HP, the Great PC Whale Beached Itself
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HP, the Great PC Whale Beached Itself

By Greg Mills

As news of the cancelation of the HP TouchPad and Web OS smartphones hit the street, speculation abounds as the future for both HP as a company and its established business units. Almost as an afterthought the news came out that HP was also throwing in the towel on its PC manufacturing business.

What makes the abrupt changes at HP significant is that HP was the largest PC manufacturer in the world. Normally, economy of scale rules mean that HP should have demanded and gotten the best prices on parts and assembly. That should have reaped the largest margins in the industry.

Unlike the Apple computer manufacturing business, the PC manufacturing industry has seen so much competition and so little innovation that PC is just a PC, only a commodity that is defined by the sum of its parts. The PC manufacturers, Intel and Microsoft, the three legged stool is teetering right now. For the first time ever, a combination of a poor economic outlook and strong innovation at Apple have caused a global decline in PC sales.

While Apple has a gross profit margin of 30% to 40%, HP was working with a 7% margin on its PCs. This is partly due to the Apple premium. Everyone knows quality costs a bit more than junk and Apple has reduced its prices enough to be competitive in recent years.

When you are working on a razor thin margin in a cut throat business like manufacturing PCs, even a minor change in the market can be disastrous very quickly. While some think HP panicked way too soon, time may prove their decision to get out while the getting is good to have been brilliant.

I am still unclear on what the new business HP intends to get into will amount to. Something about cloud software? Don't tell them Apple is also getting into that, as they have had enough bad news at HP for a while.

Now that HP has beached itself, competitors are lining up to pick the bones and hope to own some of the PC market HP has surrendered. The HP PC manufacturing business may be too large for any one competitor to purchase intact, but HP might rearrange the division for better liquidation.

The failure of the HP TouchPad, Palm Pre and the Web OS platform has resulted in HP planning for a US$100,000,000 charge off to pay for a mountain of unsold TouchPad tablets. The problem is, that once a platform is publicly abandoned, no one in their right mind would touch an orphaned device. Want to buy a Kin phone for cheap? Actually, TouchPads that have been sold are likely to be returned in a mass panic that will make the day after Christmas returns seem tame.

The market shunned the HP TouchPad to the extent it has to be sold at less than the cost of manufacturing it. There is no way out of that sort of mess. Actually, the HP TouchPad lasted about 6 weeks, Microsoft killed the Kin phone after just three weeks. HP's TouchPad lasted twice as long as Microsoft's Kin Phone before being scrapped.

While discussing epic electronic disasters, RIM is working on streaming Music on its poorly received PlayBook. When you think of RIM, you think business. RIM has a problem of not being able to focus on its strengths as it becomes distracted by the success of others who's focus is more general. There is a market for a really good tablet computer for business. While iPad is certainly making progress in that market, RIM is so unfocused they have even dropped the ball in their strong suit.

Launching PlayBook without an email client, requiring a BlackBerry to hook up to cellular Internet and an almost empty app store doomed the well built PlayBook from the start. For my money, I predict the PlayBook won't last much longer. RIM has launched a number of new smartphone just recently to a collective yawn from tech reviewers. RIM may go on the block as soon as its patents are worth more than the market cap of the company.

That's Greg's Bite.


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