Essay:HP's Terrible Business Decisions

It's been a year since I've been even tempted to buy any new electronics on the market, but a while back, I spent time building my dream computer and hunting for my ideal smartphone. As a result, I still follow the consumer electronics industry as something of a hobby. I've spent the last couple months wondering what the heck Hewlett-Packard thinks it's doing.

If you don't know, the multi-billion dollar corporation Hewlett-Packard (HP) spent the last several months making a stream of terrible decisions. The biggest by far is the decision to shift the focus of their business from selling consumer-oriented personal computers (PCs) to selling business-targeted software and support contracts. I honestly cannot find the business sense in this.

True, the business IT industry offers much higher profit margins, while the consumer PC industry is always under pressure to lower prices. In the abstract, it makes sense to focus on the business division making the most money. HP may be the #1 retailer of consumer PCs, in both sales volume and total revenue, but its profit margins are relatively low. (The sheer sales volume of PCs is enough to earn HP $126 billion in revenue for 2011. But the abysmally slim margins of that same market ensured it only saw $9.7 billion in profit. Compare that to IBM, whose revenue for 2011 was about $107 billion—$19 billion less than HP—but its profit was a much more impressive $16 billion. More simply, HP’s profit/revenue ratio is barely half of IBM’s.)

Unfortunately, this is not the abstract. Their business-oriented services and products make up a fraction of their income. Historically, their business services division was more a token effort—“You’ve bought our computers for your office workers. Wouldn’t you like to purchase IT services from us, too?” That fact that most businesses have said “no” to that offer are a key sign that HP isn’t competitive in that market. Consumer PCs are what HP is known for; they’re its core competency. Which is why I find it incredibly foolish of them to decide to spin off their consumer PC division into a separate company. There is no word for this outside of “dumb.” What next? Is Microsoft going to sell off its Windows and Office software divisions so it can focus solely on the Xbox? It’s like deciding to cut off an arm so you can focus more on a single finger.

And I've been ignoring the elephant in the room up to this point. HP will be going up against the king of the corporate IT services industry: IBM. IBM has over four decades of unrivaled brand recognition and market dominance in the corporate IT market. Business software is IBM's bread and butter, while HP's is considered mediocre. IBM’s history of savvy investments and high profits ensure it has a lot of spare cash to throw around. Meanwhile, HP’s smaller profits and previous poor business decisions leave them relatively strapped for cash, giving them very little room for error, and almost no ability to recover from messing up. Which they will, because there is absolutely no reason to believe they’ll pull a miraculous turn-around in an industry they’ve historically sucked at.

My faith in Hewlett-Packard's ability to execute was already damaged when they bought the promising (but dying) smartphone manufacturer Palm (makers of the legendary Palm Pilot smartphones that came out in the early 2000s) for $1.2 billion, and accomplished practically nothing with it. They produced one smartphone, targeted at the cheaper end of the market, and one tablet, intended to compete with the iPad. When both flopped, HP canceled all future smartphones and tablets and dissolved their respective departments. Did they expect their first entry into the smartphone and tablet markets to make them piles of cash? Google released Android into the smartphone market in 2008, and it wasn’t until 2010 that they started seeing significant sales. (Android now has the largest market share in the smartphone market. It only took them three years to get there.) Microsoft is just barely starting to see results from their year-long effort to penetrate the same industry. If they had any brains at all, HP would've recognized that entering the smartphone and tablet markets meant playing the long game, rather than petulantly throwing up their arms in frustration and giving up after one try. That decision to enter, then abruptly exit the smartphone and tablet markets cost Hewlett-Packard an additional $2.1 billion on top of the $1.2 billion they spent to acquire Palm in the first place, for a total of $3.3 billion. It would've been less disastrous if they'd taken that $3.3 billion and lit it on fire in their headquarters' parking lot.