(image is copyright of DC Comics)
The dominant headlines over the past week in the world of tech and strategy have belonged to H-P, for good or bad. If Hewlett-Packard were a Harry Potter novel, its latest title might be something along the lines of "Hewlett Packard and the Myth of the Post-PC Era." Or you could consider that H-P is going the superhero route trying to reboot a whole new strategic reality, similar to DC Comics and their massive effort to revitalize their entrire portfolio of super-titles. Either way, H-P is making brave and bold decisions that would make Batman and the Flash blush. The problem is that to some market observers H-P is acting more like a DC politician two-facing products and speaking in rhetoric than a Tech Titan with clear goals, commitment, and direction. As such, markets have punished H-P and the jury is still out as to whether it is merited.
H-P has aggressively messaged its intent in three specific actions that took place right before their recent earnings call. First, the demise of the webOS devices currently in the market, R.I.P Touchpad and Palm Pre. Second, the shocker that H-P will seek to spinout their consumer PC and mobile business, most likely not retaining an ownership position. This enhanced the declaration as to the "end of the PC era" Golden age and ushers in the Post-PC Silver age of computing. Third, the acquisition of UK enterprise software company Autonomy for a hefty $10.2+ billion price tag. Big hairy audacious messages that sent shockwaves through the industry. A strategy that when reviewed should be less surprising and probably was the plan all along.
I would argue that H-P was probably on a strategic direction to exit lower margin and highly competitive consumer devices regardless of recent leadership changes. Also, it comes as no surprise that H-P CEO Leo Apotheker wants to strengthen H-P's software offerings to provide a more powerful end-to-end enterprise offering. To be honest, its a transition that Mark Hurd former H-P CEO started way before Apotheker's reign. Over the last 5 years, the majority of companies on H-P's acquisition list have been in software and enterprise solutions related companies. Not only should this not be a surprise, but it is part of the natural evolution of companies as they chase profits and seek to shift their "paradigm."
While a complete management buzzword, paradigm shifting borrowed from the classic definition of the changing of basic assumptions. As such, it has been a base strategic tactic that requires significant reallocation of resources to expected future areas of profitability within a company. The concept is that as markets and products evolve, so do the competitive strengths and weaknesses of companies. Companies use metric analysis to help determine and predict the shifts in profitability to better allocate resources and realign priorities to provide current and future returns. Ultimately, the direction of a company and the paradigms it chooses are largely determined by profit and expected profit growth. As such, it can be predicted that certain companies are reasonably expected to enter adjacent markets with similar technology or resource profiles that exhibit extranormal profits and high potential for profit growth. As adajcent markets take hold over a company's focus, old markets eventually commoditize and become less attractive. As a result, companies have to make the tough decision to participate in market disruption or divest/kill the business. H-P is no different, the bulk of its profits and margins are in the enterprise markets, and the products they build or acquire are mostly tied to filling end-to-end solution needs. Solutions that require integrated offerings in storage, compute, software, and networking... not PCs or mobile devices.
If companies are supposed to chase profits and are supposed to maximize profitability and shareholder value, then how did H-P end up with companies like Compaq and Palm in its portfolio? The answer is pretty simple... perceived value. Value can take many forms of which, in business, the most important is usually profitability or cash generation. But, the intangibles, items like talent (man-quistion or acq-hire), brand, distribution channels, marketshare consolidation, synergies, patents, and pride are all items that drive passion to purchase and contributes to seemingly irrational prices. At the time of the Compaq acquisition, H-P under Carly Fiorina thought that it could create a PC market mammoth that could create economies of scale from market consolidation and production synergies driving growth and profitability. 10 years later, hindsight is 20/20. The PC sales growth peaked, consolidation couldn't generate enough synergies, competition intensified, and commoditization killed gross margins. But that is the risk you take... its like getting excited for going to Vegas... you always think you are going to be up $500 by midnight...
Also, like all companies with multiple business units and large budgets, governance and decision making is difficult to control 100% of the time. There are independent budget allocations, product roadmaps, and commitments from hundreds and at times thousands of leaders who, based on there specific view of their business, give the approval to move forward on investments and acquisition recommendations. At the time, I am sure that webOS seemed like the silver bullet to fire at the tablet and mobile market. The trend was to either join the low margin Andriod fray a la Samsung and Motorola or try to differentiate through unique software/hardware offerings.
H-P placed their bet and while it was a decent differentiated product, it fell short of Apple. In essence, the promise and allure of profits in the "growing" tablet and smartphone market place crapped out. As such, H-P re-evaluated its strategy and decided to not compete. While an unpopular decision with technologists, they would have had a long hard battle to fight had they elected to continue. Did Apotheker and H-P leaders pledge their support for the defunct Touchpad and Pre lines? Absolutely... but what did you expect them to say to the public? At the time, they were trying to put on a brave face, rally the troops, and do battle... they didn't want to admit weakness until a loss was reasonably assured. Did Apotheker and the executive team ever really have faith in webOS? My retort is that it doesn't really matter. The product was a sunk cost by the point of release and they weren't going to damage the chances the product might have had to do well. I believe it was always an attitude of "let's deal the cards and see what turns up." It was the perverbial "double down" and if they won, then they would continue to invest, but they didn't win and they cut bait.
As such, the game continues on. The purchase of Autonomy is more about looking for a software capability to enhance other offerings and create high margin growth opportunities that have a strong potential pull through for other products and services. Its strong presence in the private-cloud solution space is very appealing and fits well with the early market trends. But, high potential companies don't come cheap. Autonomy is not stupid, they realize their position, they realize they can help complete or at least advance H-P's product offering really far. In turn, they want to get paid. If Autonomy turns out to be the lynch pin in a superior and potentially market leading cloud-software strategy, then why not pay whatever it takes. You are still H-P, you still have significant resources and loads of talented inventors. This could be the spark to jumpstart your innovation engine in a highly profitable growth market. You can fill in the gaps with smaller innovators, companies with solid technologies that fill those critical gaps... those $20-100 million companies that can bolster your engineering and innovation roster. So while H-P might be overpaying in an economic sense for Autonomy, perhaps the 'intangibles' if executed correctly will make up the difference.
A wise man once said to me, "it is better to execute a poor strategy well, than execute a great strategy poorly." Excute poorly and those Oracle rumors might be the least of its worries. Execute well and H-P could do more than turn the tables.
-K
UPDATE: H-P has just resumed manufacturing of the TouchPad due to a sudden surge of demand after liquidation price of $99 was set. WSJ.com reports that at $99 the TouchPad is a loss leader costing $307 per unit to make... awesome catch phrase "the TouchPad is dead. Long live the TouchPad!"
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