HP, Dell: PC makers in desperate need of a reboot

Aug 27, 2012 by Michael Liedtke
This Tuesday, Aug. 21, 2012, file photo, shows an exterior view of Hewlett Packard Co.'s headquarters in Palo Alto, Calif. The PC business is faltering amid shifting technology trends since Apple Inc. shifted the direction of computing with the release of the iPhone in June 2007. HP's market value has plunged by 60 percent to $35 billion, while Dell's market value has also plummeted by 60 percent, to about $20 billion. (AP Photo/Paul Sakuma,File)

Hewlett-Packard Co. used to be known as a place where innovative thinkers flocked to work on great ideas that opened new frontiers in technology. These days, HP is looking behind the times.

Coming off a five-year stretch of miscalculations, HP is in such desperate need of a reboot that many investors have written off its chances of a comeback.

Consider this: Since Apple Inc. shifted the direction of computing with the release of the iPhone in June 2007, HP's market value has plunged by 60 percent to $35 billion. During that time, HP has spent more than $40 billion on dozens of acquisitions that have largely turned out to be duds so far.

"Just think of all the value that they have destroyed," ISI Group analyst Brian Marshall said. "It has been a case of just horrible management."

Marshall traces the bungling to the reign of Carly Fiorina, who pushed through an acquisition of Compaq Computer a decade ago despite staunch resistance from many shareholders, including the heirs of HP's co-founders. After HP ousted Fiorina in 2005, other questionable deals and investments were made by two subsequent CEOS, Mark Hurd and Leo Apotheker.

HP hired Meg Whitman 11 months ago in the latest effort to salvage what remains of one of the most hallowed names in Silicon Valley 73 years after its start in a Palo Alto, California, garage.

The latest reminder of HP's ineptitude came last week when the company reported an $8.9 billion quarterly loss, the largest in the company's history. Most of the loss stemmed from an accounting charge taken to acknowledge that HP paid far too much when it bought technology consultant Electronic Data Systems for $13 billion in 2008.

HP might have been unchallenged for the ignominious title as technology's most troubled company if not for one its biggest rivals, Dell Inc.

Like HP, Dell missed the trends that have turned selling PCs into one of technology's least profitable and slowest growing niches. As a result, Dell's market value has also plummeted by 60 percent, to about $20 billion, since the iPhone's release.

That means the combined market value of HP and Dell—the two largest PC makers in the U.S.—is less than the $63 billion in revenue Apple got from iPhones and various accessories during just the past nine months.

The hand-held, touch-based computing revolution unleashed by the iPhone and Apple's 2010 introduction of the iPad isn't the only challenge facing HP and Dell.

They are also scrambling to catch up in two other rapidly growing fields—"cloud computing" and "Big Data."

Cloud computing refers to the practice of distributing software applications over high-speed Internet connections from remote data centers so that customers can used them on any device with online access. Big Data is a broad term for hardware storage and other services that help navigate the sea of information flowing in from the increasing amount of work, play, shopping and social interaction happening online.

In this undated file photo, a man tries out the enhanced version of International Business Machines Corp's Personal Computer which was unveiled in New York, March 8, 1983. The PC business is faltering amid shifting technology trends since Apple Inc. shifted the direction of computing with the release of the iPhone in June 2007. HP's market value has plunged by 60 percent to $35 billion, while Dell's market value has also plummeted by 60 percent, to about $20 billion. (AP Photo/File)

Both HP and Dell want a piece of the action because cloud computing and Big Data boast higher margins and growth opportunities than the PC business.

It's not an impossible transition, as demonstrated by the once-slumping but now-thriving IBM Corp., a technology icon even older than HP. But IBM began its makeover during the 1990s under Louis Gerstner and went through its share of turmoil before selling its PC business to Lenovo Group in 2005. HP and Dell are now trying to emulate IBM, but they may be making their moves too late as they try to compete with IBM and Oracle Corp., as well as a crop of younger companies that focus exclusively on cloud computing or Big Data.

A revival at HP will take time, something that HP CEO Meg Whitman has repeatedly stressed during her first 11 months on the job.

