’s accept it. PSG’s quarterly operating profit is something ~$500m or ~$2bn yearly. In a high velocity $40bn rev business, the revenue number is irrelevant as it seems like you understand.
But what’s the return on invested capital? $2bn/$4bn = 50%if you count only the (overestimated) working capital. What are the fixed costs that should go in the denominator? You might estimate that from statements as rev-cogs-operating profit~$7bn. So you still wind up with ROIC in the 15-25% range. That’s not bad I think.
@ roiman: You’re right, I’m clearly not CFO material. Still, I’d be more comfortable if you compared PSG with other HP divisions and other PC makers such as Del or, forbid the thought, that heretical in Cupertino.
Not that we ought to put too much stake in Wall Street anal-ists, but they’ve all worked through HP’s numbers and declared the PC business a bad deal for shareholders. Incidently, I did an admittedly quick channel check on HP today, they have loads of PC inventory out there.
See slide 23, Inventory and Accounts Receivable, in the Q3 earnings presentation http://bit.ly/oQWMMt
None of the bloggers seem to comment on how well HP executed in the PC space versus the space is bad. period.
HP killed their PC business years ago when they stopped innovating, and outsourced some design and made bland, unexciting, and unreliable machines.
Like most of the PC manufacturers (except Apple!), industrial design was patchy, too many models/confusing line up, hard to buy, inconsistent feature set across models. Would a PC manufacturer that executed PCs *well* be getting out? I’m not so sure. But currently there is noone that disproves this – certainly not HP.
Perhaps some critical analysis of this might also be worthwhile in the mix of commentary.
Enjoyed the article!
But I must quibble with:
“In June ’68, they hired me to launch their first desktop computer on the French market. ”
June ’68 == HP Desktop Computer… doesn’t compute… And, I didn’t think you were that old, er, ah seasoned
@Jean-Louis Gassée HP seems to be allured by the 80% margins of Autonomy. Chasing profits in such a way, especially when it is not your core competency, is a sure way to boil them off. I also think it worth a follow up Monday note on the state of the PC industry in toto. While some might think that Dell can/will pick up after the HP slack (most notably Michael Dell – what a twerp to make that Tweet), what actually happens to the HP PC division will be determinant in this sector. I see three scenarios: It will be sold to a low end maker for a relative song (most probable). It will be retained by HP upon retrospection (and then die of starvation as customers assume its already dead). Or it will self destruct as engineers depart and lose its inherent (already discounted, value). Scenarios two and three are, ipso facto, equivalent. I’m not CFO either, but if Leo Apotheker has written this off already, then he’s fooling himself. How long will Dell shareholders stick around to watch it implode? It’s like Arizona real estate. When your neighbours start walking away from their under water mortgages, your own house becomes shaky.
I clipped this quote out of PC Magazine in 1990-something and pulled it out last week:
“The PC is just a blip. It’s a big, bright blip, but just a blip.”
–Scott McNealy
Americans go nuts for a sale, regardless of what’s being sold, as long as it’s at least 200% off. I bet that if I packed a box full of phones running Windows Mobile 6 and charged $0.99 for a crate, people’d go nuts. Yet, they wouldn’t be able to explain why they bought it.
Take the $100 and put it towards and iPad.
@Canucker @iphoned or anyone else – how is the Autonomy purchase supposed to work for HP? Will HP plus Autonomy staff and customers be a good fit?
@Gassée: well, if you have a services business where all the costs are fixed then roi approximately equals margin. so that’s the point. psg, when considered on an roi basis actually compares quite well to even the services business. now, it’s true that growth is an issue, and the the risk in the is an issue, because it’s not recurring business….
Somebody told me that you can’t shop (even technologically superior) software around if it doesn’t have customers. I guess that must’ve been your experience with BeOS and HP’s future now with WebOS. Whoever buys it will probably pay very little because it still needs a grand marketing effort to turn it into an Android competitor.
Very interesting article, thank you JLG.
The Microsoft note appears to be very realistic in my opinion. Even if Google just bought Moto, I could also see Google buying HP PC… but that’s another note..
I’m wondering as well about the state of the PC industry… and also Dell : they have a card to play as it will/should take the 1st position. What do you think?
Mr. Gassée, been a longtime fan, ever since the early days. Just a footnote: you were hired by HP in June 1968. That was when I popped into the world. How cool!
Can you elaborate on the free phone bit? Sorry, but I’m not a business man. I need things explained slowly. How does Google make money out of this deal? A phone costs what $400-$500? Wait, that’s probably retail. $250-$300? A small percentage of the ARPU over the two year contract would bring how much to Google? Enough to cover the cost of the phone? They then make their money by selling ads using that user’s personal data? That’s been estimated at $5-$10 a year per phone (elsewhere on the web). Is this really enough? And what will that do to/for their existing partners – HTC, Samsung, etc.?
