Staying ahead in an ever changing business market is hard, but that’s what management is paid to do, right? It is therefore hard to see how spending $1.2 billion to purchase a company, before closing it without recouping much, if any, of the purchase price less than 15 months later, let alone the additional R&D investments, make any sense at all. To compound the situation, the way that the information was released led to major misunderstandings among large parts of the media.

This is exactly what happened to HP. It resulted in not only speculation over HP’s business strategy, but a 20% collapse in its share price over a three day period. Behavior like this is bound to have institutional investors wondering what on earth is going on.

The facts

  • April 2010: HP bought Smartphone manufacturer Palm with all its assets for $1.2 billion.
  • Early 2011: HP’s global market share of laptops fell to just 18.5% according to DigiTimes.
  • February 2011: HP launched two webOS smartphones and announced its own tablet to compete with the iPad.
  • July 2011: The HP TouchPad finally launched and, despite the pre-launch hype, it had no enterprise software and did not perform well in reviews and tests.
  • August 2011: Several news outlets were reporting that Apple had overtaken HP in Mobile PC market share when you include laptops, netbooks, and tablets.
  • 18 August 2011: HP announced that it was discontinuing webOS phones and the TouchPad and will be exploring options around webOS software going forward.
  • In the same announcement: HP added that it was looking at options for its Personal Systems Group (PSG) – either selling it, spinning it off, or keeping it.


This announcement has had everyone scrambling, trying to work out why HP wants to sell PSG, and who would want to buy it. The fact that this is just about options, and that HP might still keep or spin-off PSG into a separate company that could still be partially owned by HP, seems to have passed a lot of commentators by. To make matters worse, HP has been slow to engage with its communities to correct any misunderstandings.

The TouchPad debacle

When HP bought Palm the market watched with interest. Here was a vendor who had all the right credentials to upset Apple’s easy ride to dominate the tablet market. It had a long history of producing tablets, ever since Microsoft first released a Tablet version of Windows XP, and it has had tablets in production ever since then. As a result, it clearly understood the need for a device that was not driven by a keyboard and it had the right applications to make it work.

Among HP’s successes with its PC tablets were good penetration into hospitals, schools, government, as well as product placement on TV shows. None of its competitors in the PC space have been anywhere near as successful or consistent in delivering products. The purchase of Palm seemed to offer HP an alternative route to market, and one whose destiny HP could fully control rather than be dependent upon Microsoft.

When the TouchPad was announced, the question was raised as to who it was targeting. RIM, the makers of the BlackBerry devices, had decided that its very delayed Playbook would be a consumer device. All the other tablet vendors were targeting the consumer market, while Apple was almost alone in hitting both the premium business and the consumer markets.

The opportunity for HP seemed clear – go for the business user. HP’s responses as to who its target market was seemed to imply that it was going to do just that. However, keeping in mind that the vast majority of its laptops were aimed at the consumer market, it really needed two devices or, at the very least, two different application sets.

None of this was insurmountable, because internally, HP had the staff and knowledge to create first class clients for all of its enterprise products. This would enable it to tightly bind those clients to its enterprise software stack and make this a true business device that would sell easily to its very large corporate customer base.

The bigger problem was to create a market full of consumer applications and other business applications outside of its own software. To do this, it needed to create a large developer base and bind those developers to it.

Unfortunately, HP either didn’t understand or it had the wrong people in charge. Because it failed to ship with first class clients for its own software, and the lack of applications from a consumer perspective was abysmal. The company didn’t go out and actively create a developer community, or seed it with devices and emulators to help port applications. So at the launch, there was little available and the only decision left was to inject a large amount of cash or pull the plug.

We now know that HP pulled the plug, but we believe it was premature and the company could have still recovered the situation if it had really wanted to. There is a clear need for a business competitor to Apple, and HP is probably the only vendor who could have grabbed that market. Throwing away the initial $1.2 billion, plus all the other costs over the last 15 months, seems a poor cut-and-run option.

So where does this leave HP’s mobility strategy?

Put simply, in tatters. HP, like the rest of the IT industry has been telling anyone who would listen that the future is about accessing systems, anywhere, anytime, using any device. But if you abandon your smartphone and tablet division because you don’t get enough sales with the first generation of devices, that’s not a strategy, that’s surrender.

This is deeply concerning. While HP will point to its strength in laptops, it will no longer have the “must have” device a tablet that is very thin, power efficient and that it owns. Since the announcement of the dropping of webOS, HP has offered no alternative mobile device strategy and that silence is deafening.

Personal Systems Group

That brings us to PSG and the 18 August 2011 announcement. For those who haven’t seen it, here it is:

There is no doubt that PSG is profitable. In terms of units shipped, HP is still the number one vendor of both desktops and laptops. Although laptop market share dipped in Q1/11, HP has fared much better than its main competitor Acer, who since January has slipped from number two in the world to number four.

However, HP hasn’t had it all its own way and has struggled in the netbook space. The company decided against developing an Android-based device, but whether that was because it was already eyeing up Palm and considering a webOS powered netbook, or whether it did not want to jeopardize its relationship with Microsoft, is unknown.

