In nod to IBM, HP overhaul minimizes consumers

August 18, 2011 - 8:20 PM
Hewlett Packard Mobile Shutdown

FILE - In this Feb. 2, 2010 file photo, the Palm Pre Plus, left, and the Palm Pixi Plus are shown in San Francisco. In a dramatic reshuffling, Hewlett-Packard Co. on Thursday, Aug. 18, 2011 said that it will discontinue its tablet computer and smartphone products and may sell or spin off its PC division, bowing out of the consumer businesses. The announcement comes just two years after spending $1.8 billion on smartphone maker Palm, which gave HP the webOS software that has been praised by critics but largely been ignored by the marketplace. (AP Photo/Jeff Chiu, File)

SAN FRANCISCO (AP) — Hewlett-Packard Co. is surrendering in smartphones and tablets and has put its personal computer division up for sale, as new CEO Leo Apotheker tries to transform the Silicon Valley stalwart into a twin of East Coast archrival IBM Corp.

The restructuring announced Thursday contains an unmistakable message: HP has missed the mark on trying to cater to consumers and corporations. As a result, it needs more than ever to exit most of its consumer businesses, as IBM did nearly a decade ago.

The overhaul will have three parts:

— HP will stop making tablet computers and smartphones this quarter.

— It will attempt to spin off or sell the world's No. 1 PC business. By the end of next year, HP computers could be sold under another company's name.

— The company plans to buy business software maker Autonomy Corp. for about $10 billion in one of the biggest takeovers in HP's 72-year history.

HP, the largest technology company in the world by revenue, will continue to sell servers and other equipment to business customers, just as IBM now does. Those businesses currently don't generate as much revenue for HP as PCs, but they have higher profit margins.

It was not immediately known whether any jobs will be cut. HP employs more than 300,000 people worldwide.

The changes are motivated by a shift toward an IBM-style business model, which is focused on selling to corporations and governments.

But the influence of Steve Jobs and Apple Inc., the hottest consumer electronics company on the planet with its highly popular iPhones and iPads, shouldn't be underestimated.

"Apple singlehandedly knocked HP out of the PC, smartphone and tablet business," Gleacher & Co. analyst Brian Marshall said in an interview.

Rather than remain locked in a futile fight with a company that seems to have found the magic touch on making hit consumer products, HP decided to whittle its competition to the other business technology specialists — namely, IBM, Oracle Corp. and Cisco Systems Inc., Marshall said.

The focus makes sense considering that Apotheker spent most of his career at German business software maker SAP AG, another company that catered to the technology needs of companies and government agencies.

"This is his bread and butter," Marshall said. "Now he has to deliver."

Investors appeared underwhelmed, sending HP's stock down $1.88, or 6 percent, to $29.51 during the regular trading session, after news of the changes leaked and HP disclosed them along with a lower-than-expected quarterly forecast. After the market closed, the stock fell another 10 percent to $25.66.

Apotheker is seeking radical changes to help erase the stain of scandal and leave his imprint on a massive company he inherited last year. His predecessor, Mark Hurd, resigned under pressure a year ago, following sexual harassment allegations that the company found were unsubstantiated.

In trying to ditch most of HP's consumer businesses, Apotheker is turning a decade-long binge on computer hardware on its head.

The area where HP has been most visibly lacking is mobile devices.

HP has been hopelessly outmatched in smartphones and tablets despite its $1.8 billion acquisition last year of Palm Inc., whose webOS software was the crown jewel of the deal. The software powered the fledgling TouchPad tablet and HP-powered smartphones, which HP said Thursday are being discontinued.

The software was well-reviewed, but iPhones and iPads and smartphones running Google Inc.'s Android operating system have dominated the fastest-growing parts of the consumer technology market, forcing HP into the margins. WebOS smartphones had a worldwide market share of less than 1 percent, according to Gartner.

HP will try to find ways to keep webOS alive, which could include using it in other devices such as PCs and printers or licensing it to handset makers, Apotheker said in an interview. He said he was disappointed with the designs of HP's mobile devices and the business would have required too much money to keep afloat.

"We have better opportunities to invest our capital," he said.

HP executives likely decided that "they were too late to the tablet market to make a dent," said Forrester Research analyst Charles Golvin. "They recognized they did not have a high probability of success."

HP conceivably could try to license the webOS for usage in cars and consumer electronics devices made by other companies, Golvin said, but that figures to be challenging because Google is targeting many of the same markets with its Android system, which is free.

"This begs the question of how much longer it will be before the other shoe drops and they close the Palm business entirely," Golvin said.

The diminishing of the Palm business will be striking to many technologists.

Jon Rubinstein, the former CEO of Palm, said in December that Palm sold itself because executives realized the business could be small and successful, but couldn't sustain itself long term on its own.

Rubinstein, who was an Apple executive before leading Palm, said HP seemed to be the best choice because, given its size, it could help Palm bring its products to more people.

In PCs, HP is acknowledging that it needs to reverse course on a path begun three CEOs ago, under Carly Fiorina. She pushed through the controversial decision to spend more than $24 billion for Compaq Computer. That set the stage for HP's ascent to eventually become the world's top PC maker.

PCs are HP's biggest revenue generator, but the business is also HP's least profitable, a product of falling prices for computers and brutal competition.

Here, too, analysts see pressure from Apple.

HP's effort to jettison its PC business is another concession to Apple's increasing dominance of the consumer electronics market, said Shaw Wu, an analyst with Ticonderoga Securities. The PC division also had become a drag on HP's stock even though it still accounts for about 15 percent of the company's earnings, Wu said.

"Apple is a such a fierce competitor that HP probably realized it was going to have to cut its losses," Wu said. "And it makes sense to cut your losses sooner than later."

The decision also makes HP's trajectory look remarkably similar to rival IBM's nearly a decade ago. IBM, a key player in building the PC market in the 1980s, sold its PC business in 2005 to focus on software and services, which aren't as labor- or component-intensive as building computer hardware.

The acquisition of Autonomy mirrors a key element of IBM's transformation from stodgy mainframe seller into a software and services powerhouse, which has made IBM the envy of many large technology companies.

HP's net income increased in the fiscal third quarter, which ended July 31, but its lower-than-expected outlook for the current period weighed on the stock. The company also cut its full-year revenue outlook.

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AP Technology Writers Michael Liedtke and Rachel Metz in San Francisco and Barbara Ortutay in New York contributed to this report.