"Make no mistake about it: We are still in the early stages of a turnaround," Whitman told analysts during a conference call last week.

The problems Whitman is trying to fix were inherited from Apotheker and Hurd.

HP hired Apotheker after he was dumped by his previous employer. He lasted less than a year as HP's CEO—just long enough to engineer an $11 billion acquisition of business software maker Autonomy, another poorly performing deal that is threatening to lump HP with another huge charge.

Before Apotheker, Hurd won praise for cutting costs during his five-year reign at HP, but Marshall believes HP was too slow to respond to the mobile computing, cloud computing and Big Data craze that began to unfold under Hurd's watch. HP also started its costly shopping spree while Hurd was CEO.

How much further will HP and Dell fall before they hit bottom?

HP's revenue has declined in each of the past four quarters, compared with the same period a year earlier, and analysts expect the trend to extend into next year. The most pessimistic scenarios envision HP's annual revenue falling from about $120 billion this year to $90 billion toward the end of this decade.

The latest projections for PC sales also paint a grim picture. The research firm IDC now predicts PC shipments this year will increase by less than 1 percent, down from its earlier forecast of 5 percent.

Whitman is determined to offset the crumbling revenue by trimming expenses. She already is trying to lower annual costs by $3.5 billion during the next two years, mostly by eliminating 27,000 jobs, or 8 percent of HP's workforce.

Marshall expects Whitman's austerity campaign to enable HP to maintain its annual earnings at about $4 per share, excluding accounting charges, for the foreseeable future.

If HP can do that, Marshall believes the stock will turn out to be a bargain investment, even though he isn't expecting the business to grow during the next few years. The shares dropped 37 cents Monday to finish at $17.21, HP's lowest closing price in eight years.

One of the main reasons that Marshall still likes HP's stock at this price is because of the company's quarterly dividend of 13.2 cents per share. That translates into a dividend yield of about 3 percent, an attractive return during these times of puny interest rates.

Dell's stock looks less attractive, partly because its earnings appear to still be dropping. The company, which is based in Round Rock, Texas, signaled its weakness last week, when it lowered its earnings projection for the current fiscal year by 20 percent.

Dell executives also indicated that the company is unlikely to get a sales lift from the Oct. 26 release of Microsoft Corp.'s much-anticipated makeover of its Windows operating system. That's because Dell focuses on selling PCs to companies, which typically take a long time before they decide to switch from one version of Windows to the next generation.

Dell shares slipped to a new three-year low of $11.10 in Monday trading before closing at $11.12, down 14 cents.

As PC sales languish, both HP and Dell are likely to spend more on cloud computing, data storage and technology consulting.

Although those look like prudent bets now, HP and Dell probably should be spending more money trying to develop products and services that turn into "the next new thing" in three or four years, said Erik Gordon, a University of Michigan law and business professor who has been tracking the troubles of both companies.

"It's like they are both standing on the dock watching boats that have already sailed," Gordon said. "They are going to have to swim very fast just to have chance to climb back on one of the boats."

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User comments : 14

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SatanLover
not rated yet Aug 27, 2012
i like my pc very much. i just think people dont have money to buy a pc and most people nowadays dotn need a pc they get by fine with a laptop/tablet for internet-ing.
i will never give up the PC for gaming and programming.
Eikka
5 / 5 (2) Aug 27, 2012
HP might benefit from a slight increase in quality control. They've been consistently at the tail end of reliability studies with other cheap manufacturers like Acer, except they're not cheap.

HP builds computers that are designed to sit on an office desk and be replaced every three years as the on-site service contract runs out.
Shifty0x88
not rated yet Aug 27, 2012
I think all PC manufacturers need to get on businesses to upgrade their aging XP machines to the new Windows 7 machines by either offering discounts or somehow giving them support or something for a cheaper rate, just so they can send PCs out their doors.

I also agree with @SatanLover, not a lot of people have the money for a full PC, and almost all of the time a tablet will be cheaper(even the new iPad).

Speaking of the new Ipad, know why it's call the new iPad and not the iPad 3? Apple doesn't want you to realize you bought the thing 3 times already.