Like all laptop manufacturers, HP has seen netbooks, ultrathin notebooks, and tablets eat heavily into its traditional customer base. While Apple has increased its market share in laptops, it is the iPad that has driven its strategy and put it ahead of HP in terms of mobile device sales. This is why the TouchPad made a lot of sense and why its demise makes even less sense.

But what about the rest of PSG?

This is more difficult to answer. There will always be laptops and desktop computers because tablets still have some way to go when it comes to having the power to do everything people want. While that demand is there, PSG should continue to dominate provided HP can continue to get the most out of Microsoft Windows.

The question is, can it continue to make the right products at an affordable price and make them attractive to consumers? HP has a solid history of controlling its Bill of Materials (BoM) and makes many of its own components. This has allowed it to introduce technology at an affordable price, but margins on hardware are getting thinner and thinner. Only HP knows how long it can keep certain product lines going with an acceptable margin.

Like other PC and laptop vendors with the exception of Apple, HP has a lot of different product sku’s. In a rush to be seen to always have new products, it sometimes appears that products are getting marked as end-of-life almost before they have left the factory. Such product churn creates waste, increases discounting by the channel, and reduces profitability. It’s also questionable as to whether customers want so many products, so fast.

One thing we have seen in the core enterprise space is that changing technologies are lengthening the life of PCs and laptops. HP has been aggressive in its thin client strategy over the last few years and has been pushing virtual desktops for some time. With its own software broker, it can easily extend the life of a desktop PC, laptop, or thin client by a few years. However, as a hardware manufacturer that seems counter intuitive to its business, so it does have a fine line to walk.

Something that will worry HP is the large growing market in second-hand HP kit undercutting its dealer channel. This is not just about PSG but also affects its key server market. Two years ago, second hand HP small form factor desktops were available but commanded a reasonable premium. Today, that is no longer the case. For example, it is now possible to buy a complete pallet of 50 HP desktops suitable for a school or call center for around £3,000 inclusive of tax.

Similar desktops from HP’s competitors still retail at a premium of around 40% to this price. The price differential for HP desktops is not about the quality of the product, but rather it is indicative of a collapsing market for second hand HP hardware. Whether this is because HP has done very well in upgrading customers, or whether this is due to customers going elsewhere, is hard to determine.

It may just be that shrinking margins, excess stock, and too many product sku’s are the cause for HP considering its options for PSG. If so, a spin-off or sale makes sense. Better to do it while still at the top than wait until the decline get terminal.

Whatever HP does decide internally, it would make sense to at least separate the thin clients from the rest of PSG. Virtual desktop is just taking off and to give away your client device business would be foolish.

 Who loses if PSG goes?

The obvious loss here is the Small to Medium Enterprise (SME) market. HP has invested massively in this market in terms of hardware, software, and services over the last few years. If it decides that it doesn’t want PSG, then this market will inevitably look for another vendor who will support them.

The biggest loser, however, will be HP’s channel. The same channel that sells devices from PSG also sells HP’s printers. Take away a large part of their revenue and there will be a lot of them who will stop selling HP printers. This will impact HP’s printing division as well, a consequence that will have to be carefully thought through before HP makes any decision at all.

HP’s low-end server business market will also find itself caught up in any channel interruption. In the UK, HP sells the majority of its low-end servers (towers and rack) through the channel, rather than through direct sales. This is a casualty that HP will be very keen to avoid, not just because of the loss of hardware sales and customers, but because HP has invested a significant sum in those dealers to help sell HP’s Cloud infrastructure to the mid-market.

Those customers who remember what happened when IBM decided to sell its PC division to Lenovo in 2004 will be concerned. Supply chains, product quality, and support issues were an ongoing saga for channel and customers alike and it heavily hit market share. Today, Lenovo has around 7% of the global PC and laptop market and while that has increased over the last year, it has been a long struggle.

Would anyone want PSG?

This is easy. Yes. The most obvious candidate is not Dell, Acer, ASUS, Lenovo, or even Samsung but Google. Google has the cash, it has the ambition, and in addition to the acquisition of Motorola Mobility, it would enable it to become a complete organization.

More importantly for Google, it would become a full service player in the market i.e., someone who owns the operating system, applications, and the hardware. The only other player with that control over its own destiny is Apple.This is something that Microsoft would not be allowed to do by regulators due to its operating system dominance. Google is not constrained in this way and this would immediately be a significantly disruptive market move.

As part of the acquisition, it is highly likely that Google may get a significant opportunity to acquire another large batch of patents, something it has finally realized it needs, and more importantly, get a deep insight into the future strategy of its main competitor, Microsoft. It would also create a significant market dilemma for Microsoft because Google is a company it is in serious competition with and suddenly Google would be the biggest single distributor of Microsoft software for the desktop and laptop markets. 


It is our view that HP should not have made the decision to close down webOS, and that the failure to have its own tablet to compete with Apple, is a business opportunity spurned. Keeping PSG makes more sense in the short to medium term compared to selling it or spinning it off. However, if it does go down either of these routes it must keep the thin client business and be prepared to deal with a backlash from its channel partners.