By Exiting, Slow-Moving HP Will Help Reshape the PC Market

Paul Thurrott – Windows IT Pro – InstantDoc ID #140290

When IBM announced its intention to abandon the PC market in 2004, it was big news on a number of levels, not the least of which was that IBM had created this very market. Not on purpose, of course. But by using off-the-shelf hardware for its PCs and licensing third-party software, IBM inadvertently opened the doors to clones—clones that appeared in a flood after the IBM PC BIOS was copied.

This past week, Hewlett-Packard dropped its own similar bombshell. It, too, will exit the PC market, by selling or spinning off its own PC business. But there’s a big difference between the HP announcement and IBM’s earlier decision. Unlike IBM, which had long before ceded PC leadership to smaller, faster-moving companies, HP is, as I write this, the most dominant PC maker on earth. So the market it’s leaving is one over which it reigns supreme.

Of course, that all depends on how you measure things.

According to data I’ve averaged from market researchers at IDC and Gartner (because these firms measure market share slightly differently), HP sold over 15 million PCs in the second quarter of 2011, a 3-percent gain over the same quarter a year earlier, and strong enough for a first-place finish, with 17.75-percent market share. (PC makers, overall, sold 84.8 million units in the quarter.) This places HP in a considerable lead, from a unit sales perspective, over the second-biggest PC maker, Dell. This company sold 10.75 million PCs in the same time period, also a 3-percent gain year over year, and good for 12.7-percent worldwide market share.

(Third-place finisher Lenovo is nipping at Dell’s heels with 10.25 million PCs sold in the quarter, a stunning 21+ percent gain year over year. Meanwhile, industry darling Apple sold 3.95 million Macs in the same time period, and it doesn’t even crack the top five PC makers. The Mac’s market share for Q2 2011 was just 4.65 percent.)

So why would HP abandon this market?

Unit sales don’t always equate to success. According to HP, the margins on its PC business are tiny, and like IBM before it, the company wants to focus on higher-margin, services-oriented businesses for corporations moving forward. The PC business requires shipping huge volumes of machines, many to finicky consumers, for comparatively low margins.

As proof of this statement, HP offered up some figures. Its commercial businesses experienced 5-percent revenue growth year over year, but its consumer businesses nose-dived 15 percent. Overall, its PC business generated almost $10 billion in revenues last year and, ironically, was the company’s biggest revenue contributor. (Its tech services division delivered $9.1 billion in revenues.) But profits in the division were much smaller, about $2 billion.

Although many smaller companies–Samsung, Acer, ASUS, but also possibly Lenovo–would probably happily accept $2 billion in additional profits per year on HP’s PC business, for HP, it’s only part of the story. The company had already paid $1.2 billion last year for struggling mobile OS maker Palm, and the Palm-based products HP was already selling–smartphones and the recently released TouchPad tablet–were summarily executed this week as well; HP will take another $1 billion charge related to winding down that business, though it’s possible the company will offset some costs by finding a buyer. The wider issue here is that being competitive in the ever-shifting consumer market would require even higher outlays of cash, and HP simply isn’t interested in this market and the resources and effort it would require.

Left unsaid is that HP simply cannot compete with the Apples and Googles of the world. Not that it didn’t try: In addition to its Palm efforts, HP built clones of Apple’s MacBook Pro laptops, purchased the high-end boutique PC maker Voodoo, briefly licensed the iPod from Apple, and launched Microsoft-based products such as the Tablet PC and Media Center PC. None of these efforts ever amounted to anything positive.

More important than consumer lust for Apple and Google mobile products, perhaps, is the fact that these companies also generate dramatically better margins than does HP. (Google’s margins could cool a bit, however, thanks to its mammoth $12.5 billion purchase of Motorola.) And while the death of the traditional PC is grossly exaggerated–PC makers should sell roughly 400 million PCs this year, and the market is still growing by 4 to 5 percent, rather than contracting as many imagine–it’s absolutely true that consumers are turning in ever-greater numbers to more mobile devices. And this includes both tablets and smartphones, neither of which HP has ever made successfully.

But Apple has. Last quarter, the company sold an astonishing 20 million iPhone 4 handsets and a reasonable 9.25 million iPad tablets. And while Apple has fallen behind Google’s more diverse Android OS in the smartphone market, it has the tablet market all to itself for the time being. Remember that Mac sales figure I mentioned earlier? If you were to add Apple’s Mac and iPad unit sales together–they are both, after all, general-purpose computing devices at heart–Apple suddenly vaults into second place in the worldwide PC market, behind HP but ahead of Dell: Combined Mac/iPad sales in Q2 2011 were 13.2 million units, good for about 15-percent worldwide market share. Still behind HP, yes, but well ahead of HP when it comes to margins and profits.

That’s not a bad little turnaround for a company that was within 3 months of bankruptcy in 1996. But it’s bad for HP, which despite heady unit sales, simply can’t leverage its PC business well enough to be successful in the growth consumer markets of the future.

So HP will almost certainly exit the PC market—there’s a small possibility it could continue selling PCs only to businesses–and I think the model it will follow is IBM’s. Certainly, Lenovo has done a wonderful job of shepherding and improving IBM’s ThinkPad brand, and its products today are still the wonder of the corporate world, with superior keyboards, pointing devices, and construction when compared with the competition. Yes, including Apple.

My guess is that HP’s PC business, whatever it’s called, will also be very successful moving forward, and that whatever smaller company does end up with it–either a standalone spinoff or a former competitor like Samsung–will be quite happy with the results. And while HP’s decision was unexpected and initially shocking, let’s face it: All that’s really happening here is that a slow-moving behemoth is moving on, leaving the market to scrappier upstarts, any one of which is better equipped to compete with Apple or Google. Once the dust settles, this will likely be the better course for everyone involved: HP, its PC business, and its customers.

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