2011-03-15 12:17:20
Two computer giants prepare for a world no longer dominated by the PC
Mar 10th 2011 | ROUND ROCK AND SAN FRANCISCO | from the print edition
ROUND ROCK in Texas and Palo Alto in California are half a continent apart, but
Dell and Hewlett-Packard (HP), two tech behemoths that, respectively, have
their headquarters in those cities, have much in common. The two
personal-computer makers boast impressive records as innovators Dell in
supply-chain management and HP in fundamental research though each has lost
some of its creative spark in recent years.
Both are battling to remain relevant in a rapidly changing
information-technology landscape. Since Michael Dell returned in 2007 to the
helm of the company he founded, he has overhauled its operations in a bid to
revive its fortunes. L o Apotheker, HP s boss since last year, is due to
announce a new strategy for his company on March 14th. He has been hinting that
he, too, will want to make significant changes at a firm that is still reeling
from the traumatic departure of its previous boss, Mark Hurd, after a fuss over
his relationship with a female marketing contractor.
Among the trends the two firms are grappling with is the growing popularity of
tablet computers, smartphones and other devices that let consumers work and
surf the web on the move. Apple s wildly popular iPad and other tablet
offerings are starting to have an impact on low-end laptop sales. Gartner, a
research firm, now reckons that global PC shipments will grow 10.5% this year,
to 388m units, down from its previous forecast of almost 16%, partly because
consumers are switching with such enthusiasm to tablets.
An even more important trend sweeping the industry is the growth of cloud
computing. This lets companies store and process vast amounts of data in huge
warehouses of servers run by third parties. The data can then be accessed over
the internet whenever and wherever needed. New competitors such as Amazon and
Rackspace Hosting have jumped into this market and are trying to persuade
companies they would be better off renting capacity in the cloud than buying
their own servers from the likes of Dell and HP. Of course, the cloud-services
providers themselves buy lots of servers, mainly Dell and HP ones but their
huge size means they can drive a hard bargain on prices.
The emergence of the cloud is also partly responsible for a third trend,
verticalisation . This is the increasing tendency of makers of IT hardware,
operating systems and applications to move into each other s area of business,
because their corporate customers no longer want to shop around for all these
different bits and splice them together themselves. They now want all-in-one
solutions they can just take out of the box and switch on and which are well
integrated with their cloud-computing systems. Furthermore, for providers like
Dell and HP, spreading vertically into other parts of the IT business also
offers the best hope for growth in a market that is, overall, maturing.
This has created a free-for-all, with software firms swallowing up hardware
firms and vice versa. HP and Dell now face stiff competition from the likes of
Oracle, a software firm that bought Sun Microsystems, a hardware maker (Oracle
hired Mr Hurd as its president after he left HP); and from Cisco, a maker of
networking gear which has moved into the market for servers. This rapid
restructuring of the industry is prompting the big IT firms to get out of
low-margin businesses, as Japan s Hitachi did this week when it sold its
disk-drive business to Western Digital for $4.3 billion.
HP and Dell dominate the PC business, together with Taiwan s Acer (see chart),
so they are vulnerable to any shift away from such computers. Declarations of
the death of the PC are premature, not least because demand from emerging
markets is still growing. But Apple s stunning success with its iPad in rich
countries, and corporate customers demands for IT firms to provide a full
service, not just bulk quantities of desktops and servers, mean that neither
company can afford to be complacent. The PC is not dead, but its importance
henceforth is going to be significantly diminished.
Dell is likely to fare a bit better than HP in this new world because its sales
of PCs, which were 23% of the $16 billion of revenue it earned in its latest
quarter, are more heavily geared towards companies, and they will probably keep
buying desktops for some time to come. HP, which counted on PC sales for 32% of
its $32 billion of revenue in its latest quarter, relies more heavily on
purchases by consumers, whose heads are easily turned by new gadgets. However,
both firms have plenty to worry about. The computing market is fragmenting and
devices are specialising, says George Shiffler of Gartner.
Dell s relative strength in the corporate market is becoming steadily less
relevant, though. Companies are increasingly being swayed by what IT gear
consumers (especially their own staff) are buying. So firms like HP and Dell
need to come up with successful mass-market devices or risk seeing rivals
gadgets eat into their corporate sales. That is why they have recently unveiled
tablets of their own. Dell s Streak 7 is based on Google s Android operating
system, whereas HP s TouchPad runs on webOS, an operating system developed by
Palm, a company that HP bought last year. In a recent Bloomberg interview Mr
Apotheker said HP would start installing webOS in its PCs too, in addition to
Windows, to create a broader platform for it.
