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Does Apotheker need an apothecary? Why HP is exiting the PC business

HP made big news today when it announced its intention to leave the PC and …

Does Apotheker need an apothecary? Why HP is exiting the PC business

One of our favorite acronyms is ditching another one: Hewlett-Packard wants to spin off its personal computers division in a dramatic move. Whatever the means—spin-off, direct sale, or "other transaction"—HP is done with this low-profit market. Yes, that announcement comes from the current leader in worldwide PC sales. Speaking of the commodity PC business during today's earnings call, HP CEO Leo Apotheker said "continuing to execute in this market is no longer in the interest of HP and its shareholders."

And that's not all. The company is also buying British data analysis company Autonomy in a $10.2 billion blockbuster deal and effectively shutting down what's left of Palm. You'd think that the third-quarter report that's due after the closing bell would be enough excitement for one day, but HP didn't think so.

There's a common thread running through all of these changes, and it all starts at the top.

Trickle-down economics

Apotheker is very much a software man. Coming in from decades of enterprise software experience at German powerhouse SAP, Leo was thrown into a world full of hardware at HP. From PCs and printers to UNIX servers—and even a finger in Intel's Itanium design—the Palo Alto giant must have looked alien to a man of Apotheker's pedigree.

HP's board of directors knew this when they hired him. If the steering committee wasn't okay with a radical shift into software and services, they would have hired somebody else.

So it was always obvious that the new boss would run HP very differently from predecessor Mark Hurd's relentless cost-cutting focus. Less low-margin hardware and more super-profitable software is the motto here. Every single one of Thursday's announced and rumored moves echoes that very refrain.

A dash of history

When HP joined forces with Compaq ten years ago, the mega-merger created a computing colossus to rival Dell, which ran the roost in those days. Even in the aftermath of the dot-com implosion, the PC market was vibrant and full of growth. It was something worth fighting for.

Then IBM dropped out of the race, selling its PC operations to Chinese counterpart Lenovo. Meanwhile, Microsoft coasted on Windows XP for half a decade, exchanging OS innovation for service packs. And when Windows Vista finally showed up, it was a dud. Meanwhile, Palm and the BlackBerry platform had sown the seeds for meaningful mobile computing, and Apple seized that market with both hands in 2007. Hello, iPhone!

And now, HP gives up on the PC market even as Dell focuses on servers and services over its old consumer-grade warhorses. Consumer-grade systems are not very profitable unless you're Apple, because the market has become saturated. If you want or need a PC, you probably already have one (or two, or five). Like the family car, you'll buy a new one only if the old mainstay breaks down. Gigahertz races are a thing of the past, and nearly every system is interchangeable with a dozen alternatives from competitors.

Rise of the non-machines

Preannouncing that standalone webOS devices like the TouchPad and Pre-successor smartphones are joining the Dodo bird and dinosaurs only underscores HP's lack of hardware commitment. If it's not software or services, it's probably not worth spending resources on. In the case of the Palm-derived gadgets, it's more of a failed experiment than the end of an era. Indeed, Apotheker said on the call that the TouchPad and other consumer devices "didn't perform to expectations." And it's all right—webOS lives on as a feature of HP's printers anyway. The company is getting a little something for its $1.2 billion investment.

I wouldn't be surprised to see webOS finding new uses, too. It's software, after all, and Apotheker understands how to wring value out of that asset class.

Reforming in the name of...

That brings us back to Autonomy. As of the last financial report, software sales represented just 2.9 percent of HP's annual sales. The Autonomy deal will give the software segment an instant 20 percent revenue jolt. When you remove the PC division from the equation, software sales then become about 5.5 percent of the company's total sales—more than twice as important to HP's health as the segment is today.

Purchasing Autonomy will drain HP's cash reserves, probably even forcing the company to dip into fresh debt to finance it all. Don't forget that taxes take a real toll when moving cash across national borders, and that Autonomy is a British company.

Even so, I expect plenty more software deals out of HP in the coming quarters and years. Apotheker has tipped his hand, and his version of Hewlett-Packard looks even more IBM-like than the Mark Hurd incarnation. Server systems can stay because they are wildly profitable and also tied into the vestige of a software ecosystem that HP has. Printers? Apotheker can get used to them, being the primary driver of HP's cash machine today. But if he ever finds the ink drying up, that division is going to someone like Toshiba, stat. Leo just needs an excuse.

Trading even more hardware products in for software will transform HP in Apotheker's own image. Three or four years from now, the new HP will butt heads with Oracle and Microsoft more than Canon, Epson, and Lenovo. The one constant in HP's environment is IBM, which remains a big, blue role model for both Apotheker and Larry Ellison.

By hook, crook, or stock swaps, Apotheker will find a way to move his company in that direction. And it doesn't hurt his ambitions at all that interest rates are at historical lows across the globe. The economic crisis creates a flood of cheap and easy debt-based financing.

Does Apotheker need an apothecary?

All of this drastic change begs the question whether Leo Apotheker is a genius or a madman. HP is already a very successful and profitable business, and a worldwide leader in the soon-to-be-forgotten PC market. You don't mess with success, right? Apotheker knows that HP's shareholders are watching very closely: "I know our investors don't like being in this position, and neither do I," he said during the earnings call. "I'm taking ownership for these decisions and investments."

But I think the man is on an inspired mission. The Personal Systems Group, which sells business and consumer PCs as well as mobile computing devices, is by far the least profitable of HP's many divisions. It's also stagnant in a fully mature market. Getting rid of that is a logical first step, and why wouldn't a software guru get back to what he knows best? The dominoes fall from that premise and leave us with a reformed, very different, and more profitable company when all is said and done.

And that's what it's all about in the name of the patriarch, his favorite business, and the holy shareholder.

Listing image by Photo illustration by Aurich Lawson (Mad Hatter still courtesy Walt Disney Pictures)

Channel Ars Technica