I think HP may have decided to focus on the enterprise market about the same time the enterprise market has decided to focus heavily on “the cloud’ and SAS. Sure, HP may have a play in these initiatives, but I don’t see them being as lucrative as they were 5 – 10 years ago. I sure would hate to be the future HP sales rep pitching “solutions” to the CIO of a company who is trying to figure out how to maintain and support thousands of HP branded PCs throughout his organization that abruptly got end-of-life’d by whichever company eventually took over that business. No matter how they try to spin it I can assure you this will never turn out as well as it did for IBM did when it sold its pc division to Lenovo.
Bill asked, “Can you elaborate on the free phone bit? Sorry, but I’m not a business man. I need things explained slowly. How does Google make money out of this deal?”
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It’s a bit of a stretch today but one CAN find smartphones available for below $100.
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We’ve seen very rough estimates that Google can capture maybe $25 of ad revenue (per year?) from each Android, so either Moore’s Law or else Google being able to enhance its revenue stream and you now merely have to promise to USE the free gizmo. An enhancement would be for Google to get say, 10% of the carrier’s monthly data charges.
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This is not a model *I* would enjoy; it values my eyeballs at something like $0.10 per hour of crap that is poked into them.
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But think back to the origin of radio and TV, which were originally owned by religious and social institutions who wanted to spread their Word; advertising support ushered in the so-called Golden Age of TV. I guess it’s not impossible for there to be a Golden Age of the Internet, although today’s hard-cash model works pretty well for me; my biggest objection is the lock-ins and non-competition that goes with it.
@Walt – Are you saying there are unlocked smartphones for $100? That are any good? The problem with the whole thesis is that 90% of the cost of a smartphone is the data plan. How does Google subsidize that (especially as the whole ethic of this approach is antithetical to the incumbent telco networks).
I posted this over at asymco:
It seems that Stephen Elop and Leo Apotheker went to the same business school. The one that teaches you should let your customers know your plans before your own staff. Another rule being that you do not need to have thought about what you are going to do after the announcement, it’s only the announcement that counts. The third rule is that it is better to ad-lib during a question period with analysts than practice answers to obvious questions and even better to provide three incompatible and incoherent answers than one. Lastly, it always helps to describe your current efforts and assets in terms of disaster phraseology such as “burning platform”. The tuition rate at this school must have been pretty low.
Since the days of the IBM-compatible clone all PC hardware gave the user largely the same experience. You can hardly differentiate, so you compete on price. No matter how brilliant HP’s engineers were, the user had largely the same experience as with a €400 piece of cr#p. Case in point: their 1985 touchscreen (!) Vectra. Innovative premium hardware, but Lotus 1-2-3 did not run any better. Integrate HW and SW and you get happier customers and higher margins. If you do it absolutely perfectly. I saw WebOS as HP’s last chance to do that, and it is sad they give up. The longer I think about what you wrote, the more sense it makes for MS to buy PSG
@Canucker— it’s been a while since I saw mentions of these, and of course they’re primarily intended for markets such as Kenya. But yes, some Googling found 3 brands with US offerings of $99.99 unlocked and I imagine more are to be found.
Android 2.2, otherwise, sorry: I wouldn’t be the one to claim about their quality.
@Walt, I think sub-Saharan Africa has more important things to worry about than smartphones, but I get your point. Google cannot really subsidize phones – it goes against its business model. Apple, on the other hand can. It just doesn’t need to.
Disappointing. Palm needed to hit with webOS, but it fizzled. I’d had to not only be as good as iOS, it had to be better, and the hardware let it down. The Touchpad released by HP is the same. It is a really good tablet, and if the iPad didn’t exist, it would be great. But Apple have had 2 generations of iPad now, and the iPad 2 I’m using for this reply is just fantastic. If has replaced my old laptop for nearly everything I used it for. And the battery life is the killer feature. This was the touch pads archillies heel too, 7 hrs does not beat 10 hrs on the iPad. It doesnt matter how good the tablet is if the battery is flat.
@ Walt French and @ Canucker: Free iPhone 3GS today “only” ay Best Buy http://bit.ly/qEXsRR
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I guess I won’t run my “Larry. Please Give Us a free gPhone!” column. [Larry Page, not Larry Ellison, that's for another post
@ Canucker: That “Elop and Apotheker went to the same biz school” post is cruel — because it’s right. I met Léo in Paris last Summer. Extremely pleasant meeting. I found Léo pleasant, superior intelligence, encyclopedic knowledge of the [enterprise] software industry, products, business models, travelled around the world, speaks 5 languages, und so weiter. So, when he was appointed HP’s CEO, I thought they were getting a Mensa mensch.