This highlights a difference in philosophy between the two companies. Dell
places huge emphasis on making products that are open, capable and affordable
. It is open to borrowing operating systems and other stuff from third parties
and splicing them together itself. HP seems less willing at least for now to
embrace such openness, preferring to use its in-house operating system. But if
a successful ecosystem of apps evolves around Android, and tablets based on
Google s operating system turn out to be as popular as Android-based
smartphones, it may have to rethink its approach.
Splashing out
Although they are still paying plenty of attention to the PC and server
markets, both Dell and HP have been working overtime to reduce their dependence
on them notably by splashing out on cloud-related businesses such as
data-storage providers. In 2008 Dell paid $1.4 billion for EqualLogic, or more
than ten times its target s revenues. EqualLogic is now on track to deliver
$800m of annual revenue, justifying what appeared to be an extravagant purchase
price. Last year, Dell added to its cloud capabilities when it bought Boomi,
which helps move software applications to the cloud, and InSite One, which
offers cloud-based medical archiving.
But Dell missed out on its most ambitious target last year when HP waltzed off
with 3PAR, another data-storage firm, after a ferocious bid battle. HP paid
$2.4 billion for the company, way above Dell s initial offer of $1.15 billion.
After the dust had settled, Mr Dell claimed HP had overpaid for 3PAR, which had
revenues of just $194m, whereas Dell had shown discipline. Yet Dell s final
offer was a whopping $2.35 billion, only a smidgen below its rival s. The firm
got a consolation prize in December, when it bought Compellent Technologies,
another data-storage firm, for $960m.
Battles ahead
HP and Dell are destined to cross swords again as they go further down the
verticalisation route and emulate IBM, a hardware maker which has built
powerful software and services businesses with fat margins. Both firms have
already made big acquisitions of service providers, with HP buying EDS in 2008
and, the next year, Dell buying Perot Systems (which, like EDS, was founded by
Ross Perot, a former American presidential candidate). But they are bound to
seek more such deals. Mr Apotheker, who used to run SAP, a German software
giant, has made little secret of his desire to see HP expand in highly
profitable software businesses. Last month HP bought Vertica, whose software
helps firms analyse massive amounts of data fast, and there has been
speculation that the company will consider more ambitious targets.
Dell s executives argue that the firm s diversification strategy is already
bearing fruit. As evidence of this, Brian Gladden, its finance chief, points to
the net profits of $927m it earned in the three months to late January, almost
three times the figure a year earlier. Admittedly, Dell benefited from low
component costs and an uptick in new PC purchases by companies following the
economic crisis. But its results also reflect the growth of its services
businesses, which have higher margins. These now account for 41% of the
revenues of Dell s large-enterprise business, up from a third at the start of
2008.
HP s recent record has been less impressive, which is reflected in the relative
performance of its shares (see right-hand chart, above). In particular, whereas
Dell and other firms such as IBM and Accenture have seen an increase in
service-related sales recently, HP s services revenue slipped 2% in its latest
quarter. That partly reflects the fact that, although it is strong in
outsourcing thanks to EDS, it does less well in higher-margin consulting a
weakness that Mr Apotheker ought to address.
HP s boss will also need to decide whether the computers-to-calculators
company, which has $126 billion of annual revenues and 325,000 employees, can
continue to dabble in so many areas. IBM, for instance, sold its PC business to
Lenovo to focus on building its services activities. HP is unlikely to follow
suit, considering that it is still the leader of the PC pack. Nor does it look
set to jettison its printing business, which is having to adapt to an
increasingly digital world. But if it is serious about beefing up its software
and services activities, HP may have to make sacrifices elsewhere.
At the very least, Mr Apotheker will have to be clear when he speaks next week
about the strategic logic that binds HP s disparate activities together. And he
will need to emphasise that he is prepared to undo some of the savage
cost-cutting undertaken during Mr Hurd s reign, which dented the company s
innovation engine and sapped its morale.
HP has already started to reinvest in its services business and in January it
brought in several new board members, including Shumeet Banerji, the boss of
Booz & Company, a consulting firm, and Dominique Senequier, the chief executive
of AXA Private Equity, whose experience will be invaluable as it mulls new
investment. Mr Apotheker likes to joke that since moving to Palo Alto from
Europe to run HP he has learnt how to say awesome and cool like a true
Californian. Now his task is to persuade customers and investors to use those
same words about HP.
from the print edition | Business