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:
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?
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. —