They may also benefit from being more like Apple(although I don't like or agree with it), and get their own little ecosystem around their products(cloud/online backup, updates, better support, etc.)
Vendicar_Decarian
5 / 5 (1) Aug 27, 2012
You can put together a fast and clean desktop PC for under $300 these days.

"I also agree with @SatanLover, not a lot of people have the money for a full PC" - Shifty
draa
3 / 5 (2) Aug 27, 2012
What do Dell and HP have in common? They are both run by Republicans. What happens when you put a Republican in charge of anything? Well, it will do ok for a while but sooner or later it goes to crap. They've proven it over and over again. It's really not THAT hard to figure out. Republicans are incompetent.
Eikka
not rated yet Aug 28, 2012
You can put together a fast and clean desktop PC for under $300 these days.


But you also need another $300 for a decent monitor, and for that money you might as well buy a laptop.

And I highly doubt you can put together even a mediocre PC on that budget, unless you're talking about what prices you could get as an OEM when you buy ten thousand of each part.
alfie_null
not rated yet Aug 28, 2012
Their desktop machines are commodity appliances. Completely interchangeable. Nothing to distinguish them.
And there's no way for them to distinguish the most influential aspect (from the perspective of the end user) - the GUI. It's the same Windows 7. It will be the same Windows 8.
antialias_physorg
not rated yet Aug 28, 2012
HP builds computers that are designed to sit on an office desk and be replaced every three years as the on-site service contract runs out.

Which isn't such a bad business model. The traditional computer brands should try to stick to their core competence.
Mobile and handheld are certainly big business - but they are for the crowd that consumes data - not for those who generate it.
And the latter will still need the powerful boxes with big screens and comfortable sized keyboards for some time to come.

HP just suffers from a very crapy image (and maybe deservedly so) for producing expensive, yet low quality products. What happens to such companies can be seen with Compaq.
If HP doesn't up its game by either becoming a quality vendor or competing with the likes of Acer and Toshiba on price they will suffer the same fate.
antialias_physorg
5 / 5 (1) Aug 28, 2012
You can put together a fast and clean desktop PC for under $300 these days.

Agreed. If the mobile aspect isn't important to you then you can get a WAY better machine for the price of an iPad (or even the price of an iPhone). The specs on these gadgets are hilarious.

But you also need another $300 for a decent monitor, and for that money you might as well buy a laptop.

I think that's an unfair comparison, as you don't have to buy a new monitor or keyboard (or even hard drive) with every new desktop machine you buy (as opposed to laptops/tablets where you mostly cannot even transplant drives from one to the next)
CreepyD
not rated yet Aug 28, 2012
I wonder if PC sales are also falling as more and more people become tech savvy. e.g. I have never bought a PC in a shop, only components to go in one, saving myself a fortune in the process.
packrat
1 / 5 (1) Sep 01, 2012
I wonder if PC sales are also falling as more and more people become tech savvy. e.g. I have never bought a PC in a shop, only components to go in one, saving myself a fortune in the process.


That might have something to do with the high end stuff but I think it's basically that the average home user doesn't really need a full pc with separate monitor, keyboard, etc... Most of the people I know use their home computer for internet browsing, games on internet, email, watching movies, playing music and very little else. A pad or even just a smart phone can supply what many want. They don't need a full size desktop so they are not buying them. Personally I prefer a full desktop with a nice big monitor or two.
Vendicar_Decarian
not rated yet Sep 02, 2012
"Republicans are incompetent." - Draa

The only thing Republicans can successfully do is destroy what others have created.

Vendicar_Decarian
not rated yet Sep 02, 2012
Claptrap!

"But you also need another $300 for a decent monitor" - Eikka

I just priced a 1900 x 1080 LG monitor for $134.

Further I included the monitor in the price of building the PC.

Vendicar_Decarian
not rated yet Sep 02, 2012
"It will be the same Windows 8." - Alfie

The difference of course will be that W8 will be an absolute disaster for Microsoft, and Ball Boy Ballmer.

Crack heads should not be permitted to manage multi-billion dollar companies.

Developers, developers, developers, developers.

http://www.youtub...e=fvwrel