HP, where art thou going?

Todd Bradley gave an interview on Bloomberg to qualm the latest rumors about WebOs and to discuss HP’s PC business reversal-decision. In that interview, he suggests that HP is going to be everything to all people – corporates, end-users: “consolidation of its parts”

That translates into no strategy at this point. But let’s look at the numbers:
In 2010, HP’s revenue was split between products (~$80 billion) and services (~$40 billion) . Further, 1/2 of the products (~$40 billion) were consumer devices that generated an operating profit of $2 billion. In contrast, services generated net income of $5.6 billion. Comparing these numbers to a close competitor’s (Dell), it would seem that HP’s gross margin is three times lower than that of Dell. Looking at these numbers it’s clear why Leo Apotheker didn’t see much of a future in consumer computing. HP generates more profits in services and that’s where he wanted to go.

But now, Meg is running the show and she decided that the consumer computing business should stay - with the noticeable exception of WebOs devices. That doesn’t surprise me (as I stated that a while back) but one has to wonder what is HP going to do when it says it will offer tablets but no WebOs. Todd was very vague in describing the future of WebOs – he praised it and yet didn’t commit to it. This could also signal something else: if HP is continuing with tablets, it has two choices: Android (now) or Windows 8 (in 2013), so maybe it’s currently engaged in ‘discussions’ with either or both parties but wants to keep WebOs as an option in case it can’t get the agreement it would like to have. Microsoft is very unlikely to pull another Nokia move – especially since the whole PC universe at HP is based on Microsoft. But then again, dancing with Android would just fragment its product offering – this is not relevant for the enterprise but it might confuse some consumers who think they buy a Microsoft operating system on a HP tablet.
But what seems to become clearer is that it’s more likely HP sells WebOs as soon as it can. The current flock of rumor-mill enticed contenders includes: Amazon, Samsung, HTC and a couple of others. But whoever bites the bullet and launches its own eco-system will need deep pockets, an aptitude to completely control a segment of the market and patient investors – frankly, I can only think of four markets where this could happen: BRIC (Brazil, Russia, India and China).

But let’s get back to HP: it needs a new business model for its products – this is an obvious conclusion looking at its weak gross margin numbers. The problem with the current PC paradigm is that it all evolves around Intel and Microsoft. But this long-standing equation is now going to change and the so-called Wintel Empire is slowly falling apart (although very slowly).

Enter Arm: HP has announced a partnership with Calxeda to use Calexda’s Arm chips in HP’s server line. This is currently a Linux-only solution as Linux is the only available system that runs on Arm for this kind of purpose. But it’s not unthinkable that with the enormous energy saves that Arm chips promise, we could see this sort of technology move into the desktop as well. Large corporate buyers as well consumers do not really need high performance computing solutions and this is where Windows 8 will become relevant. Microsoft has announced that it will make a Windows 8 version that runs on Arm – now for a lot of software vendors, this break backwards compatibility to their legacy Intel based software. But for most users, namely the ones who mostly use Office anyway, this is clearly a possible migration path. This is also where the tablets will come back into play.
So there you have it, HP’s consumer strategy is centered on Windows 8 – tablets and desktops. The high-end desktops will continue to run on Intel but for the low-end it could be looking at Arm to fulfill the computing needs. Why? Because with Arm, it can produce a specific system on chip architecture and have multiple suppliers compete for contracts. What’s more, there is tremendous innovation happening right now in Arm architecture precisely because everyone can produce Arm chips. Something that is not possible with the Intel architecture. Consumers will be the benefactors of all this, not only will we see low power consumption in our devices but we’ll also see lower price points and new (smaller) form factors for increases in performance. Obviously, that same system-on-chip would make its way into tablets. Frankly nothing is really new here since Apple and all Android OEM’s are doing precisely that – what is new is that this same chip would find it’s way into a low-end Microsoft desktop, and this could offer significant savings and an increase in profit margin.
But that would also mean HP’s tablet plans would be delayed into possibly 2013 – that’s when the expected Windows 8 is rolling out. In other words, HP is in waiting mode.