Market Overview

Instead of Innovating, HP is "Masking the Incompetency"

Hewlett-Packard is planning to combine its PC and printer businesses. Is this a smart move or a cheap way to delay the company's demise?

“Instead of innovating, HP (NYSE: HPQ) is masking the incompetency of the PC business by merging it with the stronger printer business,” Trip Chowdhry, the Managing Director of Equity Research at Global Equities Research, wrote in a report this morning.

Further, Chowdhry said that:

  • HP personal computer [business] has lacked innovation: HP personal computers are lagging behind Apple on screen resolution, industry design and other network technologies such as Thunderbolt.”
  • HP personal computer [business] has lacked quality: Compared to Apple (NASDAQ: AAPL), Sony (NYSE: SNE) and Acer, lacks attention to detail.”
  • HP personal computer [business[ has lacked clear customer messaging: None of the people we spoke to have any idea of why they should buy [an] HP personal computer. However, all these people were very quick to point out that HP printers are the best – they never jam.”
  • HP personal computer division may destroy the healthy HP printer division.”

“Personal computer and printer businesses are fundamentally different,” Chowdhry continued. “Customer makes purchasing decision to buy a personal computer or a printer independent of each other.”

Chowdhry believes that the success of the PC business relies heavily on design and computer engineering, “while success of [the] printer [business relies] heavily on chemical and mechanical engineering.”

“New operating system releases are prime drivers for new [a] personal computer,” Chowdhry wrote. “Razor and Blades model defines the business model for printers.

“Because of [the] clear separation between HP's printer division and personal computer division, different personal computer OEM's do a joint promotion with HP printers. E.g., Sony, Acer etc. run promotions for HP printers. Clear separation between the personal computer division and printer division removes the conflict of interest and helps the printer business.”

Finally, Chowdhry said that HP's PC division is being led by an executive who lacks direction. “Replacing him might probably be a step in the right direction,” Chowdhry wrote.

“HP's personal computer chief was previously the CEO of PALM and drove the company from a leadership position to a non-player,” Chowdhry continued. “HP's personal computer chief has been with HP for six years, and during his tenure HP's personal computer division has continued to lose market share, while Apple and some Asian firms gained market share at the expense of HP.

“HP's personal computer chief was instrumental in acquiring PALM at a great price and PALM's WebOS is still one of the best mobile [operating systems]. However, the leadership has failed to define a mobile strategy for HP.”

Downward Spiral

While Chowdhry made some excellent points, Hewlett-Packard's problems go well beyond the leadership of its PC division. Consumers don't see or care about who leads the company – all they care about is the quality of the products they're buying. Despite the many, many loyal users who support the company year after year, HP has continually tarnished its own image by releasing cheap laptops that don't last.

To be fair, I have spoken to many HP fans that swear by the company's products and insist they've never had a problem. But Chrysler loyalists said the same thing about Dodge trucks 10 years ago, and that didn't stop most consumers from heading to Ford (NYSE: F), which was thought to manufacture a more stable product. A similar thing is happening here. In this scenario, MacBooks are perceived to be the high-end and high-quality alternative to HP laptops.

Has marketing played a role in Apple's success? Sure. In that sense, HP's top execs have not served the company well at all. But I firmly believe that it's the end product that persuaded users to move on to other computer manufacturers. If HP's machines were just as good as Apple's, why would anyone spend the extra money for a MacBook? Some would do it for the aesthetic appeal (Macs are much more attractive). Other would do it for the Apple name. But most consumers would stick to HP.

In addition to the PC market, HP has failed in the area of tablet devices. Its first attempt at an iPad competitor proved to be a $500 device that nobody wanted. Until the price dropped to $99, that is. After that happened, everyone wanted an HP TouchPad. Amazon (NASDAQ: AMZN) quickly capitalized on this and released a tablet of its own, the Kindle Fire, for twice the price. With more than three million units sold last Christmas, the Amazon device is already more popular than the ill-fated HP tablet.

HP has also made the mistake of prematurely merging with and/or acquiring other companies. Doing so may not have had any impact on the quality of HP's products (which just happens to be the company's biggest problem in the eyes of consumers who don't like HP). But these M&As cost money that could have been put to better use.

One Step to Recovery

Apple's popularity didn't come overnight. But it did start with one device: the iPod. As soon as Apple created one device that everybody wanted to own (the iPod was, after all, the best MP3 player available), consumers were curious about – and eventually wanted to purchase – every Apple device. In this regard, the iPhone has had a greater impact than the iPod. But without the iPod, Apple wouldn't be where it is today.

Since consumers will not come back to HP laptops without a good reason, the company needs to release a fresh, exciting and innovative device that inspires us to re-examine HP's portfolio of products. Then and only then will the company find a way to compete with Apple.

Follow me @LouisBedigian

Posted-In: Apple Global Equities Research hewlett-packardAnalyst Color News Rumors Analyst Ratings Tech Best of Benzinga

 

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