Then, the incoherent statements started to pile up/on one after another.
Three things:
1. Intelligence doesn’t trump domain knowledge that had time to descend into your gut and inform your taste buds. (I know, I’m mangling metaphors but I hope to still make some sense.)
2. Like most humans getting into a new job, he kept doing the old one (CEO at SAP). It stops after a while. But it looks like he’s still making decisions based on the old one.
3. HP’s Board of Directors is jinxed. They hire Carly Fiorina. They approve the Compaq acquisition giving Compaq something like 47% (not sure the exact number, but it was big) of HP. Then we have the “pretexting” scandal. Then the clumsy firing of Mark Hurd. Then this.
@ Bill: I was half serious about the free gPhone. Then Best Buy announced they were offering “free” 3GS iPhones – that is with a 2-year contract. http://bit.ly/qEXsRR
It’s last year’s model, but it works, I see lots of them around here, not everyone upgrades every year
This said, it’s only viable if, as Google does, you have a something else to sell. Such as ads. Or, for the carriers, a big fat 2-year contract.
@ All: Regretfully, I have to stop replying to comments for a while. These conversations are enjoyable, enlightening and encouraging. Thanks.
@Jean-Louis Gassée What makes this blog particularly interesting is the fact that you do take time to reply. It’s much appreciated. We are all busy, you more than most. Cheers!!
@JLG, a second (102nd?) to @Canucker’s appreciation.
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The $100 Androids come without ANY other obligation. You could slip your existing dumb phone’s SIM into it and use it as a wifi-smart only smartphone with no incremental costs to a low-cost contract. Versus the close-to $2000/2 years contract that US majors get for iPhone or similar.
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And here’s a fun idea: if Oracle scored a total knockout against Google in its IP claims, basically requiring Google to pay a full Oracle license for each copy, plus who knows what damages, etc., perhaps Google could take the opportunity to revert to being an ad- and search-server only, competing just on the merits of its search, by selling Android Inc. to Oracle, for whatever damages.
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Oops, that shoulda been “*IF* (!!!) Oracle …”
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But then you’d be right with your “Larry, …” call. Just that it’d be Ellison. ;^>
@Walt French
Take your fun idea a step further — Say Oracle gets Android and assumably the Android-based GoogleTV.
1) What does Google do with MMI?
2) What does Oracle do with Android?
3) What do the Android licensees do?
It may be that Larry #1 has worked himself inrto a situation that, regardless of what happens, he will be worse off
There’s the story about the basball player (Larry #1) who made so many errors in left field that he was taken out and repaced with another player (Larry #2) — who promptly made an error on the next play. He threw down his glove and stormed off the field — muttering that Larry #1 had gotten left field so screwed up, that nobody could p lay it.
HP completely misinterprets Reg. FD in my mind here. There is no rule that says you must disclose some half-baked plan just because someone might get wind of something being maybe placed in the oven at some time in the future.
Companies routinely engage in massive strategic reviews without public disclosure. What’s no OK is disclosing this fact to some people and not others in a way that will advantage those people in terms of trading the stock.
I’m inclined to agree that the market reaction to HP’S quarter was mostly about two things:
1) “We are going to torch most of our remaining cash by thoroughly overpaying for Autonomy”. Whatever one thinks about this acquisition, the price is indefensible and there is no scenario where the price becomes defensible even if Autonomy’s sale grow much faster than expected by anyone.
2) “We are going to do something with our PC division but we have no idea what that is. Yes it’s 1/3 of our company and it’s not really killing us, but we want to kill it and we just really have no idea how.” This gives the correct appearance that management has no real idea what it’s doing.
It’s absolutely fine to spin off the PC division. I don’t personally agree with that division, but it’s hardly indefensible if you want to remake yourself as an enterprise hardware/software/services company. I’d argue that under the same logic, you should spin off the imaging/printer division into a separate company too. It has virtually no synergies with this hypothetical enterprise company, but that’s another conversation for another day. (And, no, selling those customers printers is not “synergy” anymore than selling them PCs is.)
If they had an announcement to make on PSG, they should’ve made it. If they didn’t, they should’ve kept their mouths shut. It’s perfectly fine to have answered a question about it — in the incredibly unlikely even one arose — with: “Look, in an uncertain global economy and an incredibly competitive business environment, we’re evaluating all our lines of business. If we have anything to announce, we’ll get you all together when that date arrives.”
The date hadn’t arrived, but they opened their mouths and stuck their feet deeply inside them. That wasn’t logical and certainly wasn’t required by Reg. FD.
(Disclosure: I ran investor relations for a company about 10 years ago.)
Does Mike Dell really have the gall to be opening his mouth right now? The last time he shot his mouth off concerning the fate of a competing company, he never heard the end of it – and still hasn’t.
