Last week HP announced that they won’t be making anymore WebOS devices and leaving the PC business altogether. Initially the plan for HP was to integrate WebOS into all their future hardware. That plan is now scrapped. HP seems to be refocusing on their software business which although smaller commands higher margins than the hardware; this post is about why this is a good strategic move.
Negligible margins on sub $1000 PCs
Consider the image above, they’re all different HP laptops from the past decade at least. While yes chips became smaller, stronger, and ultimately cheaper, the laptop itself remained the same. HP like other major PC manufacturers did not control the OS, they focused on the hardware and loaded it with Windows or even Linux. There is hardly any innovation left in the consumer hardware business itself.
Looking at the Laptops & Netbook PCs page on HP.com we can see that all their laptop categories start in the sub $1000 price range. Netbooks start at $279, the high performance 17″ model starts at $649 and even comes with a free 6GB memory upgrade. The last most expensive group – dubbed “Envy” – starts at $999.
It is known that the biggest problem for manufacturers with the sub $1000 laptops is Moore’s law and lack of margin. This explains why Apple does not want to participate in that cut throat market. Apple is known for their ability to maintain high margins and even manage to squeeze in more profit per product before expanding their lineups. Even the least expensive Mac i.e. the 11″ MacBook Air has a 28% margin built in, and that is the entry level mode. Upgrade to the 13″ with 128GB MBA and now it’s at 37%. Supposedly, a high school student and amateur tech reporter was able to crunch some numbers and show that Apple makes more revenue from the sale of one Mac than HP does from selling SEVEN PCs.
The only consumer-facing innovation left: Design
20 years ago, very few cared about design aesthetics or the overall user experience of tech gadgets and devices. These devices provided enough hardware innovation that there mere existence was great enough. Its the other way today. The hardware is such a small and slowly becoming invisible part of the equation. It is all about how I’m going to use this device, and what I can do with it, and where. Case and point: very few people care what processor is in the iPad vs. a TouchPad vs. a Xoom. 15 years ago we asked is it Pentium IV? or Pentium III? Was it Intel or AMD?, 100Mhz? or 256? Who cares. Only the techies.
As we venture into the age of touch screens, gestures, and augmented reality, hardware innovation will no longer be visible across different devices as they would all becomes boxes with screens that extend to the edges that accept your gestures.
Going forward, similarly with augmented reality applications. Who knows, maybe there will be Surrogates in our life times?
Steve Jobs has a great eye to details, but 30 years ago it was not appreciated and Apple fell behind. The large companies just wanted computers to crunch numbers and store documents. Bill Gates and Microsoft gave them that. Job’s wanted to design and build beautiful computers that did that. When he returned to Apple, he still had the same great attention to detail and the vision he runs with today. It is amazing to see a company go from the verge of bankruptcy to the most valuable company today… in 14 years. His attention to detail is pursued today and that is why Apple hardware commands such high margins. It’s a brand synonmous with high quality, performance, and beauty.
It is not just hardware that is demanding higher design standards, but we are also seeing consumers demand this from software applications regardless of where it is. Soon you’ll even look for a user friendly fridge or stove. It’s about time actually.
Words like “user-friendly”, “intuitive”, “simple” were not too common in the early days of computing. The common answer to all was RTFM.
Lessons from IBM’s 100 year history
IBM’s 100 year history contains a lot of lessons for any company. IBM kept up with the changing times and revised their business model to remain competitive. HP bought Compaq in 2002 for $25B and three years later in 2005 IBM sells the ThinkPad line of PCs to Lenovo. Even though the Compaq deal pushed HP over IBM in 2005 revenue-wise, IBM was able to re-focus its energy into its more profitable software and business consulting lines. Today HP is only re-playing a card IBM did 6 years ago, and IBM is once again ahead.
I think it’s looking good for HP, things will get worse before getting better but they have clearly admitted what they were doing will not last much longer and they need a change in direction, a U-turn. That’s what they did. HP is big enough to do that today and still survive. They attempted to plug their deficiencies in the consumer devices market by buying Palm but that didn’t work. That investment is still good as it comes with a load of high profile and pursued patents in the mobile. Those will become lucrative.
HP’s offer to buy Autonomy also shows this new direction. The consumer devices field is useless without data, a lot of data. Innovation in UI experiences requires a lot of data. Data needs to be managed. This purchase puts HP facing off with Google over enterprise data management. HP’s model which would be similar to IBM’s than Google’s would probably be more welcomed in the enterprise than Google’s cloud solutions would. Don’t forget it was Google’s mission for the last decade to organize the world’s information and HP recognizes that a lot of the world’s information is locked away behind enterprise firewalls – they too need data management.