HP Should Ditch PCs, Printers, Focus on Services: Analyst

A scattered HP can’t compete with IBM and EMC in the enterprise, or Apple and Samsung in consumer technology, USB analyst Steve Milunovich argues.

Hewlett-Packard should shed its PC and printer businesses, according to an analyst in a research note that raises once again a controversial proposal that helped lead to the ouster of the company€™s CEO last year.

In a note Aug. 8, Steven Milunovich, an analyst at UBS Investment Research, said that in its current state, HP is unable to compete vigorously in either the consumer or the enterprise markets, putting itself into the mediocre middle. Rather than continue on its current course, the massive tech vendor should get rid of its PC and printer units, and instead focus on such services as cloud computing, Milunovich said.

The analyst said he disagrees with current CEO Meg Whitman, who has said that HP is €œbetter together€ with all its businesses. Whitman, after taking over last year after Leo Apotheker€™s 11-month tenure, quickly squelched Apotheker€™s decision to split off the PC business with the hope of focusing on services and software.

Milunovich, taking a look at the competitive landscape for HP, said that might be a mistake.

€œWe question whether HP is €˜better together€™ and that it might be €˜smart to be apart,€™ specifically spinning off printers and PCs,€ he wrote in his research note. €œHP lacks the pure enterprise focus of IBM and EMC, yet will have trouble competing for consumers without strong tablet and phone businesses like Apple and Samsung. HP is surrounded.€

HP€™s future€”and what the company should do to preserve it€”has been an ongoing source of debate and speculation for several years, as the vendor€™s stock has steadily fallen and it has undergone rapid changes in management and product plans.

The questions can be traced back to Carly Fiorina€™s time as CEO, and her decision to spend $25 billion to buy rival PC maker Compaq Computer. The move was hotly debated within the industry and inside the company, though it did enable HP to take the title of the world€™s top PC maker from Dell, a position it continues to hold today, though it€™s being threatened by Lenovo. However, some questioned in 2002 why HP was spending so much money for a larger share of a commoditizing market, an argument that got a boost two years later when IBM got out of the PC business, selling its PC unit to Lenovo.

Now worldwide PC sales are stagnant, thanks to the rise of tablets and smartphones, a trend that has impacted HP and Dell, which itself is trying to transform from a box maker to an IT solutions provider. In addition, HP is seeing sales in its highly profitable printer business slow. According to the company, in the second quarter, revenue in the Personal Systems Group (PSG) were flat, while sales in the Imaging and Printer Group fell 10 percent from the same period in 2011.

It was those sorts of numbers that drove Apotheker to decide last year to sell or spin off the PC business. However, the decision was met by considerable backlash, and that€”combined with other moves, such as spending $11 billion to buy software maker Autonomy€”led to Apotheker€™s forced resignation last year.

After being appointed the new CEO€”HP€™s third in less than a year€”Whitman soon decided to keep the PC business in-house, arguing that PCs were deeply ingrained in HP€™s other lines of business, that they contributed to the company€™s overall brand and that they gave the company the scale needed when negotiating with component suppliers. Whitman also noted the consumerization-of-IT trend, and the foothold PCs give HP in addressing it, though the company is still struggling with its tablet strategy.

Keeping the business also removed a lot of the confusion within the industry caused by Apotheker€™s abrupt decision, she said. Analysts generally applauded Whitman€™s move, though some said it was postponing the inevitable.

€œWhile we believe keeping PSG inside HPQ is appropriate, given the state of the company currently; in 3-5 years we hope the company sells the group to focus on enterprise infrastructure (similar to IBM€™s move in late 2004),€ Brian Marshall, an analyst with the ISI Group, wrote in a research note.

HP is making some moves to regain its footing, including merging the PC and printing businesses and sharply cutting expenses, including laying off 27,000 workers over the next three years.

However, UBS€™ Milunovich argued that Whitman is still presiding over an increasingly unwieldy company.

€œCan any CEO lead such diverse businesses with different technology and distribution requirements?€ he asked. €œThe complexity must be overwhelming.€

Milunovich also argued that HP€™s marketing department continues to have trouble focusing on a consistent theme for the company, moving from one (€œInvent,€ during Fiorina€™s tenure) to another (the current €œMake it matter€).

€œIn terms of marketing, what does the HP brand stand for since being all things to all people means standing for nothing?€ he asked.

Milunovich€™s argument echoes one by Forrester Research analyst Peter O€™Neill, who said in an Aug. 7 blog post that the perception of a rudderless and mismanaged HP can become reality without a strong marketing effort. Unfortunately, said O€™Neill€”a former HP marketing executive€”that effort isn€™t being seen at HP.

€œPretty soon, HP will be generally considered to be a badly run company,€ he said. €œReality becomes perception! Isn€™t anybody in marketing seeing this? After all, they are responsible for the perception€”or correcting one that may have got awry. €¦ The only marketing that comes across is at the business-unit level: usually €˜InsideOut€™ content about HP products and services.€