@Rick DeNatale: Interesting tale. I think I attended one or two Taligent/Kaleida JV discussions with IBM, but I wasn’t responsible for Pink. You may be thinking of Ed Birss. The only JV that I drove was in 1990, with Acorn and VLSI Technology, and it was called ARM.
What I find particularly interesting, regarding the industries Apple is playing in, is that everyone talks like they understand what makes for success. But, even after 10 years, there are still only a handful who actually execute on that.
In theory, Apotheker is making the right choice for the HP of today: their PC margins are low, their WebOS products, well, suck and they would be facing an uphill battle that they might not have the endurance for. So, it seems logical to pull an IBM.
But the way they have been going at it, in my view, is wrong. If you want to go after business customers, your most valuable asset is their confidence in you, your products and your dedication to “their” market. HP seems rather chaotic at the moment and I am wondering if they didn’t damage their (potential) customer’s confidence a bit too much. Time will tell.
@Steven: It’s not gall that Mr. Dell has, but a certain type of stupidity, imo.
@Mr. Gassée: I’ve been enjoying your articles a lot, and among all the industry commenters you seem to be one of the few who actually seem to live in reality and write very good analysis—thank you for your articles.
@patrik: “Americans go nuts for a sale, regardless of what’s being sold, as long as it’s at least 200% off.”
100% off is free. 200% off means it’s free and then the seller gives you the original price in cash as well.
I’ll take that deal, and I’m not even American!
Neil said, “100% off is free. 200% off means it’s free and then the seller gives you the original price in cash as well.”
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@Neil, methinks the battle is lost. Intel talks about chips using 500% less power and others utter similar abominations. You’ll just have to guess from context, or to presume the author just doesn’t care about English.
perhaps hp could do something worthwhile and open source web OS, giving back to the community palm built on… not likely but given the controversy over new interfaces in the linux community right now, it wouldn’t hurt to have a new face in the crowd.
Jean-Louis Gassée, you’ve always been one of my heroes in the apple story. Love playing with haiku… wish the BeOS model would have made more of a mark.
@ Dick Applebaum I’m not clear why you doubt JLG’s anecdote about being hired in 1968 to launch HP’s first desktop computer in France. According to Wikipedia’s HP_2100 article, the 2116A minicomputer launched in the U.S. in 1966. The HP_9800_series_desktop_computers article says that the 9810A desktop computer launched in 1971. By 1968, HP could have been selling the 2100 series in France and already planning the 9800 desktop series.
@Brandon Watson – I do not know how misguided jabs at Apple developer relations help your cause. I would think attendance at recent WWDC’s, and the developer diversity represented in the IOS ecosystem would quickly debunk your claims. Just because they do it differently, doesn’t mean they do it badly.
@Jean-Louis – I’d love to see you do a note on the Palm patent portfolio. I’ve seen a few articles pop up mentioning it as a tempting acquisition, but have yet to see any actual patents covered. We seem to be entering the age of mobile patent wars and I am curious to learn what the palm patents really bring to the table. I see the potential for dispute with the Newton cited as prior art? Thoughts?
Mimike wrote, “We seem to be entering the age of mobile patent wars…”
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We are amidst an attack by Google on the value of others’ IP. A recent article (at BigPicture?) showed that if all IP suits were settled, they would total about 0.2% of GDP. And while they are big bucks to individual firms, they are transfers of wealth from one company to another, so don’t net-net directly GDP one iota.
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Of course, they impact individual firms: would Carl Icahn have backed Motorola without its IP portfolio? How about the banks and other backers for Nortel, a firm that developed the 4G standards foundation (LTE) and could never have hoped to manufacture every handset in the world that used it? The attack on IP is easily seen on an attack on investing itself; firms would have to monetize all their R&D in a few weeks before copycats reverse-engineered their efforts; everything reverts to the pre-patent days of trade secrets or no inventions.
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If generic IP is both “bogus” and worth $12 billion to Google, why did they buy Moto, which holds no patents relevant to Google’s products, while passing on Sun’s $1.2 billion portfolio, over which they are now being sued? The whole “patent wars” story seems cultivated to justify Google’s positions and rather astonishingly bad judgement in considering how it plays well with the laws of its host country.
Leo Apotheker is quite frankly the worst CEO of a technology company I have ever seen. If there’s a wrong way to do something he does it, mis-step after mis-step. Does he really inspire any confidence?
Stephen Elop of Nokia is not far behind him.
We seem to be entering the age of mobile patent wars and I am curious to learn what the palm patents really bring to the table.
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Bonjour, On en veut davantage traité de cette manière. Merci 1000 fois ! A bientôt.
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I don’t even know how I stopped up here, but I thought this put up used to be good. I don’t recognize who you’re but certainly you’re going to a famous blogger should you aren’t already. Cheers!
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