HP Banks on PCs to Foster Growth

When Hewlett-Packard Co. first announced last September it was going to buy Compaq Computer Corp., critics said HP would be saddled with a larger, unprofitable PC business in a part of the industry that was economically crashing through the floor.

But dont tell that to Duane Zitzner. In an interview with eWeek two weeks ago, the executive vice president of the merged companys Personal Systems Group defended the move as bolstering HPs hopes for growth and increased profitability. While neither company would reveal breakdowns of their PC earnings, HP contends its consumer sales were profitable, while Compaq made money on commercial sales. As such, HP officials say the combination is complementary and enhances HPs opportunities to boost overall PC earnings. And Zitzner will have a large say over how it plays out. "I have always felt that it is a good business for HP to be in," he said. "There has been and there will be a lot of money that can be made in this business."

With the acquisition, HP, of Palo Alto, Calif., became the worlds largest PC vendor, topping Dell Computer Corp., which had held the position since last year. Despite ever-shrinking profit margins on PCs as a result of price wars, Zitzner said they still are a key component of todays business and consumer markets. "If you have large-scale Unix equipment or other servers, you obviously have input devices into them—and the PC is certainly the most popular of those," he said. "At the other extreme, PCs are still the ubiquitous way for storing digital pictures."

Even in its most lucrative business, 25 percent of HPs imaging and printing products are sold in package deals with PCs. Still, manufacturing commercial PCs has become a money-losing proposition for HP. In contrast to HPs top-ranked consumer PC business, its commercial PC sales have floundered.

In recent years, HP has struggled to compete against Dell, of Round Rock, Texas, whose more efficient direct-order model allowed it to consistently undercut HPs prices. However, buying Compaq gives HP added muscle. Perhaps most important, HP will seek to tap Compaqs direct-order manufacturing model to reduce costs and lower product prices. Prior to the merger, only 15 percent of HPs U.S. commercial PC sales went through its direct channel. By contrast, Compaq shipped about 70 percent of its commercial PCs and low-end servers through the direct channel. In addition, being the largest PC vendor in the world has advantages beyond bragging rights. As the biggest volume player in the market, analysts say, HP should be able to secure lower component prices, further reducing its product costs. But what will give HP the edge, Zitzner said, are the new PC designs it will bring to market, such as the tablet PC, and technological innovations, such as always-on wireless computing. Zitzner cited the companys thin e-PC desktop design it introduced two years ago, which now is "a huge piece of our product portfolio."

Currently, the company is working on a new notebook design, shown at Comdex/Fall, that features a screen that folds down on top of the keyboard, enabling the notebook to be used much like a tablet PC. But while hip new products may fuel some sales, the future of HPs PC division will rest on whether it can pull together its vast technological, product and services resources to deliver more value to its customers.

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