HP plans to exit PC business in favor of software, services

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Hewlett-Packard Co.'s decision to exit the PC business should enable it to focus more on higher-value, higher-margin businesses, including software, services and networking, according to the company and analysts. HP announced Aug. 18 that its board had approved a plan to explore strategic alternatives for its Personal Systems Group (PSG), including a spinoff or other type of divestiture. HP also said it will discontinue sales of webOS devices, including tablet PCs and smartphones. “The exploration of alternatives for PSG demonstrates our commitment to enhancing shareholder value and sharpening our strategic and financial focus,” HP President-CEO Leo Apotheker said in a statement. He said the company would pursue a strategy focused on cloud-based applications, software and services, as well as supporting existing products. Analysts said the move is a good one for HP, although the company faces significant challenges in trying to catch up to its competitors in the software space. “It is not that their PC business is broken; it is that they are deciding as a company that they are interested in being in higher-margin businesses,” said Crawford Del Prete, chief research officer at IDC. “Net margins of software are north of 40%, while net margins of PCs will never be close to that,” he said. Although HP is the PC market leader, with about $40 billion in annual revenue, the net margin for its PC business was about 6% last quarter, he said. “Going forward, they are a work in progress in software and services. HP has a lot of catching up to do in the software business to be as competitive as Oracle, or IBM or SAP,” Del Prete said. One challenge, he said, is the consolidation that has been occurring in the software business, with HP's competitors snatching up software companies. “Oracle, IBM and SAP have all been acquiring software companies,” he said. “HP identified it early, but hasn't been as aggressive in acquisitions. The really hard customer problems, such as unstructured data, are what's left.” To further pursue its software strategy, HP announced it plans to acquire Autonomy Group, a Cambridge, England-based enterprise software company, in a deal valued at about $10.3 billion. Autonomy develops infrastructure software to help enterprises handle tasks such as business process management, Web content management, records archiving and customer interaction. “Autonomy brings to HP higher-value business solutions that will help customers manage the explosion of information,” Apotheker said in a statement announcing the acquisition. Del Prete said the acquisition will give HP an advantage in solving difficult customer problems, but it will also face some challenges. “It will take a long time to really have that product come to fruition and really make a big dent in HP's overall revenue opportunity,” he said. “They have a lot of work to do in that area. The unstructured data problem, in a world where you have massive data sets, is a very hard problem to solve.” Dave Johnson, senior analyst at Forrester Research, applauded the acquisition. “The acquisition of Autonomy is a smart move,” he said. “HP is responding to a very real change in the IT markets they serve. The IT landscape is changing—empowered users are making decisions for IT needs that don't require IT approval. I think this opens up new opportunities for HP.” Johnson also said the move does not reflect any underlying problems with HP's PC business. “Their PC business has been doing well from a customer standpoint,” he said. “From an enterprise business standpoint, HP has been a reliable vendor.”
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